Asian Paints - strong volume growth with gross margin improvement; result update Q3FY08; maintain Buy

Asian Paints (APNT IN, INR 1,108, maintain Buy)

Asian Paints’ Q3FY08 results were ahead of our expectations with strong growth in both, sales and net profits. Key takeaway from the results was robust volume growth across categories in domestic paints on account of both Diwali and Dushera festivals being in Q3 this year as against of only Diwali being in the same quarter last year. EBITDA margins improved by 257bps to 15.8% of net sales led by 210bps drop in raw material costs arising from lower prices of crude-based chemicals and appreciating INR against USD.

The key highlights of the quarter were: (a) consolidated net sales grew by 25.9% Y-o-Y to INR 11,776 mn driven by 29.8% Y-o-Y growth in standalone operations; (b) gross margins improved by 210bps Y-o-Y, while staff expenses dipped by 50bps Y-o-Y to 6.5%; (c) EBITDA grew 50.3% Y-o-Y to INR 1,856 mn as EBIDTA margins grew 257bps Y-o-Y; and (d) net profit grew 66.5% Y-o-Y to INR 1,189 mn.

Continued strong growth in paint volumes and drop in raw material costs have been the key drivers of performance during Q3FY08. The trend in raw materials is expected to remain benign further aided by appreciation of the rupee. In view of Asian Paints’ strong earnings growth, we are revising our EPS estimate for FY08E by 16% to INR 44.3 and FY09E by 9 % to INR 51.4. We are optimistic on the company’s business prospects on the back of consistent buoyancy in decorative paints, continued momentum in industrial paints segment, and better profitability in international business; we expect 17% CAGR in sales and 27% CAGR in earnings for FY07-10E.