Asian Paints’ Q3FY14 revenue/Ebitda/PAT grew c12%, c5% and -c2% respectively and were below estimates. Two key issues were lower than expected volume growth (we estimate c7%) in the domestic decorative business and gross margin compression of 315bp sequentially, coupled with higher other operating and employee expenses in the standalone business. Gross margin impact was aggravated by adverse currency movements (Aug-Sept) and an increase in input costs such as monomers and solvents.
Although the demand environment is volatile and challenging, Asian Paints is confident of achieving double-digit volume growth for FY14, which implies 8.5-9% growth in Q4.
In our view, lower-than-expected Q3 volume growth of c7% was also due to overstocking in the last quarter due to the early festive season (Q2 volume growth was inflated at 13-14%). Employee costs had one-off elements of new wage settlements with the union (arrears paid of past periods were provisioned in Q3).
We remain overweight on the stock but cut target price to R590 (from R610). Valuation that looks optically expensive at 31.6x FY15 PE is actually pricing in relatively modest growth expectations of c11%. We view this short-term weakness as temporary and any excessive weakness on the back of these results as a buying opportunity into this structurally attractive name.
HSBC
