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Paints: A positive 3QFY02? - Views on News from Equitymaster
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  • Jan 7, 2002

    Paints: A positive 3QFY02?

    Starting January 10th 2001, the third quarter result season is set to unfold. With the sharp run up on the bourses over the last two weeks, expectations are on the higher side. Here we take a look at the first half performance of the paint companies and what 3QFY02 holds for the paint majors. Consolidated 1HFY02 numbers include results of Asian Paints, Goodlass Nerolac, Berger and ICI India.

    If one were to look at the first half performance of the paint sector, topline has declined by 1.7%. However, this is primarily on account of an 11.2% fall in sales reported by ICI India. Excluding ICI, topline actually grew by 1.9% in 1HFY02. Topline growth was lacklustre in 1QFY02 and 2QFY02 in light of the slowdown in the economy. The rise in other income is on account of higher lease rentals from installation of dealer tinting machines. One can expect the rise in other income to sustain in the coming years in line with the expansion in number of tinting machines.

    Paints-Consolidated 1HFY02 performance…
    (Rs m) 1HFY01 1HFY02 Change
    Sales 15,577 15,312 -1.7%
    Other Income 155 240 55.0%
    Expenditure 13,830 13,561 -1.9%
    Operating Profit (EBDIT) 1,748 1,751 0.2%
    Operating Profit Margin (%) 11.2% 11.4%  
    Interest 218 172 -21.1%
    Depreciation 392 465 18.6%
    Profit before Tax 1,293 1,354 4.7%
    Extraordinary item 90 (11)  
    Tax 386 402 3.9%
    Profit after Tax/(Loss) 997 942 -5.5%
    Net profit margin (%) 6.4% 6.1%  

    There are few favorable factors that are expected to drive profitability of paint companies in the third quarter of the current fiscal. For one, the kharif output has been comparatively higher, which should increase paint demand in rural areas. Secondly, auto sales, led by passenger cars and commercial vehicles, have picked up in the last three months and are expected to boost growth for companies like Goodlass, the market leader in the automotive paint sector. Thirdly, the festive season is spread across two quarters in the current year and much of it is expected to accrue in 3QFY02.

    On the raw material front, with crude price falling notably over the last three months, titanium dioxide prices that account for almost 60% of raw material costs has also declined. Against an average price of US$ 1,950 per tonne in 2QFY01, titanium dioxide prices are currently ruling around US$ 1,750 levels. Most of the paint majors have passed on the benefit to the consumers in the last two months, which should also help in boosting revenue growth.

    But one has to keep in mind that the industry growth is expected to slowdown to around 7%-8% in the current fiscal as against 10%-11% growth witnessed last year. However, the organised sector would continue to expand market share in the current fiscal. Overall, 2002 is expected to be good for the paint industry.



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