Hold Asian Paints; target of Rs 2820: Emkay

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Hold Asian Paints; target of Rs 2820: Emkay

Emkay Global Financial Services has recommended hold rating on Asian Paints (APL) with a target of Rs 2,820, in its October 24, 2011 research report.

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Emkay Global Financial Services has recommended hold rating on Asian Paints (APL) with a target of Rs 2,820, in its October 24, 2011 research report.

"Asian Paints' (APL) revenue increased 24% yoy to Rs 22.5 bn. Ebidta margins at 14.3% and APAT of Rs 2.1 bn decline of 3% yoy is much below our expectations. Domestic volume growth in decorative paints reported a weak quarter at 10% vs our expectation of 12%. Industrial coatings continued its subdued demand performance. Continued increase in titanium dioxide prices, coupled with higher operating costs resulted in a sharp decline of 400 bps in EBITDA margins to 14.3%. Lowered FY12E/13E EPS by -2%/-3% to Rs 101.4 and Rs 117.5, respectively."

"Revenue growth of 24% yoy to Rs 22.5 bn is marginally below our expectations. Volume growth of 10% in domestic decorative paint segment against our expectation of 12% has resulted in this deviation. While the monsoon season continued to impact the decorative paints, industrial, especially auto segment, continued its subdued demand performance. International business registered healthy revenue growth of 19% yoy during this quarter. Higher raw material costs continued to play the havoc. This, coupled with higher-than-expected other expenditure due to forex loss of Rs 150 mn and preloaded A&P costs due to Q3 festive season, resulted in consolidated operating margins contracting by 400 bps to 14.3%, against our expectation of 16.4%. Consequently, consolidated APAT registered a fall of 3% yoy to Rs 2.1 bn, below our expectation of Rs 2.4 bn."

"Domestic paint growth has slowed during the quarter due to extended monsoon in Q2FY12. We expect Q3 volumes to pick-up qoq in light of the festive demand, however, being a discretionary product category, we re-iterate on a full year basis, volumes will moderate and revert to the mean levels - Expect volume growth of 1.9X GDP in FY12E and FY13E. Continuation of moderation in volumes and absence of any upgrade catalysts will continue to hamper the stock performance in the near term. Despite price increase of 8.5% increase since May 2011, continued increase in titanium dioxide prices coupled with higher other operating expenditure on account of Rs 150 mn forex loss and pre-loaded A&P expenditure resulted in sharp 400 bps EBITDA margin contraction to 14.3%. We re-iterate that operating margins will continue to trail cost inflation and hence, operating margins to remain under check - Expect EBITDA margin to decline 100 bps yoy in FY12E. Absence of upgrade catalysts to weigh on stock - Re-iterate Hold with revised target price of Rs 2,820 per share," says Emkay Global Financial Services research report.

FIIs holding more than 30% in Indian cos

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To read the full report click on the attachment