Asian Paints Reported PAT at Rs2.22bn was ahead of our estimates (Rs2.1bn). EBITDA was c10% ahead of our estimates – driven by both a revenue beat of ~8% and EBITDA margin beat, which at 19% exceeded estimates by 20bps. Higher depreciation coupled with lower financial income resulted in PAT beat of ~5%.
Gross margins at parent and consolidated level contracted ~120 and ~210bps Y/Y respectively – a combination of costs + higher excise duties. We believe gross margins have peaked – forecast ~140bps GM contraction over FY10-12E. In future, pricing power should remain strong, enabling ASPN to manage cost pressures.
There could be some element of stocking (given ~4% price hike in May, followed by ~2.8% in July). Mix also appears to have improved, which should enable ASPN to mitigate margin pressures over the next 2 years.
Citi and Merrill say,
Asian Paints at 19xFY12E is trading at ~10% discount to FMCG sector. This we believe is unjustified given stronger earnings growth, lower competitive & possible positive surprise from volume growth and margins. We reiterate our Buy with a PO of Rs2700 on expected re-rating to 21xFY12E, in line with sector average.
