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Asian Paints: Disappointing quarter - Views on News from Equitymaster

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Asian Paints: Disappointing quarter

Oct 27, 2010

Asian Paints announced 2QFY11 results. Topline registered flattish growth during the quarter. However, bottom line declined 20% YoY due to increase in depreciation and minority interest coupled with a fall in other income. Here is our analysis of the results.

Performance summary
  • Topline grew 5% YoY in 2QFY11. Growth was flattish due to good monsoons which delayed construction activity during the quarter.
  • Operating margins declined marginally to 18.3% this quarter as compared to 18.7% in 2QFY10. The dip was due to raw material price escalation. It may be noted that prices of titanium dioxide (key raw material input) have increased significantly over the last quarter pressurizing margins.
  • Net profits declined 20% YoY in 2QFY11 on the back of lower other income, higher depreciation and increase in minority interest.
  • The company has declared interim dividend of Rs 8.5 per share.

Financial performance snapshot
(Rs m) †2QFY10† †2QFY11† Change †1HFY10† †1HFY11† †Change†
Sales ††††††† 17,239 ††††† 18,108 5.0% ††††††† 31,842 †††††† 36,410 14.3%
Expenditure ††††††† 14,012 ††††† 14,793 5.6% ††††††† 25,856 †††††† 29,624 14.6%
Operating profit (EBDITA) ††††††††† 3,228 ††††††† 3,315 2.7% ††††††††† 5,986 †††††††† 6,786 13.4%
Operating profit margin (%) 18.7% 18.3%   18.8% 18.6%  
Other income †††††††††††† 874 †††††††††† 249 -71.5% ††††††††† 1,030 ††††††††††† 433 -58.0%
Interest ††††††††††††††† 64 ††††††††††††† 46 -29.2% †††††††††††† 136 †††††††††††††† 88 -35.5%
Depreciation †††††††††††† 200 †††††††††† 284 42.2% †††††††††††† 398 ††††††††††† 553 39.1%
Profit before tax 3,838 3,234 -15.7% ††††††††† 6,482 †††††††† 6,578 1.5%
Tax 1,065 984 -7.6% ††††††††† 1,909 †††††††† 1,997 4.6%
Minority interest ††††††††††††††† 89 †††††††††† 103 15.6% †††††††††††† 129 ††††††††††† 212 64.8%
Profit after tax/(loss) 2,684 2,147 -20.0% 4,445 4,369 -1.7%
Net profit margin (%) 15.6% 11.9%   14.0% 12.0%  
No. of shares (m)         †††††††††† 95.9  
Basic & diluted earnings per share (Rs) *         †††††††††† 45.5  
P/E ratio (x) *         † 29.0  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Net sales increased 5% YoY in 2QFY11. Growth was flattish due to prolonged monsoon which delayed projects and maintenance demand during the quarter. International operations continued to face challenging conditions impacting topline growth. However, South Asia and Egypt were an exception and performed well. Management expects demand conditions to remain stable for decorative paints across the country. Nonetheless, demand for industrial paints is still lagging and the situation is expected to improve gradually over a period of time. The company expects capex of Rs 2.5 bn in FY11 and is on track to achieve it. However, rising raw material cost continues to be the major concern.

  • Asian Paintsí operating margin stood at 18.3% in 2QFY11, a decline of 50 bps over 2QFY10. In light of raw material price inflation, the company had already increased blended prices twice in May and July. Nonetheless, the situation got worse as the company affected another price increase in the month of August by about 1.2% to counter increase in prices of titanium dioxide (key raw material input). In light of increasing raw material prices management expects margins to remain under pressure.

  • Bottomline declined 20% YoY during the quarter on the back of poor performance at the operating level, lower other income, higher depreciation and increase in minority interest.

What to expect?
At the current price of Rs 2,500, the stock is trading at 19 times our estimated FY13 earnings. Although Asian Paints remains a preferred play given the quality of the management and healthy growth prospects, valuations are above our comfort zone. As a result we maintain our view on the stock.

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