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Asian Paints: Bolstered by strong demand

Jan 23, 2010

Performance summary
  • Revenues grow by 23% YoY during 3QFY10 led by the decorative paints business in India and the Middle East.
  • EBDITA margins improve substantially by 11.3% during the quarter due to a considerable fall in raw material, staff costs and other expenditure (as percentage of sales).
  • Led by the strong growth in operating profits higher other income and lower depreciation charges, net profits more than triple during the quarter.

Consolidated results
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 13,220 16,200 22.5% 40,407 48,042 18.9%
Expenditure 12,117 13,019 7.4% 35,480 38,874 9.6%
Operating profit (EBIDTA) 1,104 3,181 188.2% 4,927 9,168 86.1%
Operating profit margin (%) 8.3% 19.6%   12.2% 19.1%  
Other income 111 167 50.2% 380 1,197 215.3%
Interest 66 79 20.2% 189 215 14.2%
Depreciation & amortisation 202 197 -2.9% 543 594 9.5%
Profit before tax 946 3,072 224.6% 4,575 9,555 108.8%
Exceptional item - 2   - 2  
Tax 291 955 228.7% 1,444 2,864 98.3%
Prior period items (6) (1)   (20) (2)  
Profit after tax 650 2,118 226.0% 3,111 6,692 115.1%
Minority interest (60) (133) - (144) (261)  
Net income 590 1,986 236.5% 2,967 6,431 116.7%
Net profit margin (%) 4.5% 12.3%   7.3% 13.4%  
No. of shares (m)       95.9 95.9  
Diluted earnings per share (Rs)*         77.6  
Price to earnings ratio (x)*         22.8  
* on a trailing twelve month basis

What has driven performance in 3QFY10?
  • For 3QFY10, Asian Paints’ revenues on a consolidated basis grew by 23% YoY. Growth was led by good demand conditions across various parts of the country. A lower base in the corresponding previous quarter may also have helped matters. It may be noted that a slump in demand in 3QFY09 had considerably hampered the company’s performance both at the topline and bottomline level. While the company has not divulged details of the segmental revenues, on the international front, as in the past, the Middle East would have been the strongest performer of the lot. For 9mFY10, the company’s topline grew by an impressive 19% YoY.

  • Asian Paints’ operating margins during 3QFY10 improved substantially by 11.3% to 19.6% largely due to a substantial fall in raw material, staff costs and other expenditure (as percentage of sales). Raw material costs fell sharply from 63.8% of sales in 3QFY09 to 56.3% in 3QFY10 as material prices stayed low despite the increase in crude prices. This resulted in the company reporting strong margins. However, crude prices have been staying firm and the company does not expect these margins to be sustainable going forward. Good profit growth in the decorative, industrial and the international segments also helped in bolstering overall profitability.

  • Led by the strong growth in operating profits, higher other income and lower depreciation charges, net profits more than tripled during the quarter. For the nine month period, growth in net profits stood at 117% YoY.

What to expect?
At the current price of Rs 1,767, the stock is trading at a multiple of 19.9 times our estimated FY12 earnings. In the paint sector, Asian Paints has the edge given the quality of its management and its strong brand and pricing power. As far as capex is concerned, the construction of the plant at Rohtak is on schedule and the first phase is expected to be commissioned by April 2010. Further, the company has finalized the land for its seventh paint plant in Western Maharashtra and construction is expected to commence in mid 2010.

The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. As far as the international business is concerned, focus would be on increasing the market share through initiatives such as new product launches, dealer tinting systems and increasing operating efficiency. However, the scenario for the industrial paints business is likely to remain subdued in the medium term atleast as markets are yet to recover from the deferral of capex spends by industries. Though we will have to upgrade our number for the full year, current valuations do not leave much on the table for investors.

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