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Asian Paints: Volume driven growth - Views on News from Equitymaster
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Asian Paints: Volume driven growth
Nov 7, 2012

Asian Paints has announced the second quarter results of financial year 2012-2013 (2QFY13). Topline increased 16.8% YoY while bottomline increased 14.6% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Topline grew 16.8% YoY in 2QFY13. The growth was fuelled by rural demand as the company did not resort to any price increase during the quarter.
  • Operating margins were relatively flat at 14.5% in 2QFY13. Inflationary trend in the raw material costs have eased out a bit but rupee depreciation continues to hurt the company.
  • The raw material price index for the decorative products stood at 107.7 in 2QFY13, on a base of 100, compared to 116.9 in 2QFY12.
  • Net profits increased 14.6% YoY in 2QFY13 due to strong performance at the operating level.
  • The capacity expansion at Khandala plant is on schedule. The first phase is expected to go on stream by 4QFY13.
  • Planned capex for FY13 is about Rs 7.5 bn, of which 4 bn is already expended till date.

Consolidated financial snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Total income 22,568 26,364 16.8% 45,224 51,844 14.6%
Expenditure 19,282 22,548 16.9% 37,967 43,562 14.7%
Operating profit (EBDITA) 3,286 3,817 16.1% 7,257 8,282 14.1%
Operating profit margin (%) 14.6% 14.5%   16.0% 16.0%  
Other income 232 217 -6.3% 485 457 -5.9%
Interest 88 122 37.7% 153 230 50.1%
Depreciation 300 357 19.2% 591 691 17.0%
Profit before tax 3,130 3,555 13.6% 6,998 7,817 11.7%
Tax 952 1,041 9.4% 2,104 2,314 10.0%
Minority interest 91 122 34.2% 171 228 33.7%
Profit after tax/(loss) 2,087 2,392 14.6% 4,724 5,275 11.7%
Net profit margin (%) 9.2% 9.1%   10.4% 10.2%  
No. of shares (m)         95.9  
Basic & diluted earnings per share (Rs)         55.0  
P/E ratio (x) *         37.9  
* On a trailing 12-months basis

What has driven performance in 2QFY13?
  • Net sales increased 16.8% YoY in 2QFY13. The growth was led by buoyancy in volumes as the company did not undertake any price increase during the quarter.

  • As far as the international operations are concerned, all the four regions (Caribbean, Middle East, Asia and South Pacific) where the company has presence grew in excess of 20% during 1HFY13. However, some part of this growth was fuelled by currency impact. Overall, sales in Middle East and South Asian markets were hit due to weak economic sentiments.

  • The operating margin was relatively flat at 14.5% in 2QFY13. Downward trend in raw material cost shielded the margins of the company. It may be noted that the raw material price index stood at 107.7 in 2QFY13, compared to 116.9 in 2QFY12. In 1QFY13, the same was at 106.6.

  • Bottom line increased 14.6% YoY during the quarter due to strong performance at the operating level. However, fall in other income; rise in interest and depreciation expenses curtailed the profitability growth.

What to expect?
At the current price of Rs 4,121, the stock is trading at 37.9 times its trailing twelve month earnings. Going forward, growth from the international business, particularly Middle East and South Asia remains a key concern. However, considering strong demand emanating from the rural economy, top line growth is expected to remain healthy. Also, with raw material prices softening margin pressures have started easing out.

But valuations leave very little on the table for the investors. It may be noted that since April 2007 to April 2010 the stock has traded within a PE band of 20-30x (TTM annualized EPS). However, without any dramatic improvement in financials, the stock re-rated to a new territory altogether, after April 2010. Since April 2010, the stock is trading within a PE band of 30-35x (TTM annualized EPS) breaching the upper band on few occasions as well. And this is precisely the period where valuation multiples of all the consumption stories expanded. Thus, the current expansion in multiple, after April 2010, is due to investors becoming too optimistic perhaps on the consumption story. Considering such expensive valuations, we maintain our SELL view on the stock.

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