Asian Paints: Demand conditions in domestic market remain challenging

Margins squeeze is a big negative surprise for Asian Paints, according to Nomura

Nomura Equity Research stated that Asian Paints Q1FY14 results were below expectations with volume growth coming in at 10%, well below its and consensus expectations. Another key negative surprise was the decline in EBITDA margin on a y-o-y basis, despite an improvement in gross margin. Higher overhead and employee costs led to EBITDA margins declining by 150bps y-o-y. Given expensive valuations (29.6x FY15) and risk to its and street earnings, Nomura maintain a cautious stance on the stock at these levels.

 

Q1FY14 results were significantly below Nomura’s estimates. While sales were 8% below estimates, net profit was 22% below estimate and 11% below the street estimate, it said.

 

The results demonstrate that demand conditions remain challenging in the domestic markets. The implied volume growth in the quarter has been around 10%. This will likely continue to be a key issue. Margins squeeze is a big negative surprise, according to Nomura. Margins in international business have gone up marginally but the hit has been largely on account of industrial business where profitability has taken a big hit.

 

Key numbers

Net sales increased 11% y-o-y to Rs28.1 billion against Nomura’s expectation of Rs30.47 billion. A negative surprise of around 7%.
 

Domestic business registered revenue growth of 12.5% y-o-y, implying volume growth of 10% y-o-y.
 

Consolidated gross margin expanded by 110bps y-y to 42.7%, versus Nomura estimate of 90 bps y-y expansion.
 

Net profit came in at Rs2.75 billion against our expectation of Rs3.5 billion.

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ML sectoral trends

Shares of software & IT services companies, paints companies and telecom service companies advanced 9% each. Shares of building material companies, healthcare companies and lifestyle & leisure companies went up by 7%, 6% and 5%, respectively. Airlines companies’ shares declined by 10%.

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