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Asian Paints’ consolidated numbers for the March quarter were largely in line with Street expectations. Aided by growth in the decoratives segment, the company posted year on year sales growth of 21.4 per cent, its highest in about 10 quarters, to Rs 3,266 crore.
Consolidation of the Sleek International financials in the quarter also helped push up overall revenue. Net profit grew 14.5 per cent to Rs 287 crore, just shy of consensus estimates of Rs 290 crore. Its Ebitda (earnings before interest, taxes, depreciation and amortisation) margin also expanded 35 basis points (bps) to 14.9 per cent, as against expectations of flattish margins.
The company is likely to expand its home improvement business, supporting the strong growth in the paints segment. Thus far, the company has managed to do well in tough times and continues to gain market share from smaller players. Though most analysts are positive, many believe current valuations limit significant upsides. Of the 17 analysts polled by Bloomberg since February, 10 have a ‘Hold’ rating, five have a ‘Sell’ and rest have a ‘Buy’ on the stock. Their average target price is Rs 480 a share, translating to a downside of about 13 per cent from Wednesday’s closing price of Rs 554. The stock trades at 35.8 times the FY15 estimated earnings, much ahead of its historical average one-year forward price to earnings ratio of about 25 times.
“We note that quarterly volatility of Asian Paints’ performance has increased significantly in the last two years. This is driven by superior performance in tier-II and tier-III towns. However, we believe valuations are expensive, given continued margin headwinds. Spikes in input costs and currency depreciation constitute key downside risks,” says Gautam Duggad, fast moving consumer goods analyst at Motilal Oswal Securities.
Price rises boost revenue
Asian Paints’ double-digit volume growth was partly a function of a low base effect in the March 2013 quarter (when volumes grew only two per cent). It also had higher inventory at various channels before raising prices on March 1. Notably, it continues to display strong pricing power; price rises formed six per cent of domestic sales growth. Industrial paints’ demand continued to remain muted, with a slowing in the automobile sector. Good traction in Nepal, Bangladesh and the UAE fuelled a good show in the international business (13 per cent of consolidated revenue) in the quarter. The Carribean and South Pacific markets, though, were impacted by weak economic growth and political unrest.
Volume growth is likely to be strong. Says Abneesh Roy, associate director, institutional equities-research, Edelweiss Securities: “Asian Paints posted a good set of numbers, with volume growth of 14-15 per cent. We expect nine to 10 per cent volume growth, robust in the current environment.”
The Ebitda margin expansion was largely a function of good sales growth and eclipsed an increase in input costs (up 82 bps to 57 per cent of sales). Lower employee costs (down 56 bps to 5.4 per cent) and other expenses (down 62 bps to 22.1 per cent) also aided the margins. A lower tax rate (down 36 bps to 30.9 per cent) offset lower other income (down 18.7 per cent to Rs 31 crore) and supported overall profits.
Acquisitions, diversification to drive growth
Asian Paints has diversified into modular kitchens (Sleek International buyout) and bathroom segments (ESS acquisition) to boost overall growth. It did two small acquisitions recently, one each in the paints and home improvement segments. It acquired 51 per cent stake last month in Ethiopia-based Kadisco Chemical Industry. Along with the results, it announced acquisition of the entire front-end sales business, including brands, network and sales infrastructure, of India-based ESS ESS Bathroom Products. The latter makes taps, divertors and mixers in India and has a dealer network of about 1,400; it has weak brand visibility.
The company plans to cross-sell these products to existing and new customers, and leverage on the combined dealer network to boost sales. Adds Roy of Edelweiss, “We expect the company to do more such acquisitions. The strategy of acquiring brands with low visibility enables them to get a good acquisition price. Also, most of its acquired businesses are profitable. We are positive on diversification plans, as Asian Paints has multiple offerings for the consumer. They are not ignoring the core paints business, which is (also) doing quite well.”
