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  • Aug 11, 2014 - Asian Paints: Pricing power yet to filter into margins

Asian Paints: Pricing power yet to filter into margins
Aug 11, 2014

Asian Paints has announced the results for first quarter of financial year 2014-2015 (1QFY15). The topline increased 18.1% YoY while bottomline increased by 8.7% YoY. Here is our analysis of the results.

Performance summary
  • Sales grew by 18.1% YoY in 1QFY15 on the back of slow demand in domestic and international markets. The impact of currency depreciation on raw material cost was partially offset by staggered price rises of 6.25% taken in FY14.
  • The company ceased manufacturing activity at the Bhandup plant in Mumbai. The VRS expense relates to the Bhandup plant.
  • Despite its pricing power, operating margins declined marginally to 17.9% in 1QFY15 from 18.1% in 1QFY14.
  • Higher depreciation costs for the newly commissioned plant in Khandala and lower other income affected profits. Excluding exceptional items, profit growth was 17.6% YoY.
  • The board declared dividend of Rs 4.2 for FY14 (dividend yield 0.7%).

Standalone financial snapshot
(Rs m) 1QFY14 1QFY15 Change
Total income 23,197 27,407 18.1%
Expenditure 19,005 22,511 18.4%
Operating profit (EBDITA) 4,192 4,896 16.8%
Operating profit margin (%) 18.1% 17.9%  
Other income 521 489 -6.1%
Interest 47 43 -8.5%
Depreciation 529 547 3.4%
Profit before tax 4,137 4,795 15.9%
Tax 1,296 1,455 12.3%
Exceptional item# 0 252  
Profit after tax/(loss) 2,841 3,088 8.7%
Net profit margin (%) 12.2% 11.3%  
No. of shares (m)#   959.2  
Diluted earnings per share (Rs)   12.5  
P/E ratio (x) *   49.7  
*Based on trailing 12 month earnings
#Exceptional item refers to VRS payout

What has driven performance in 1QFY15?
  • After the staggered price rises in FY14, Asian Paints seems to have faced pressure on volumes both in the decorative and industrial paint segments in the domestic and international markets in 1QFY15. The Industrial Coatings JV (AP-PPG), which had seen a decline in FY14, saw good volume growth in the Industrial Liquid Paints and Road Marking business.

  • As per the management, the overall demand scenario remained challenging. It has effected further price rise of 1% in May 2014 and 1.2% in June 2014.

  • The powder coating plant at Baddi was closed on in November 2013 due to significant decline in the processing volume of powder coatings in the last two years. Going forward, the company will cater to the demand for powder coatings from the facility at Sarigam in Gujarat. The company had to provide Rs 99.6 m towards impairments having ceased manufacturing activity at the Bhandup plant in Mumbai.

  • Raw material cost as a percentage of sales stood at nearly 60%.

  • Sales from international operations were a mixed bag as Egypt and Bahrain witnessed political turmoil and the Caribbean region saw drastic economic slowdown.

  • The home improvement (Sleek) business performed well during the quarter with new dealer openings in certain geographies. During 1QFY15, Asian Paints has acquired the front end sales business (including brands, network and sales infrastructure) of Ess Ess Bathroom Products Pvt Ltd, a prominent player in the bath and wash segment in India.
What to expect?
At the current price of Rs 619 (post stock split), the stock is trading at 49.7 times trailing twelve month earnings.

The company's management remains cautious for FY15 amid a weak macro environment. In addition to the broader economic environment, a lot depends on the demand from the rural regions. Additionally, the good agriculture growth might also drive rural growth. However a weak currency can continue to pose challenges on the margin front due to raw material cost pressures. Further the demand in the auto and non-auto industrial segments to remain challenging due to higher policy rates and investment slowdown given the policy logjam. Internationally, political instability in countries like Egypt and Bangladesh are the concern areas.

Coming to valuations, we believe the same continues to remain out of our comfort zone. We continue to believe that the current expansion in multiples is more so because of the consumption boom rather than anything else. We believe investors should wait before buying the stock at more attractive valuations.

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