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The Asian Paints stock was down three per cent over the past four trading sessions on lower-than-expected numbers for the quarter ended March and demand concerns. This was reflected in the lower volume growth, which had shrunk from the high teens in March 2012 to low single digit in the March 2013 quarter.
Further, the company has recently diversified into the modular kitchens segment by acquiring a 51 per cent stake in Sleek and is exploring organic and inorganic opportunities in the home improvement segment. This means that it will be investing in new businesses which might take some time to contribute meaningfully to profits.
“Management comments of looking at organic/inorganic growth into different segments of home and its references to IKEA, Home Depot, etc, make us believe that there might be more on the anvil after the acquisition of a 51 per cent stake in Sleek. We think capital intensity will increase and near to medium-term profitability/return ratios may be impacted. Issues on scalability, catering to localised tastes and management bandwidth need to be considered,” says Aditya Mathur, analyst at Citigroup. He has trimmed its FY14 earnings per share estimates by four per cent. At the current price of Rs 4,703, the stock trades at 34.2 times FY14 estimated earnings, which appear expensive and could limit significant upsides from current levels.
“We see slower topline growth in FY14 on lower price hikes and subdued demand, while earnings growth would be reasonable at 17 per cent CAGR over FY13-15. Valuations at 33.7 times FY14 estimated earnings do not offer much upside,” says Varun Lohchab, analyst at Religare Capital Markets. He has a sell rating on the stock, with a target price of Rs 4,000.
These concerns will weigh on the stock, which has had a good run over the past four years (grew over 500 per cent) outperforming the broader benchmarks by a wide margin. The gains have come about given that the company has been gaining market share consistently and continues to outpace peers in the premium emulsion paints segment. It has maintained its number one position in the paints market despite increasing competition from smaller peers such as Berger Paints, Akzo Nobel and Kansai Nerolac.
The Asian Paints’ management remains cautious for FY14 amid a weak macro. Analysts expect the company’s volume growth to remain in high single digits in FY14 as well. Some relief is likely from softening input prices and analysts believe gross margins could grow if raw material prices remain at similar levels. The company has been growing strongly in the high-margin premium emulsion paints segment. Management remains optimistic of longer term growth in West Asia and Southeast Asian markets, while the Carribean market remains challenging.
For the March quarter, consolidated sales grew 6.9 per cent over the March 2012 quarter to Rs 2,714 crore and were pulled down by muted volume growth. Analysts estimate the volume growth to be between two and four per cent for the company, against 12-13 per cent volume growth in the festivals-driven December 2012 quarter. This quarter’s volume growth is almost half of that witnessed in the September 2012 quarter.
Slower top line growth and higher expenses (due to commissioning of the Khandala plant in Maharashtra) overshadowed the benign input cost scenario. Consequently, the Ebitda margin contracted by 100 basis points to 13.8 per cent. Further, other expenses, too, grew 25 per cent in the quarter led by higher power, fuel and transportation expenses.
Higher depreciation due to commissioning of the Khandala plant also impacted net profit, which fell 3.2 per cent to Rs 251 crore. “Since the plant became operational only during the March quarter, it is running at less than optimum capacity, which could continue to impact overhead costs for the next couple of quarters,” says Manish Jain, analyst at Nomura Equity Research. Amongst its key segments, the demand from industrial and automotive segments was muted, while the same remained strong in the premium segments. The company has launched many products to tap the high growing premium-end emulsions segment. International business (13 per cent of revenues) witnessed continued pressure.
