>ASIAN PAINTS

Asian Paints reported disappointing set of numbers for Q1FY13 on the back of meagre volume growth. Company reported consolidated sales of INR 25,479mn, a YoY growth of 12.72% largely led by price increases. EBIDTA margin improved by 18bps YoY to 17.53%. PAT grew by 9.38% YoY to INR 2,884mn which was below our expectation. We expect volume growth to pick in next quarter; however, improvement in monsoon and stable exchange rate would be the key catalyst for the company's performance. We expect consolidated sales and PAT CAGR of 16.77% and 18.62% over FY12-14. At CMP, stock is trading at 30x FY13E EPS, which in our view is high on the backdrop of falling demand and continued pressure on margins. We downgrade to SELL.



Disappointed volume growth
Company's domestic decorative paints (standalone) business grew by 11.24% (after adjustment for shift in industrial business from standalone to subsidiary) representing a meagre volume growth of ~1% which is quite low compared to ~14% CAGR in last 2 years. The lower growth in volumes is attributed to higher stocking by dealers in previous quarter and lower consumer confidence in weak macro-environment which was also dented by ~25% cumulative price hikes taken by the company in last two years. However, we expect volume growth to pick up from next quarter onwards albeit at slower pace.


Price hikes supported margin expansion
Effective price hikes of ~5% YTD in decorative paints business supported by lower cost inventory helped company to improve its standalone EBIDTA margin by 343bps QoQ and 112bps YoY to 19.68%. However, the margin expansion in Q1FY13 in our view is not sustainable and is likely to contract in next quarter. Continued pressure on international and industrial paints business resulted in consolidated EBIDTA margins to improve by 249bps QoQ and 18bps YoY, lower than standalone. INR depreciation bereft company to take benefit of fall in international prices of key RM like TiO2 and crude derivatives.



Other business, a mixed bag
Other businesses including international and industrial paints business grew by ~32% YoY. International business reported good growth on the back of continued growth momentum in South Asian markets (except Nepal) and improved macro-environment in Middle East. Industrial paints business though reported growth in revenues but inability to pass RM inflation to institutional clients resulted in margin erosion. Growth in international and industrial paints business is expected to come down on the back of overall slowdown in Global economy and industrial sector.


Bad monsoon could be a damper
Company saw slowdown in rural demand owing to high inflation and delayed monsoon. In the event of bad monsoon, there could be risk to demand scenario particularly in rural markets which currently contribute ~50% to decorative paints revenue.


Outlook & Valuation
After considerable slowdown on volume front from ~16% in FY11 to ~11% in FY12 and ~1% in Q1FY13, we expect the downward trend in demand to continue. Lower demand also reduces the scope for any price hikes which would continue to put pressure on margins on the backdrop of high RM cost pressure. Poor monsoon and INR depreciation (against USD) could pose further risk to the overall performance of the company and therefore are key watchable. We downgrade the rating on the stock to SELL with target price of INR 3,336 (18 months) discounting FY14E EPS at 23x.