The gloss is gone

Updated: Jul 29 2013, 17:16pm hrs
Asian Paints consolidated revenues at R28.2bn rose 11% year-on-year, below expectations (Citi/consensus: R28.8/ R28.3bn). Decorative paints volume growth is estimated 10% y-o-y on a low base (no growth in Q1FY13). Despite input cost tailwinds, Ebitda was flat & PAT (profit after tax), down 5% to R4.4bn & R2.8bn (missing our/street estimates by >10%). While some cost pressures (operating/capital costs on Khandala plant + higher fuel & freight costs) were known, the revenues miss, lower-than-expected GM (gross margin) expansion and certain negative surprises (discount rate change for gratuity/leave liabilities + FX loss) led to the sharp profit miss.

GM expansion of 120bps y-o-y and 30bps quarter-on-quarter to 42.7% was led by the overseas subsidiariesand was less than anticipated as the weaker INR played the spoilsport in India.

Ebitda margins contracted 160bps y-o-y to 15.7%disappointing, considering the raw material environment. Further, the variance was due to higher staff costs (+27% y-o-y, change in discount rate used for gratuity/long-term leave liabilities led to an incremental R100m this quarter) and other expenses (+23% y-o-y, Fx loss + higher manufacturing, power and freight costs).

Like Q4FY12, Ebitda of R4.4bn was once again flattish y-o-y. Higher depreciation costs of the new Khandala plant (incremental R200m this quarter) and higher tax rate led to a 5% decline in consolidated PAT to R2.8bn.

Standalone revenue growth was a tepid 13% y-o-y despite a fairly benign base of last year (flat volumes, 7% value growth in Q1FY13). Ebitda was R4bn (+1% y-o-y) as margins declined 190bps to 17.4%. Standalone PAT was up a modest 3% y-o-y to R2.8bn.

Rupee plays spoilsport: 40-45% of inputs are imported and thus, the weak INR is a net negative (offsets any translation gains from international revenues). Soft global commodity prices havent flown through entirely; TiO2 (titanium dioxide) was flat-to-marginally higher in INR terms.

Paring estimates, TP: We cut EPS (earnings per share) estimates by 3-6% (lower revenues, GMs & cost pressures) & consequently TP (target price) to R4,050 (28x Sept14e EPS). Retain Sell.