Reiterate ‘reduce’ on Asian Paints and cut estimates a tad with an unchanged (despite rollover) target price of R750.
The company missed our and Street’s Q4FY15 estimates by a mile, the third consecutive quarter of miss versus expectations, weaker-than-expected volume growth being the key reason.
Even as Asian Paints’ quarters have routinely been a ‘hit or miss materially’ affair, the weak Q4FY15 does underscore an important point — earnings are never about a single variable (gross margin expansion, in this case; GM expansion did happen but failed to deliver expected EPS growth) and valuations need to factor in the risk to other variables (volumes, in this case).
Consolidated net income of Rs 343 crore (+15% y-o-y) was 14% below our estimates and 12% lower than consensus.
Net income miss was primarily driven by weaker-than-expected topline growth (+7% y-o-y versus +11% expected) that also resulted in a miss at the Ebitda margin level (15.8% versus 17% expected).
Domestic decoratives volume growth was around 3-4% y-o-y, in our view (price/mix contributed the balance 2-3% to standalone revenue growth of 6% y-o-y), second consecutive quarter of low-single-digit volume growth. GMs did expand 320 bps y-o-y to 45.1%, broadly in line with our estimate; however, negative operating leverage driven by subdued topline growth restricted Ebitda margin expansion to 114 bps y-o-y.
At a consolidated level, Asian Paints delivered revenue, Ebitda and recurring PAT growth of 12%, 12% and 16% respectively for FY15 — decent in absolute terms, but weak versus Street’s expectations.
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