1. 1QFY2011 Result Update | FMCG
July 27, 2010
Asian Paints ACCUMULATE
CMP Rs2,438
Performance Highlights Target Price Rs2,773
(Rs cr) 1QFY11 1QFY10 % yoy Angel Est % Diff Investment Period 12 Months
Revenue 1,830.2 1,460.2 25.3 1,706.3 7.3
EBITDA Stock Info
347.1 275.8 25.9 326.8 6.2
OPM (%) 19.0 18.9 8bp 19.2 (18bp) Sector FMCG
PAT 222.2 176.1 26.2 210.4 5.6 Market Cap (Rs cr) 23,383
Source: Company, Angel Research Beta 0.4
52 Week High / Low 2,548/1,280
Asian Paints (APL) posted yet another quarter of strong results beating our
estimates by ~6-8% on both revenue and profitability front. Consolidated top-line Avg. Daily Volume 16,682
grew 25% yoy led by: 1) ~18-20% volume growth, 2) ~2-3% price led growth Face Value (Rs) 10
(driven by low base and 4.15% price hikes initiated in May), and 3) product mix
gains. Earnings grew 26% yoy largely led by higher operating leverage as gross BSE Sensex 18,078
margins declined. We maintain an Accumulate on the stock. Nifty 5,431
Reuters Code ASPN.BO
Volume growth at ~18-20%, gross margins contract but OPM flat: APL reported a
strong growth of 25% yoy in consolidated top-line to Rs1,830cr driven by Bloomberg Code APNT@IN
~18-20% volume growth and price/mix led growth of ~5-6%. However, we
highlight that robust growth this quarter was also aided by: 1) low base (took
price cuts in 1HFY2010), and 2) inventory pile up in trade this quarter ahead of Shareholding Pattern (%)
price hikes. Earnings registered a growth of 26% yoy to Rs222cr driven by higher
operating leverage as gross margins contracted. Management has indicated that Promoters 50.6
input costs are witnessing an uptrend particularly in Tio2 rutile, monomers and MF / Banks / Indian Fls 22.2
some oils due to demand-supply mismatch. APL has initiated another round of
FII / NRIs / OCBs 17.2
price hikes: 1) 2.6% effective from July 2010 and 2) 1.2% effective from August
2010), which is likely to help APL sustain steady growth in ensuing quarters. Indian Public / Others 14.0
Outlook and Valuation: We believe that APL is well poised to benefit from an
uptick in consumer demand aided by strong economic recovery. At Rs2,438, the
Abs. (%) 3m 1yr 3yr
stock is trading at 22x FY2012E revised EPS of Rs111. We maintain an
Accumulate on the stock, with a revised Target Price of Rs2,773 (Rs2,461) based Sensex 2.2 17.6 18.7
on P/E multiple of 25x FY2012E earnings (~15-20% premium to its historical APL 18.2 80.6 182.4
valuations), justified due to sustained double-digit volume growth, stronger
pricing power (as reflected in the recent round of price hikes) and stable margins.
Key Financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net Sales 5,464 6,681 7,867 9,227
% chg 24.0 22.3 17.8 17.3
Net Profit (Adj) 401.4 772.0 909.3 1,063.9
% chg (3.9) 92.3 17.8 17.0
EBITDA (%) 12.3 18.4 18.0 17.9
EPS (Rs) 41.8 80.5 94.8 110.9
P/E (x) 58.3 30.3 25.7 22.0 Anand Shah
022-4040 3800-334
P/BV (x) 19.4 13.7 10.5 8.3
anand.shah@angeltrade.com
RoE (%) 33.1 48.9 40.8 37.8
RoCE (%) 36.3 54.7 51.5 49.3 Chitrangda Kapur
EV/Sales (x) 4.3 3.5 3.0 2.5 022-4040 3800-323
EV/EBITDA (x) 35.0 19.1 16.4 13.8 chitrangdar.kapur@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Asian Paints|1QFY2011 Result Update
Exhibit 1: Quarterly Performance (Consolidated)
Y/E March (Rs cr) 1QFY11 1QFY10 % yoy FY2010 FY2009 % chg
Net Sales 1,830.2 1,460.2 25.3 6,680.9 5,463.9 22.3
Consumption of RM 1,048.7 819.1 28.0 3,758.0 3,370.6 11.5
(% of Sales) 57.3 56.1 56.2 61.7
Staff Costs 118.9 104.4 13.9 436.3 371.5 17.4
(% of Sales) 6.5 7.1 6.5 6.8
Other Expenses 315.5 261.0 20.9 1,259.1 1,051.7 19.7
(% of Sales) 17.2 17.9 18.8 19.2
Total Expenditure 1,483.1 1,184.4 25.2 5,453.3 4,793.8 13.8
Operating Profit 347.1 275.8 25.9 1,227.6 670.1 83.2
OPM (%) 19.0 18.9 18.4 12.3
Interest 4.2 7.2 (41.1) 28.5 26.3 8.2
Depreciation 26.9 19.8 35.9 83.6 74.4 12.3
Other Income 18.4 15.6 17.9 140.5 51.0 175.4
Profit/Loss from Associate - - - -
PBT (excl. Extr. Items) 334.4 264.5 26.5 1,256.1 620.4 102.5
(% of Sales) 18.3 18.1 18.8 11.4
Provision for Taxation 101.3 84.4 20.0 373.1 197.4 89.0
(% of PBT) 30.3 31.9 29.7 31.8
Minority Interest 10.9 4.0 48.3 21.6
PAT (After Minority) 222.2 176.1 26.2 834.7 401.4 108.0
Extr Income/(Expense) - - (1.2) 1.2
Prior Period Items 0.0 0.0 (0.2) (2.3)
Reported PAT 222.2 176.1 26.2 835.7 397.9 110.0
PATM (%) 12.1 12.1 12.5 7.3
Equity shares (cr) 9.6 9.6 9.6 9.6
EPS (Rs) 23.2 18.4 26.2 87.1 41.5 110.0
Source: Company, Angel Research
Top-line beat estimates by ~7%, estimate volume growth at ~18-20%
APL reported a strong growth of 25% yoy in consolidated top-line to Rs1,830cr
(Rs1,460cr), driven by a ~28% growth in domestic business on account of healthy
volume growth (estimated at ~18-20%), price-led growth (estimated at ~2-3%, on
account of price hikes initiated in May to the tune of 4.15% across decorative paints
portfolio) and product mix gains (interior and external emulsions continue to do
well).
However, we highlight that top-line growth this quarter was boosted by: 1) low base
as the company undertook price cuts in 1HFY2010 to boost volumes during
economic downturn and 2) inventory build up in trade ahead of the price hikes.
Moreover, APL has initiated another round of price hikes: 1) 2.6% effective from July
2010 and 2) 1.2% effective from August 2010, which is likely to help APL sustain
steady growth in ensuing quarters.
July 27, 2010 2
3. Asian Paints|1QFY2011 Result Update
Exhibit 2: 25% top-line growth led by ~18-20% volume growth
2,000 35.0
1,800
30.0
1,600
1,400 25.0
(yoy %)
1,200 20.0
(Rs cr)
1,000
800 15.0
600 10.0
400
5.0
200
- -
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
Top-line (LHS) YoY growth (RHS)
Source: Company, Angel Research
Earnings growth led by higher operating leverage
In terms of earnings, APL reported a growth of 26.2% yoy to Rs222cr (Rs176cr)
driven largely by higher operating leverage (on account of strong top-line growth led
by price hikes) as gross margins contracted due to rise in input costs. Depreciation
for the quarter jumped 36% yoy on account of commissioning of Rohtak plant in
FY2010. Tax rate declined by 162bp yoy partially aided by higher contribution of
international business to earnings.
Gross margins decline, OPM flat aided by price hikes
At the operating level, APL delivered flattish OPM resulting in 26% yoy growth in
EBITDA to Rs347cr (Rs276cr) largely driven by top-line growth. Gross margins
declined by121bp yoy (as expected) due to the spike in input costs (have risen 6.5%
from FY2010 levels as a base). Management has indicated that FY2010 margins
aren’t sustainable and input costs are witnessing an uptrend particularly in Tio2
rutile, monomers and some oils due to demand-supply mismatch. However, 4.15%
price hike initiated in May 2010 coupled with superior product mix (higher
contribution from emulsions) helped arrest any further margin decline. Moreover,
improvement in international business profitability (aided by restructuring of South
East Asia business – loss making subsidiaries closed down) further aided margins.
Exhibit 3: Earnings growth strong at 26% Exhibit 4: OPM flat at ~19% aided by price hikes
310 300.0 50.0 43.9 43.2 43.7 44.2 42.7
250.0 39.5 38.9 38.6
260 40.0 36.2
200.0
210
150.0 30.0
(Rs cr)
18.9 18.7 19.6 19.0
(yoy %)
160 100.0 16.6
(%)
50.0
20.0 13.9 14.2 12.4
110 8.3
- 10.0
60
(50.0)
10 (100.0) -
1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11
PAT (LHS) YoY growth (RHS) OPM Gross Margin
Source: Company, Angel Research Source: Company, Angel Research
July 27, 2010 3
4. Asian Paints|1QFY2011 Result Update
Investment Rationale
Demand conditions robust, model in volume CAGR of 15.5% over FY2010-12E:
Underlying demand conditions in decorative paints continues to be robust across
markets (as reflected in the strong double-digit volume growth over last several
quarters) driven by: 1) economic recovery, 2) shorter repainting cycles, and
3) continuing strong demand in Tier-II and III cities. For APL, we have modeled
in 15.5% CAGR in paint volumes over FY2010-12E driven by robust demand
conditions and market share gains.
Margins to sustain at ~18% levels aided by price hikes and mix improvement:
We expect APL to sustain its OPM at ~18% levels (marginal decline of 50bp over
FY2010-12E) aided by: 1) strong pricing power as reflected in three rounds of
recent price hikes amounting to cumulative hike of ~8%, 2) superior product mix
(higher proportion of emulsions), 3) higher operating leverage (driven by strong
top-line growth), and 4) improvement in profitability of international operations
(aided by closure of loss-making subsidiaries in South-East Asia).
Outlook and Valuation
Post the 1QFY2011 results we have revised our top-line estimates upwards by
~4-6% aided by: 1) sustained volume growth, and 2) three rounds of recent price
hikes amounting to cumulative hike of ~8%. In terms of earnings, we have revised
our estimates by ~8-10% modeling in higher OPMs (have modeled in only 50bp
decline over FY2010-12E) to account for: 1) higher operating leverage, and 2) price
hikes.
Exhibit 5: Change in Estimates
Old Estimate New Estimate % chg
(Rs cr) FY11E FY12E FY11E FY12E FY11E FY12E
Revenue 7,532 8,731 7,867 9,227 4.5 5.7
OPM (%) 17.5 17.7 18.0 17.9 55bp 21bp
EPS (Rs) 86.4 102.2 94.8 110.9 9.7 8.5
Source: Company, Angel Research
We believe that APL is well poised to benefit from an uptick in consumer demand
aided by strong economic recovery. At Rs2,438, the stock is trading at 22x FY2012E
revised EPS of Rs111. We maintain Accumulate on the stock with a revised Target
Price of Rs2,773 (Rs2,461) based on P/E multiple of 25x FY2012E earnings (~15-
20% premium to its historical valuations), justified due to sustained double digit
volume growth, stronger pricing power (as reflected in recent round of price hikes)
and stable margins.
July 27, 2010 4
5. Asian Paints|1QFY2011 Result Update
Exhibit 6: Key Assumptions (Consolidated)
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Paints India (Gross Sales) 4,864 5,603 7,050 8,399
Volume growth (%) 13.4 16.4 16.5 14.6
Realisation growth (%) 9.8 (1.0) 8.0 4.0
Others 139 150 176 185
Standalone Net Sales (Less of Excise) 4,270 5,125 6,385 7,569
APPG (Automotive 50:50 JV) 192 218 254 287
APICL (Industrial) 60 71 82 92
International Business 947 1,264 1,147 1,278
Consolidated Net Sales 5,464 6,681 7,867 9,227
YoY growth (%)
Paints India (Gross Sales) 24.5 15.2 25.8 19.1
Others (11.1) 7.9 17.2 5.1
Standalone Net Sales (Less of Excise) 24.9 20.0 24.6 18.6
APPG (Automotive 50:50 JV) (2.7) 13.9 16.1 13.2
APICL (Industrial) 2.2 18.4 15.0 13.0
International Business 28.5 33.4 (9.2) 11.4
Consolidated Net Sales 24.0 22.3 17.8 17.3
Source: Company, Angel Research
July 27, 2010 5
11. Asian Paints|1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Asian Paints
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 27, 2010 11
