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  • Nov 21, 2013 - Asian Paints: Pricing power helps keep up the show

Asian Paints: Pricing power helps keep up the show
Nov 21, 2013

Asian Paints has announced the results for second quarter and first half of financial year 2013-2014 (1HFY14). The topline increased 15% YoY while bottomline increased by 14% YoY during the first half. Here is our analysis of the results.

Performance summary
  • Sales grew 15% YoY in 1HFY14 on the back of growth in emulsion segment and cumulative price rise of 4.1% over past 6 months. Price rise of 1.8% effected in September 2013.
  • Operating margins moved up marginally to 16.4% in 1HFY14 from 16% in 1HFY13. The prices rises undertaken by the company helped mitigate the impact of rise in the prices of a key raw material.
  • The raw material price index for the decorative products stood at 106.6 in 1HFY14, on a base of 100, as against 101.7 for 1HFY13.
  • Higher depreciation costs for the newly commissioned plant in Khandala and negative impact of forex losses affected profits. However lower interest costs compensated for the same. Net profits went up by 33% YoY in 2QFY14 and by 14% in 1HFY14.

Consolidated financial snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Total income 26,392 31,146 18.0% 51,789 59,557 15.0%
Expenditure 22,511 26,039 15.7% 43,506 49,803 14.5%
Operating profit (EBDITA) 3,881 5,107 31.6% 8,283 9,754 17.8%
Operating profit margin (%) 14.7% 16.4%   16.0% 16.4%  
Other income 216 453 109.7% 455 730 60.4%
Interest 121 119 -1.7% 230 205 -10.9%
Depreciation 357 602 68.6% 691 1,201 73.8%
Profit before tax 3,619 4,839 33.7% 7,817 9,078 16.1%
Tax 1,041 1,449 39.2% 2,313 2,839 22.7%
Minority interest 122 121 -0.8% 228 219 -3.9%
Profit after tax/(loss) 2,456 3,269 33.1% 5,276 6,020 14.1%
Net profit margin (%) 9.3% 10.5%   10.2% 10.1%  
No. of shares (m)#         959.2  
Diluted earnings per share (Rs)         11.5  
P/E ratio (x) *         43.2  
*Based on trailing 12 month earnings
#Post stock split

What has driven performance in 1HFY14?
  • The growth in sales was on the back of demand in the emulsion segment, prices rises and improved demand conditions in the Middle East. The industrial business was however impacted by poor demand from projects business and slowdown in OEM segment. The new 300,000 KL capacity at Khandala plant commissioned in 4QFY14, taking total capacity to 9,44,000 KL per annum. Second 50:50 JV with global paint major PPG has also become operational.

  • The company witnessed the highest growth in paint sakes in Asia (26% YoY) in 1HFY14 followed by South Pacific (17% YoY), Middle East (13% YoY) and Caribbean (10% YoY). However, some part of this growth was fuelled by currency impact. The volume sales exceeded 1 lac kl mark in the first six months itself despite political and macro economic uncertainty in some regions.

  • The company's operating margins dropped to 15.7% in 1QFY14 from 17.3% in 1QFY13. Rise in the prices of a key raw material affected margins for the quarter. Raw material cost as a percentage of sales stood at nearly 60%.

  • The company has outlined capex of Rs 2.5 bn for facility optimization and regular maintenance in FY14.
What to expect?
At the current price of Rs 534 (post stock split), the stock is trading at 46.5 times trailing twelve month earnings and 25.7 times our FY16 estimates. The company's management remains cautious for FY14 amid a weak macro environment. In addition to the broader economic environment, a lot depends on the demand from the rural regions.

The company expects political instability to hurt demand in markets like Egypt, Bangladesh and Nepal. It is also not very upbeat about the Caribbean and South Asian regions as well. As for the third segment which is the auto and non-auto industrial segments, lower manufacturing activity seems to have kept the management's expectations low.

Asian Paints acquired 51% stake in modular kitchen maker Sleek Group in 4QFY13. While the company has not divulged the exact value of investment, we believe it could be a while before the 'home development' segment contributes meaningfully to the company's revenues and profits.

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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