Asian
Paints -
1QFY18 Result Update - Revenues in Line; Higher Cost Impairs Profitability
Asian
Paints has
reported a mixed set of numbers for 1QFY18. While its consolidated net
sales grew by 6.4% YoY to Rs38.2bn in line with our estimates, EBITDA
and net profit came in sharply below our estimates. While EBITDA fell by
18.5% YoY to Rs6.7bn vs. our estimate of Rs8.1bn, net profit decreased
by 20.4% YoY to Rs4.4bn vs. our estimate of Rs5.7bn.
Considering
the sharp
fall in earnings, we have revised our net profit estimate downwards by
10% for FY18E and 7% for FY19E and now we expect the Company to post
revenue and earnings CAGR of 14.2% and 12.6% through FY17-19E. Considering
the rich valuations at 43.1x FY19E earnings coupled with persistent
pressure on margins, we maintain our HOLD recommendation on the stock
with a revised Target Price of Rs1,170.
Volume Growth to
Improve in Ensuing Quarters
Volume
growth in
decorative segment came in at ~3-4% (average volume growth of past 8
quarters was 11%), mainly due to sharp inventory destocking in June
prior to GST roll-out. Compared to decorative segment, industrial and
automotive JV segments reported good performance. International business
growth was impacted due to sharp currency devaluation in key markets
such as Egypt; Sleek and Ess Ess business reported lower growth due to
transition effects of GST.
Price Hike Fails
to Maintain Margins
Consolidated
gross
margins for the quarter fell by 430bps YoY and 100bps QoQ to 42.8%.
Prices of key raw material Titanium di-oxide were higher by over 25% YoY
during the quarter, which impacted the margins. Although the Company
has undertaken two price increases totalling 5.7% in past four months,
it has not been able to contain the fall in margins. Lower gross margins
coupled with marginal increase in other cost heads led to a 530bps fall
in EBITDA margins to 17.4%.
Outlook &
Valuation
We
expect recovery in
decorative volume growth in coming quarters as trade pipeline fills in
post GST roll-out and will also be aided by good monsoon, implementation
of 7th Pay Commission’s recommendations and higher share of organised
industry in GST regime. We expect the Company to report consolidated net
sales of Rs174.6bn and Rs199.5bn and net profit of Rs21.5bn and
Rs25.6bn in FY18E and FY19E, respectively. Based on expected EPS of
Rs26.7, the stock trades at rich valuations of 43.1x FY19E earnings. We maintain our HOLD recommendation on the stock with rolled over Target Price of Rs1,170, based on 42x June’19 earnings.
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