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MOSL: ANNUAL REPORT THREADBARE (ART) | ASIAN PAINTS: Rising capital intensity keeps return ratios subdued

ANNUAL REPORT THREADBARE (ART) | ASIAN PAINTS: Rising capital intensity keeps return ratios subdued

 

Asian Paints’ FY19 annual report highlighted continued pressure on its consol. RoCE (down 640bp from 28.8% in FY15 to 22.4% in FY19). This can primarily be attributed to rising capital intensity due to increased capex and the subdued operating performance. Standalone RoCE declined 880bp to 28.6% over the last five years, while subsidiaries’ RoCE was down to 4.1% from 7.1% in FY15. The rise in working capital led to a decline in earnings-to-cash flow conversion to 89% in FY19 from 99% in the previous year and kept OCF modest at INR22.1b (FY18: INR21.1b). Consol. revenue grew 15% to INR193.4b, but (a) higher RM costs, (b) deteriorating product mix and (c) rising discounts resulted in an 80bp contraction in the EBITDA margin to 18.2%. Consol. PAT grew at a relatively slow pace of 5.9% to INR21.6b (FY18: INR20.4b). Over FY16-19, discounts increased by 170bp to 12.8% of gross revenue. Purchases from entities related to KMP stood at INR5.4b, accounting for 5.2% of raw materials consumed (FY18: INR4.3b, 5.1% of RMC).

 

• Aggressive capacity expansion drags standalone RoCE: As a result of its increased focus on capacity addition, APNT (standalone) recorded a CAGR of ~20% in capital employed, from INR32.9b in FY14 to INR80.7b in FY19. Over the same period, earnings (EBIT post tax) grew at a CAGR of 13%, from INR11.8b to INR21.5b. Consequently, standalone RoCE (ex-investment in subsidiaries) fell 880bp from 37.4% in FY15 to 28.6% in FY19.