Fwd: RBS Sees Structural Improvement In Asian Paints, Rates It A BUY

 

 

Asian Paint has maintained its EBITDA margin at 19.8% in the past five quarters(vs 15-16% in last 20 years) and continues to defend it without compromising onvolume growth. It has raised paint prices by 8% so far in FY11, against a 6.5%increase in raw-material costs in 1Q11. We raise our forecasts and reiterate Buy.
1Q11 performance ahead of our expectations
Asian Paints (AP) reported net sales growth of 28% in 1Q11, vs our expectation of 16% yoy growth. This was driven by strong paints demand and a 4.15% price increase for decorative paints effected in May 2010. EBITDA margin expanded 260bp qoq to 20.2%, despite an 80bp qoq increase in raw-material costs as a percentage of sales. EBITDA grew 23% to Rs3bn.
Raw-material outlook now challenging, AP raises decorative paint prices by about 8%The raw-material cost outlook for AP has turned challenging because of supply-side issuesfor some of its key inputs, such as titanium dioxide routile and acrylic monomers. AP's rawmaterial cost index, which had turned benign in FY10, was at 106.5 in 1Q11 (taking FY10 prices as the base).
The company has increased its decorative paints prices by around 8% so far in FY11 (4.15% in May, 2.6% in July and 1.2% in August 2010), which should help itmaintain margins in the near term, in our view.
EBITDA margin is on a structural uptrend, in our view
AP's EBITDA margin, which averaged 15-16% over the last 20 years, seems to be on astructural uptrend, with an average of 19.8% in the last five quarters. The company's EBITDA margin, which declined to 17.6% in 4Q10, bounced back to 20.2% in 1Q11, aided by price increases. We forecast an average of 19.2% for the next three years.
We raise earnings forecasts by 2-11%; reiterate Buy
We increase our FY11-13F earnings by 2-11% to reflect the better-than-expected 1Q11earnings, which raises our DCF-based target price to Rs2,924 (from Rs2,550). Our targetprice includes Rs204/share for AP's international business. At this price, the stock wouldtrade at 26.1x FY12F PE (adjusting for international business value), which is not cheap, but we believe the premium valuation is justified by the superior growth outlook and high ROEs.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.      
   

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**[investwise]** RBS Sees Structural Improvement In Asian Paints, Rates It A BUY

 

Asian Paint has maintained its EBITDA margin at 19.8% in the past five quarters (vs 15-16% in last 20 years) and continues to defend it without compromising on volume growth. It has raised paint prices by 8% so far in FY11, against a 6.5% increase in raw-material costs in 1Q11. We raise our forecasts and reiterate Buy. 1Q11 performance ahead of our expectations Asian Paints (AP) reported net sales growth of 28% in 1Q11, vs our expectation of 16% yoy growth. This was driven by strong paints demand and a 4.15% price increase for decorative paints effected in May 2010. EBITDA margin expanded 260bp qoq to 20.2%, despite an 80bp qoq increase in raw-material costs as a percentage of sales. EBITDA grew 23% to Rs3bn. Raw-material outlook now challenging, AP raises decorative paint prices by about 8% The raw-material cost outlook for AP has turned challenging because of supply-side issues for some of its key inputs, such as titanium dioxide routile and acrylic monomers. AP's rawmaterial cost index, which had turned benign in FY10, was at 106.5 in 1Q11 (taking FY10 prices as the base). The company has increased its decorative paints prices by around 8% so far in FY11 (4.15% in May, 2.6% in July and 1.2% in August 2010), which should help it maintain margins in the near term, in our view. EBITDA margin is on a structural uptrend, in our view AP's EBITDA margin, which averaged 15-16% over the last 20 years, seems to be on a structural uptrend, with an average of 19.8% in the last five quarters. The company's EBITDA margin, which declined to 17.6% in 4Q10, bounced back to 20.2% in 1Q11, aided by price increases. We forecast an average of 19.2% for the next three years. We raise earnings forecasts by 2-11%; reiterate Buy We increase our FY11-13F earnings by 2-11% to reflect the better-than-expected 1Q11 earnings, which raises our DCF-based target price to Rs2,924 (from Rs2,550). Our target price includes Rs204/share for AP's international business. At this price, the stock would trade at 26.1x FY12F PE (adjusting for international business value), which is not cheap, but we believe the premium valuation is justified by the superior growth outlook and high ROEs. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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**[investwise]** South Indian Bank-Play For Stock Split, M&A....Target Rs 240

 

South Indian Bank-Superior fundamentals but valuation at discount to peers SIB trades at a 10-30% discount to comparable peers such as Federal Bank, ING Vysya Bank, Karnataka Bank and Dhanalakshmi Bank despite its superior growth profile, stronger balance sheet and higher RoE. We expect this anomaly to correct in the next 3-6 months. Further with no promoter interest, SIB is also an attractive M&A play. SIB is set to sail faster post a successful transformation Under the aegis of new management, South Indian Bank (SIB) has transformed from a tradional, inefficient, treasury-focused, regional private bank to a modern, tech savvy, efficient, core operation focused and regionally more diversified private bank.  The brand equity of the bank has witnessed a sea change, which is reflected in the 22% and 24% balance sheet and loan CAGR over FY05-10. With transformation complete, SIB is set for a smoother and sturdier growth over the next three years through execution on its strategic plan – 'Vision 2013'. Under this, the bank is targeting a robust 25% business CAGR over FY10-13 and further improvement in efficiency levels. With credit environment turning favourable and a credible management, we are confident that SIB would achieve its targets. 28% NII CAGR over FY10-12; adequately capitalized for growth On the back of firm margin and 24% credit growth, we expect SIB to deliver a strong 28% NII CAGR over FY10-12. Bank's NIM is likely to move in a narrow band of 2.6-2.9% in the medium term cushioned by improvement in C/D ratio and strong deposit franchise that includes low-cost NRI deposits. Presently, SIB has the highest Tier-I capital amongst private banks at 13.1% providing more than sufficient headroom to grow at the targeted pace.  The bank's balance sheet is one of the strongest in the industry with a high Tier-1 capital, low RWA/IEA ratio (45%) and negligible net NPLs (0.4%). Asset quality to remain stable; RoE to improve The asset quality of SIB has significantly improved over the past five quarters with GNPLs declining from 2.2% in Q4 FY09 to 1.3% in Q1 FY11. With conservative provisioning, the NNPLs have come down to 0.4% from 1.1% in the aforesaid period and PCR has crossed the 70% mark.  Going ahead, we expect NPL levels to remain stable with strong loan book expansion. The FY10 RoA and RoE of SIB at 1% and 17% respectively were better than many private banks and we expect the RoE to improve to 19% by FY12 despite being conservative with respect to treasury income and provisioning. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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