Asian Paints: Profit in cheery hues

The company has done well on all fronts in the September quarter, and the road ahead looks promising

A strong set of numbers for the September quarter, way ahead of Street estimates, saw the Asian Paints’ stock touch an all-time high of Rs 529.35 on Monday. The stock saw a steep rise after the announcement of the results, driven by a robust volume growth, strong margin expansion and good traction in rural areas. The consolidated results beat Street expectations on all counts, with revenue (Rs 3,115 crore) and net profit (Rs 327 crore) growth of 18.3 per cent and 36.7 per cent, respectively. By Bloomberg consensus estimates, the net sales and net profit were pegged at Rs 2,943 crore and Rs 260 crore, respectively.

This performance comes when most are seeing a moderation in volume growth. Asian Paints' leadership position in decorative paints makes it well poised to achieve further market share gains, specially from unorganised players most hit by adverse rupee/input cost inflation and weakening demand scenario. As a result, analysts expect the company to post good growth in the medium term.

"Asian Paints reported good results for the quarter and demonstrated its strong pricing power. The ongoing festive season, good rural demand and a stronger rupee is likely to aid similar performance for the rest of this financial year. It is looking at improving its market share in tough times," says Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities.

While they remain positive on the company, high valuations could limit upside. Hence, buying on dips is the advice. At Monday's closing price of Rs 516, the stock trades at 37.4 times FY14 estimated earnings, above its historical one-year forward price/earnings band of 15-35 times. Even on FY15 estimated earnings a share of Rs 17 (year-on-year growth of 25 per cent), the PE works out to 30.

Against expectations of eight-10 per cent volume growth, analysts estimate the volume growth in the decorative segment (80 per cent of revenues) to have come at 12-13 per cent for the September quarter, highest since March 2012 quarter. They believe this was partly a function of higher inventory at the dealers' end (in anticipation of price rises).

Realisations were estimated to be up just three-four per cent. Asian Paints took two price rises in the quarter, a one per cent one on August 1st and a 1.8 per cent one on September 1. These were done to offset the impact of rupee depreciation on the prices of its key input Titanium Oxide (TiO2).

Its global business (13 per cent of consolidated revenues) put up a good performance. Though the smallest contributor, the industrial and automotive paints segments, however, continued to be under pressure. All this, with better operating leverage, helped the company post strong revenue growth and earnings before interest, taxes, depreciation and amortisation (Ebitda) margin expansion of 190 basis points to 16.4 per cent.

V Srinivasan, fast-moving consumer goods analyst, Angel Broking, says, "The company has not been impacted much by rupee depreciation given the price rises and that 35 per cent of its total input costs is linked to the dollar. We believe its Ebitda margins could be sustained at 16 per cent for FY14 and FY15".

The depreciation expenses though surged 68.7 per cent to Rs 60 crore due to commissioning of its Khandala plant in March quarter. The depreciation towards this plant was Rs 20 crore in the June quarter. Analysts estimate the plant will operate at 35 per cent capacity by March. The plant's power issues are expected to ease soon. Analysts say the plant will help save distribution costs in the long run. Overall, analysts estimate the revenues to grow 17-18 per cent and earnings 20-22 per cent annually during FY13-15. The key risks are sharper-than-expected demand slowdown and a jump in raw material prices.