Stock Review: Asian Paints

THE fourth quarter results of Asian Paints show that cost pressures are building steadily. The performance has come in well below the expectations of the analyst community. Revenues grew 4.7 per cent to `1,960 crore year-on-year, while earnings before interest, taxes, depreciation and amortisation (Ebitda) declined 6.9 per cent to `290 crore. While domestic volumes grew 12 per cent y-o-y, what has come as amajor worry for analysts is the 180 basis points (bps) fall in operating margin to 14.7 per cent.

While the company has undertaken a couple of price rises, these are not enough to mitigate the cost push. Factoring in a 12.4 per cent weighted price rise in FY11, coupled with a 6 per cent price rise in FY12, the total price rise in the last nine months amounts to 18.4 per cent. However, the corresponding increase in the raw material index is approximately 33 per cent, says Emkay Global.

In the coming quarters, the situation is unlikely to change, as raw material costs are expected to increase. In the immediate future, price increase are unlikely to flow to Ebitda immediately, unless cost pressures abate.

But, the good news stems from the demand scenario for paints. The domestic paints segment sales grew 25 per cent annually during the quarter with a volume growth of 17 per cent. For the full year, paint sales grew 24 per cent with a volume growth of 17 per cent. Demand remained robust in all regions of the country, with the eastern region outperforming the other regions on the back of market share gain. International business demand was affected during the quarter due to the unrest in Egypt and West Asia. The Egypt plant remained closed for a week during the quarter due to the unrest.

However, the South Asian market has shown good growth during the quarter. Analysts expect future growth in the international markets to be driven by the South Asian markets.

Looking at the current situation, Religare has marginally revised its FY12 and FY13 earnings by 3.1 per cent and 2.1 per cent, respectively