Asian Paints Ltd Result Update: Q1 FY 12 C.M.P: Rs. 3290.00 Target Price: Rs. 3717.00 Date: Sep. 05 th 2011 BUY Stock Data: Sector: Paints Face Value Rs. 10.00 52 wk. High/Low (Rs.) 3365.95/2366.00 Volume (2 wk. Avg.) 5505.00 BSE Code 500820 Market Cap (Rs in mn) 315576.80 Share Holding Pattern 1 Year Comparative Graph SYNOPSIS Asian Paints is India s largest paint company & Asia s third largest paint company, with a turnover of Rs 77.06 billion. During the quarter ended, the robust growth of Net Sales is increased by 18.66% Rs. 2636.60 million. During the quarter, the Company invested Rs 15 crores in AP Coatings Ltd., Company s owned subsidiary. Net Sales and PAT of the company are expected to grow at a CAGR of 13% and 6% over 2010 to 2013E respectively. ASIAN PAINTS BSE SENSEX Asian Paints is present in 22 countries with 27 manufacturing locations, over 2500 SKU's, Integrated SAP - ERP & i2 - SCM solution. Asian Paints is the 10 th largest decorative paint company in the world. Years Net sales EBITDA Net Profit EPS P/E FY 11 77062.40 13956.00 8432.40 87.91 37.42 FY 12E 87851.14 15228.67 9243.44 96.37 34.14 FY 13E 96636.25 16751.53 10195.33 106.29 30.95 1
Peer Group Comparison Name of the company CMP(Rs.) Market Cap. (Rs.mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Asian Paints Ltd 3290.00 315576.80 87.91 37.42 14.43 320.00 Kansai Nerolac Paints 820.00 4451.48 39.95 20.68 4.68 100.00 Berger Paints India Ltd 100.25 3469.38 4.39 22.84 4.81 65.00 Shalimar Paints Ltd 411.00 155.59 31.57 13.02 2.90 80.00 Investment Highlights Q1 FY12 Results Update Asian Paints Ltd has posted net sales of Rs 22603.70 million for the quarter ended on June 30, 2011 as against Rs 18302.20 million in the same quarter last year, an increase of 23.50%. It has reported net profit of Rs 2636.60 million for the quarter ended on June 30, 2011 as against Rs 2221.90 million in the same quarter last year, a decline of 18.66%. Total income grew by 23.92% to Rs 22909.00 million from Rs. 18486.30 million in the same quarter last year. During the quarter, it reported earnings of Rs 27.49 a share. Quarterly Results - Consolidated (Rs in mn) As At June-11 June-10 %change Net sales 22603.70 18302.20 23.50% Net Profit 2636.60 2221.90 18.66% Basic EPS 27.49 23.16 18.66% 2
Break up of Expenditure Company plans to increase the installed capacity at Rohtak in Haryana In April 2010, the state-of-the-art manufacturing facility at Rohtak in Haryana was commissioned with an initial capacity of 150,000 Kilo Liters (KL) per annum. Company plans to increase the installed capacity at this plant to 200,000 KL per annum by fourth quarter of FY 2011-12. Construction commenced at Khandala near Pune (in Maharashtra) for the seventh Decorative Paints plant Construction work proposed for seventh decorative paint plant in Khandala, Maharashtra with an initial capacity of 300,000 KL per annum of paints with an investment of around 1000 crores. The plant will be commissioned sometime around the last quarter of FY 2012-13. The Khandala plant can be expanded to 400,000 KL per annum later. 3
Company Profile Asian Paints is India s largest paint company and Asia s third largest paint company, with a turnover of Rs 77.06 billion. The group has an enviable reputation in the corporate world for professionalism, fast track growth, and building shareholder equity. Asian Paints operates in 22 countries and has 27 paint manufacturing facilities in the world servicing consumers in over 65 countries. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and Taubmans. Global Presence Caribbean- Barbados, Jamaica, Trinidad & Tobago Middle East - Egypt, Oman, Bahrain & UAE Asia India, Bangladesh, Nepal, Sri Lanka & Singapore South Pacific - Fiji, Solomon Islands, Samoa, Tonga & Vanuatu Subsidiaries Directly held subsidiaries of the company are: APCO Coatings Asian Paints Industrial Coatings Limited Berger International Ltd SCIB paints Asian PPG Industries Ltd (JV) Taubmans Paints Business Segments Company business is divided mainly into two segments. They are: Paints Segment Chemicals Segment 4
1) Paints Segment This is the primary business of the company. Out of the total revenue earned by the group 9% is generated from this segment. This segment is divided into two. Decorative Paints: Decorative Paints business contributes around 94% in the total paint business. The company ranks no. 1, in the country in this segment with around 8500 colors to offer to its customers. It has 5 manufacturing plants operating all over the country, which is strategically located in-order to cater to the widely spread, market. Segments Paints Chemicals Interior Wall Finish Exterior Wall Finish Enamels Wood Finishes Decorative Paints Industrial Paints Powder Coating Other Industrial Paints Industrial Paints Phthatic Anhydride Penraerythritol In Decorative paint segment, the Company operates in four main segments i.e. interior wall finish, Exterior wall finish, Enamels and Wood Finishes. Besides, the company outsources around 25-30% of its total production. Decorative paints segment constitute around 72% of the paint market in India. 5
Industrial Paint Segment: In this business, the company caters to automotive, powder, protective coatings, road markings segment, floor coatings and General Industrial Paints. Most of the industrial paints business is operated by two companies viz. Asian PPG Ltd. and Asian Paints Industrial Coating Ltd. The company ranks first in the automotive paints business in domestic market. The company ranks second in protective segment and first in the road-marking segment. Recently it has entered in floor coating segment. 2) Chemicals Segment Chemical business includes manufacturing of Phthalic Anhydride (PAN) and Penraerythritol (PENTA). APL has its PAN manufacturing plant at Gujarat (capacity 25,200 MT) and PENTA manufacturing facility at Tamil Nadu (capacity 3000 MT). The company consumes nearly 50% of its production as captive consumption and sells the remaining in the open market. This business contributes around 3% to company s consolidated revenues. 6
Financial Results 12 Months Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) FY10 FY11 FY12E FY13E Description 12m 12m 12m 12m Net Sales 66809.40 77062.40 87851.14 96636.25 Other Income 1405.00 826.30 908.93 999.82 Total Income 68214.40 77888.70 88760.07 97636.07 Expenditure -54533.20-63932.70-73531.40-80884.54 Operating Profit 13681.20 13956.00 15228.67 16751.53 Interest -284.70-222.30-253.42-283.83 Gross profit 13396.50 13733.70 14975.24 16467.70 Depreciation -835.60-1131.30-1244.43-1368.87 Exceptional Items 9.30 0.00 0.00 0.00 Profit Before Tax 12570.20 12602.40 13730.81 15098.83 Tax -3731.10-3788.90-4098.65-4507.00 Profit After Tax 8839.10 8813.50 9632.17 10591.83 Extraordinary Items 0.00 0.00 0.00 0.00 Minority Interest -482.70-381.10-388.72-396.50 Net Profit 8356.40 8432.40 9243.44 10195.33 Equity capital 959.20 959.20 959.20 959.20 Reserves 16140.60 20915.00 30547.17 41138.99 Face value 10.00 10.00 10.00 10.00 EPS 87.12 87.91 96.37 106.29 7
Quarterly Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) 31-Dec-10 31-Mar-11 30-Jun-11 30-Sep-11E Description 3m 3m 3m 3m Net sales 20996.00 19656.30 22603.70 24864.07 Other income 193.70 199.60 305.30 338.88 Total Income 21189.70 19855.90 22909.00 25202.95 Expenditure -17546.90-16761.90-18682.00-20587.45 Operating profit 3642.80 3094.00 4227.00 4615.50 Interest -58.50-76.00-65.10-70.96 Gross profit 3584.30 3018.00 4161.90 4544.54 Depreciation -286.40-291.60-291.10-299.83 Exceptional Items 0.00 0.00 0.00 0.00 Profit Before Tax 3297.90 2726.40 3870.80 4244.71 Tax -974.20-817.70-1154.90-1273.41 Profit After Tax 2323.70 1908.70 2715.90 2971.30 Extraordinary Items 0.00 0.00 0.00 0.00 Minority Interest -120.40-48.50-79.30-81.68 Net Profit 2203.30 1860.20 2636.60 2889.62 Equity capital 959.20 959.20 959.2 959.2 Face value 10.00 10.00 10.00 10.00 EPS 22.97 19.39 27.49 30.13 8
Key Ratios Particulars FY10 FY11 FY12E FY13E No. Of Shares(in mn) 95.92 95.92 95.92 95.92 EBITDA Margin (%) 20.48% 18.11% 17.33% 17.33% PBT Margin (%) 18.82% 16.35% 15.63% 15.62% PAT Margin (%) 13.23% 11.44% 10.96% 10.96% P/E Ratio (x) 37.76 37.42 34.14 30.95 ROE (%) 51.69% 40.29% 30.57% 25.16% ROCE (%) 74.86% 62.29% 48.49% 40.55% Debt Equity Ratio 0.13 0.11 0.08 0.06 EV/EBITDA (x) 23.07 22.61 20.72 18.84 Book Value (Rs.) 178.27 228.05 328.47 438.89 P/BV 18.45 14.43 10.02 7.50 Charts: Net Sales & PAT 9
P/E Ratio(x) Debt Equity Ratio 10
EV/EBITDA(x) P/BV 11
Outlook and Conclusion At the current market price of Rs.3290.00, the stock is trading at 34.14 x FY12E and 30.95 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.96.37 and Rs.106.29 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 13% and 6% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 20.72 x for FY12E and 18.84 x for FY13E. Price to Book Value of the stock is expected to be at 10.02 x and 7.50 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.3717.00 for Medium to Long term investment. Industry Overview Paint is defined as the group of emulsions, consisting of pigments suspended in a liquid medium, for use as decorative or protective coatings. Paint ranges from the broad group of environmentally-sound latex paints used to decorate and protect homes and the translucent coatings that line the interior of food containers, to the chemically-complex, multi-component finishes that automobile manufacturers apply on the assembly line. Paint industry is going through a colorful & happy time with demand rising sharply. Growth in housing, automobiles and construction are all driving the rise in current consumption. Decorative paints cater to the housing sector; industrial paints cater to automobile original equipment manufacturers (OEMs), industries and railways. 12
Paint demand can also be categorized into new or refinish/refurbishment demand. Fresh demand depends on the construction, housing and auto sectors, while refinish/refurbishment demand is directly related to the disposable incomes and higher aspirations of consumers i.e. both the ability as well as the willingness to spend. A boom in the Indian housing sector, increasing urbanization, easy availability of housing loans and a shift from semi-permanent to permanent housing structures have been driving growth in the decorative paints segment, which accounts for nearly 65-70% of the Indian paint industry. There is seasonality involved in the demand for decorative paints. Consumption peaks around festive time. Market Structure The paint industry volume in India has been consistently growing at more than 15% per annum for some years now. The strong growth was supported by a favourable monsoon and good industrial growth especially in the automotive sector. Growth in turnover was significantly higher than the volume growth as large price increases had to be affected during the year. In International Business, political turmoil in Egypt and Bahrain impacted business conditions in these countries during the last quarter of the year. While South Asian markets fared relatively better, the impact of economic slowdown persisted in some of the other international markets where your Company operates. Indian Paints Industry can be classified into two sub-segments: Decorative Paints Industrial Paints The paint industry is divided into organized and unorganized sector. The unorganized segment plays a huge role in decorative paint segment due to low technical know-how and highly scattered market. The organized segment constitutes around 54% of the 13
total volume and 65% of value of paints industry. Again the whole paints industry can be classified into decorative (75% of total industry size) and industrial paints (25% of total industry size). Further, in organized segment, the top 6 players account for around 84% by volume and 63% by value. The remaining players in organized business are largely present in non-auto industrial segment, and the unorganized players are mainly operational in decorative paints segment as industrial paints requires high technological know how and client tie-ups. Decorative paint (including interior and exterior wall finishes, enamels, wood finishes and ancillary products) constitutes around 72% of the paint market in India. 2010-11 was a good year for the paint industry. Sharp increase in raw material prices was one of the key concerns identified by Company for FY 2010-11 and as expected, it posed significant challenges throughout the year. The recovery of the global economy leading to a revival of demand especially in countries like India, China and the U.S., coupled with the rise in crude prices and shortage of key raw materials has led to a steady increase in prices across all categories of raw materials. In India, factors like power shortages, increase in labour and transportation cost also contributed to the inflation. The overall impact of inflation during the year was in excess of 13%. This was countered through price increases at regular intervals (five in all totaling over 12% for the year). Fortunately, this substantial increase in prices did not affect demand which continued to be robust. Margins, however, were under severe pressure during the year and continue to be a concern going forward Conclusion With the revival of the construction boom post recession also the resurgence of the automotive and consumer durable industries, the Indian paint industry is heading for an exciting phase of growth and profitability. Demand in case of industrial segment is also expected to increase going forward. Domestic and global auto majors have long term plans for the Indian market, which augur well for automotive paint manufacturers like Kansai Nerolac and Asian PPG. Increased industrial paint demand, 14
especially powder coatings and high performance coatings will also propel topline growth of paint majors in the medium term. A better focus on supply chain or distribution mechanism backed by aggressive promotion will drive the fortunes of the Indian paint industry like never before over the years to come. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 15
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