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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 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.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or

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MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

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

information in response to specific client queries.

For more copies or other information, contact

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