Asian Paints - 1QFY18 Result Update - Revenues in Line-Hold

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.