Post on 06-Apr-2018
8/3/2019 ASIPAIIA_20101027
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BuyPrevious Recommendation: Neutral Rs2,503
27 October 2010
STOCK INFO.
BSE Sensex: 20,005
S&P CNX: 6,013
2QFY11 Results UpdateSECTOR: FMCG-PAINTS
Asian Paints
BLOOMBERG
APNT IN
REUTERS CODE
ASPN.BO
Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+9122 39825404/ Nikhil Kumar (Nikhil.N@MotilalOswal.com); Tel: +922 39825120
Equity Shares (m) 95.9
52-Week Range 2,920/1,575
1,6,12 Rel. Perf . (%) -9/8/30
M.Cap. (Rs b) 240.1
M.Cap. (US$ b) 5.3
2QFY11 decorative paint volumes flat; recovery likely in near term: 2QFY11 standalone sales grew 6% due to
pricing-led gains. We estimate volumes will be flat YoY. The management indicated that volume deceleration was due to(1) prolonged monsoon affecting demand, (2) Diwali impact being in 3QFY11 (v/s 2Q in FY10), and (3) dealer stocking in
1QFY11, presumably in anticipation of subsequent price hike. We believe volume growth will recover during the course
of the year due to Diwali sales falling in 3QFY11 and a post-monsoon demand catch-up. The company believes the 8.1%
price increase (made over May-August, including by competitors, albeit with a lag) has been fairly absorbed by consumers,
and the 2QFY11 deceleration in volume growth is a matter of timeliness.
Input cost index up 12.4%; 8% price hike to limit margin pressure: Asian Paints' input cost index (domestic
business) increased 12.4% from the FY10 average due to higher prices of titanium dioxide and other oils. Asian Paints
has, over the past four months, raised prices by 8.1%, which offsets input cost pressure. Margins are unlikely to shrink
significantly.We model 50bp margin contraction in FY11 (v/s 90bp earlier) and 10bp in FY12 (flat earlier).
Volume growth to rebound in 3QFY11; input prices, competition unlikely to dent medium-term margins; Buy:
We expect decorative paint volumes to rebound in 3QFY11 due to strong consumer sentiment during the Diwali season.
We see upside risk to our estimates if input costs do not increase significantly. Asian Paints has corrected by 15% from
its peak due to concerns about slower growth and likely margin declines. The correction can be used as a good entry
point for long term investment. The stock trades at 26.1x FY11E EPS of Rs96 and 21.6x FY12E EPS of Rs116. We
upgrade the stock to Buy with a 12-month target price of Rs2,899 (25x FY12E EPS).
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Asian Paints
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Asian Paints 2QFY11 results are below estimates. Key highlights:
Net sales grew 5% to Rs18.1b (against our estimate of Rs20.5b). We estimated volumes
would be flat YoY.
Lower volume growth was due to (1) prolonged monsoons affecting paint demand,
(2) Diwali being in 3Q this year (v/s 2Q in FY10), and (3) dealer stocking in 1QFY11. Gross margins expanded 50bp YoY to 43.7%, led by lower input costs and strong
pricing power. QoQ margins were up 100bp.
EBITDA margin contracted 40bp YoY to 18.3% (against our estimate of 18%); other
expenditure increased 100bp due to lower volume growth.
Standalone 2QFY11 sales grew 6% to Rs14.7b, EBITDA margins contracted 40bp to
19.6% and standalone adjusted PAT grew 6% to Rs1.9b.
2QFY11 decorative paint volumes flat; near term recovery likely
2QFY11 standalone sales grew 6% due to pricing-led gains. We estimated volumes would
be flat YoY. The management indicated that volume deceleration was due to (1) a prolonged
monsoon affecting paint demand, (2) Diwali being in 3Q this year (v/s 2Q in FY10), and
(3) dealer stocking in 1QFY11, presumably in anticipation of a subsequent price hike.
The management indicated that demand was robust in July, though August-September
sales were impacted by the monsoons. Demand in tier II cities and rural markets
were ahead of the market, and emulsions and enamels grew ahead of the distemper
range.
We believe volume growth will recover during the course of the year due to Diwali
sales in 3QFY11, and post-monsoon demand catch-up.
The company believes the 8.1% price increase (over May-August, including by
increases by competitors, albeit with a lag) has been fairly absorbed by consumers,
and the 2QFY11 deceleration in volume growth is a matter of timeliness.
2QFY11 domestic volumes flat restricting net sales growth to 5%
Source: Company/MOSL
19
0
13 11.517.5
25
17 20
0
12.1
9.8
13.2
5.51.1
1.8
1.0
6
5
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Volume Growth (%) Realization Grow th (%)
13,2
10
14,2
49
14,6
02
17,2
39
16,2
00
18,7
68
18,3
02
18,1
08
2325
18 17
23
32
25
5
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Sales (Rs m) Grow th (%)
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Asian Paints
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We believe decorative paints are one of the best plays on the up-tick in consumption
sentiment. The rise in new construction, increasing aspiration for higher value-added paints
(enamels), and the trend of shortening the painting cycle instill confidence of sustained
mid-teen volume growth. Strong visibility of volumes resulted in Asian Paints continuing to
add capacity. Besides the 150,000kl augmentation at its Rohtak plant, Asian Paints boughtland in Maharashtra for a unit that will have a greenfield capacity of 300,000kl (all
emulsions), which is likely to become operational in 4QFY13. Industrial and automotive
paint demand recovered in 1HFY11 due to strong automotive demand and the onset of the
industrial capex cycle.
Input costs index up 12.4% from FY10 average, 8% price hike offsets RMpressure; significant margin pressure unlikely
Consolidated gross margins expanded 50bp YoY to 43.7% as price hikes and mix
improvements offset higher input costs and excise. EBITDA margins contracted 40bp to
18.3% due to higher other expenditure (up 100bp YoY) on lower volume growth.
Gross margin expands by 50bp due to price increases/mix improvement
Input cost index up 12% in 2QFY11; ~9% in 1HFY11
Source: Company/MOSL
38.936.1 38.7 43.9 43.2 43.7 44.2 42.7
43.7
14.2
8.3
12.6
18.9 18.7 19.6
16.6
19.0 18.3
6
20
34
48
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
Gross Margin (%) EBITDA Margin (%)
100
91.4 91.792.7
94.4
98.5
103.9
FY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
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Asian Paints
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The input costs index for Asian Paints (domestic business) increased 12.4% from the
FY10 average due to higher prices of titanium dioxide and other oils.
Asian Paints has, over the past four months, increased prices three times (totaling
8.1%), which offsets the current input cost pressure. We highlight that price increases
were made by the competition as well, ruling out price-led competition in the category. We believe margins are unlikely to contract significantly going forward; we model
50bp margin contraction in FY11 (v/s 90bp earlier) and 10bp in FY12 (flat earlier).
International business under pressure; Middle East profitability down
The international business reported 2% growth in 1HFY11 and EBIT declined 16%. The
Middle East was adversely impacted by a slowdown in Dubai and Bahrain. South Asia
and Egypt maintained strong growth. 1HFY11 EBIT fell 40% in the Caribbean and 26%
in the Middle East. The Middle East accounts for two-thirds of profits in the international
business. The management indicated that the Middle East would report pressure in sales
and profits in the next few quarters due to a slowdown in demand, investments in Color
World and capex plans.
International business impacted by performance in Dubai, the Caribbean
Revenue (Rs m) 1HFY11 1HFY10 Change
Caribbean 661 743 -11.0
Middle East 2846 2845 0.0
South Asia 918 719 27.7
South East Asia 255 243 4.9
South Pacific 357 331 7.9
Total 5,037 4,881 3.2
EBIT (Rs m)Caribbean 21 36 -41.7
Middle East 409 551 -25.8
South Asia 112 92 22
South East Asia 28 22 27
South Pacific 57 41 39.0
Total 627 742 -15.5
EBIT (%)
Caribbean 3.2 4.8 -1.7
Middle East 14.4 19.4 -5.0
South Asia 12.2 12.8 -0.6
South East Asia 11.0 9.1 1.9
South Pacific 16.0 12.4 3.6
EBIT margin 12.4 15.2 -2.8
Source: Company/MOSL
Volume growth to rebound in 3QFY11, input prices, competitive activityunlikely to dent medium-term margins; upgrade to Buy
We expect decorative paint volumes to rebound in 3QFY11 due to strong consumer
sentiment during the Diwali season. Demand for industrial paints is also expected to perk
up with a lag as the industrial capex has started picking up. Automotive paint demand is
also likely to be robust. But international sales will be under pressure, especially in the
Middle East and the Caribbean. Asian Paints increased prices 8.1%, which more thancovers the increase in input costs and excise duty. We are factoring-in a 50bp decline in
EBITDA margins in the current year. Margins declined by only 20bp in 1HFY11 despite
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poor volume growth. We see upside risk to our estimates if input costs do not increase
significantly.
MNCs like Sherwin Williams, Akzo, Kansai and Nippon have upped the ante in view of
huge growth opportunity in India. Nippon recently entered Mumbai and North India andAkzo is expanding and revamping its distribution. But we believe the impact of such
aggression will be reflected in increased adspend in the near term and material impact, if
any, would take at least a couple of years due to entry barriers like distribution and brand.
Asian Paints has corrected by 15% from its peak due to concerns about slower growth
and likely margin declines. We believe the correction can be used as a good entry point for
long term investment. The stock trades at 26.1x FY11E EPS of Rs96 and 21.6x FY12E
EPS of Rs116. We upgrade to Buy with a 12-month target price of Rs2,899 (25x FY12E
EPS).
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Company description
Asian Paints is India's largest paint manufacturer and
marketer with a dominant share in the decoratives segment.For the industrials and automotive segment, it has a JV
with PPG of the US. Asian Paints acquired Berger
International of Singapore to expand its operations in other
markets in Asia, the Middle East and the Caribbean.
Key investment arguments
Expansion in housing and construction will drive demand
for decorative paints over 3-5 years.
International operations, which have turned around, will
contribute to the company's earnings.
Key investment risks
Demand for decorative paints is highly dependent on
the normalcy of the monsoons.
Input costs are on an uptrend. A higher-than-expected
increase in input cost would be a key risk to our EPS
estimates.
Recent developments
Asian Paints has taken a price increase of 8.1% since
May in three rounds (4.2% in May, 2.6% in July and1.2% in August).
Asian Paints bought land in Maharashtra to set up
greenfield capacity of 300,000kl. The plant is likely to
be commissioned in 4QFY13.
Valuation and view
The stock trades at 26.1x FY11 EPS of Rs96 and 21.6x
FY12 EPS of Rs116.
We upgrade the stock to Buy with a 12-month target
price of Rs2,899 (25x FY12E EPS).
Sector view
We are positive about the long term demand potential in
the sector. Near term concerns due to the monsoons
notwithstanding, Asian Paints is the best play on the
structural growth story in decorative paints.
Longer term prospects are bright, given rising incomes,
low penetration and booming construction and
infrastructure development.
Comparative valuations
Asian Paints ITC HLL
P/E (x) FY11E 26.1 26.5 29.3
FY12E 21.6 22.3 25.6
EV/EBITDA (x) FY11E 16.3 16.3 21.9
FY12E 13.5 13.7 18.8
EV/Sales (x) FY11E 2.9 5.8 3.1
FY12E 2.4 4.9 2.8
P/BV (x) FY11E 11.0 7.7 21.4
FY12E 8.7 6.5 18.0
Shareholding Pattern (%)
Sep-10 Jun-10 Sep-09
Promoter 52.0 50.6 50.0
Domestic Inst 11.0 12.3 13.7
Foreign 16.7 17.2 16.4
Others 20.3 19.8 20.0
Asian Paints: an investment profile
Stock performance (1 year)
EPS: MOSL forecast v/s Consensus (rs)
MOSL Consensus Variation
Forecast Forecast (%)
FY11 96.0 94.5 1.6
FY12 115.9 113.4 2.2
Target Price and Recommendation
Current Target Upside Reco.
Price (Rs) Price (Rs) (%)
2,503 2,899 15.8 Buy
1,000
1,500
2,000
2,500
3,000
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
-25
0
25
50
75
Asian Paints (Rs) - LHS Rel. to Sensex (%) - RHS
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Financials and Valuation
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This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal
Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.
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MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement Asian Paints
1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No
This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required
from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide
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