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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