Hold Asian Paints: Ventura

Ventura has recommended hold rating on Asian Paints, in its May 11, 2012 research report.

“Asian Paints's Q4FY12 revenues exceeded street expectations to grow at 29.5% yoy and stood at Rs 2538.7 crore on the back of price hikes and sustained volume growth. The company had undertaken a cumulative price hike of 12.9% and has registered a volume growth of 14-15% for the year. The company witnessed good growth in interior and exterior emulsions on the changing customer preferences.”
“On the domestic business, the paint revenue grew by 25.5% in value terms while the EBIT stood at 21.0%. The EBIT margins declined by 230 bps on a qoq basis. On the international business front, the company witnessed good growth in South Asian Markets which grew by 21% yoy to Rs 90.6 crore. However, the company witnessed 530 bps decline in EBIT margins on the back of increased raw material costs. While the Middle East markets were affected by uncertain macro and political environment in the region and grew by meagre 12%. Caribbean & Singapore growth were impacted by subdued demand environment. EBIT margins across segments were affected by increase in raw material costs. The Industrial segment, Q4 was slightly better than the rest of the year. However, subdued demand environment with Auto and non Auto industry continued to remain an overhang on the performance of this segment.”
“EBITDA margins for the quarter stood at 15%, up 10 bps on yoy basis, however lower by 50 bps on a qoq basis. Raw Material costs stood higher by 120 bps to 56.6%. However, decline in other expenses by 70 bps yoy and that of personnel expenses by 50 bps yoy lead to the growth in margins. The Material prices have increased by 18.8% over the year, however better contribution from higher margins products and price hikes have helped the company arrest the decline in margins. Despite increase in interest costs and forex losses to the tune of Rs 27 crore, higher other income at Rs 39.7 crore, up 148.8% helped the company post 10 bps growth in net profit margins. Other income was higher on account of treasury gains and dividend from AP International, Mauritius. The effective tax rate stood at 29.3%. The company has given guidance of Rs 700 crore capex for FY13E, which includes Rs 500 crore to be spent on the Khandala plant in Maharashtra. The company has already spent Rs 400 crore on the expansion in FY12. The plant would have a capacity of 3,00,000 KL which can be further scaled to 4,00,000 KL by Q4FY13. The company has recently commissioned additional 50,000 KL capacity in Rohtak. The current plant at Rohtak has a capacity of 2,00,000 KL which can be further scaled to 4,00,000 KL . Current installed paints capacity of the company stood at 6,44,000 KL.”
“Driven by the change in consumer preferences and increasing disposable income in the rural segment, the Industry is undergoing a shift in demand from the low margin products like distempers to emulsions. The demand for high end products is increasing with customers demanding additional products and more choices in the segment. Further, with shift from painting the house as a maintenance exercise to viewing it as a way of reliving the living space and as a status symbol has further increased the per capita consumption of the paints. All these augur well for Asian Paints, the leader in the domestic market. Further, the shift to high margins and softening crude prices would help the company maintain margins. At a CMP of Rs 3619, Asian Paints trades at a PE multiple of 29.4x and 24.3x FY13 & FY14 consensus earnings estimates and at premium valuations. Given the expensive valuations, we recommend a HOLD on the stock,” says Ventura research report.  Public holding more than 90% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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