The Asian Paints stock has been scaling new highs since the past few trading sessions. This is partly due to wobbly broader markets making defensive bets, such as fast moving consumer goods (FMCG) stocks look more attractive. The stock touched a new high of Rs 3,731.2 on Wednesday, as the company’s March quarter results beat analysts’ estimates.
Though Asian Paints has been posting healthy results in recent quarters, which has boosted the stock since the start of 2012, the fundamentals have not improved significantly to justify its stretched valuation of 30 times 2012-13 estimated earnings (among the highest in the FMCG space). The demand scenario, especially in industrial paints and some international markets, continues to be challenging, though volume growth of decorative paints is gradually cooling off. Says K B S Anand, managing director and chief executive officer: “Other industrial business, excluding auto, saw some pressure due to subdued demand. Political events and macroeconomic uncertainty in some countries, excluding South Asia and Oman, continue to affect international performance.”
High crude oil prices also pose an upside risk to already high raw material prices. In other words, the market is not factoring in the risks or negatives. Anand Shah of Elara Capital, who expects the company’s earnings per share (EPS) to grow at a compounded annual growth rate (CAGR) of 22 per cent during FY12-14, has an ‘Accumulate’ rating on the stock, with a one-year target price of Rs 3,837. “Due to sharp run-up in the stock in last few months (aided by inclusion in the Nifty), we believe valuations at P/E (price-earnings) ratio of about 24 times FY14 EPS leave little room for negatives,” says Shah.
| STEADY GROWTH | |||
| In Rs crore | Q4’ FY12 | FY12 | FY13E |
| Net sales | 2,546 | 9,632 | 11,146 |
| Y-o-Y change (%) | 29.3 | 24.7 | 15.7 |
| Operating profit | 382 | 1,508 | 1,755 |
| Y-o-Y change (%) | 30.2 | 13.6 | 16.4 |
| Net profit | 260 | 989 | 1,143 |
| Y-o-Y change (%) | 39.5 | 17.3 | 15.6 |
| Consolidated financials Source: Company, Analyst estimates | |||
Flying colours in Q4
A favourable base effect and price increases (of 12-14 per cent) helped the company to report its best consolidated performance in the last five quarters. Volume growth is also estimated to be healthy at 12-13 per cent, but lower than the four-quarter average of 15 per cent. Even as prices of titanium dioxide and other crude-based raw materials rose and pulled down gross margins by 115 basis points year-on-year, operating profit margin remained stable at 15 per cent, as the company managed to keep a tab on other costs. The more, than, doubling of interest costs to Rs 16.6 crore and the 34 per cent jump in taxation were partly offset by a 2.5 times rise in other income to Rs 40 crore. Overall, net profit jumped almost 40 per cent, largely aided by a strong performance in the core business.
Despite a high base effect in the same quarter last year, domestic business (83 per cent of total revenue) reported a robust and resilient performance. Sales jumped 29 per cent and margins improved marginally. Anand says, “We witnessed good demand for decorative paints across India.” Revenue growth in international business was mainly aided by a low base effect, but margins remained under pressure.
Near-term outlook: Not so bright
The company ended 2011-12 on a robust note, though operating profit margin has been under pressure, as raw material prices have seen unabated rise and continue to give bullish signals. Titanium dioxide, forming 20 per cent of raw material costs, is up 60 per cent year-on-year and trading at all-time high levels. The reduction in customs duty on titanium dioxide from 10 per cent to 7.5 per cent in the Union Budget will give some relief. Further, other crude oil-based raw materials will get a push from firm crude oil prices. “Rupee depreciation and continued upward trend in raw material prices remain a concern area,” points out Anand.
“Volatility in input costs and the rupee movement remain key risks,” notes Shah of Elara Capital, who believes recent price increases and another one expected in June-July may provide stability to margins. However, with or without price increases, analysts expect the company’s consolidated margins to be under check, as most times, especially given the slowing economic growth, it is difficult to pass on the entire cost escalation to the customer.
Against this backdrop, the outlook for at least the first half of 2012-13 is a bit cautious. While the long-term story of Asian Paints remains intact, at Rs 3,707, the stock’s premium valuation (in line with Hindustan Unilever Ltd’s 31 times and higher than ITC’s 25 times 2012-13 estimated earnings) is not justifiable and suggests that its outperformance will be difficult to sustain.