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Asian Paints: Marching ahead - Views on News from Equitymaster
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Asian Paints: Marching ahead
Jan 29, 2008

Performance summary
  • Revenues grow by a robust 25.9% YoY buoyed by the festive season and due to strong growth in both the decorative and industrial business segments, the Middle East and the South Asian region.

  • EBDITA margins expand by an impressive 260 basis points (2.6%) mainly due to softening of raw material prices leading to a considerable fall in raw material costs (as percentage of sales).

  • PAT grows by 67% YoY led by the strong performance at the operating level, lower depreciation charges and considerably higher other income.

Consolidated results
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 9,356 11,776 25.9% 27,110 32,713 20.7%
Expenditure 8,122 9,921 22.1% 23,499 27,688 17.8%
Operating profit (EBIDTA) 1,235 1,856 50.3% 3,611 5,025 39.2%
Operating profit margin (%) 13.2% 15.8% 13.3% 15.4%
Other income 76 132 72.7% 236 486 105.5%
Interest 57 54 -3.9% 147 173 17.7%
Depreciation & amortisation 147 150 2.4% 438 437.3 -0.2%
Profits from associate company (0) - - (4) -
Profit before tax 1,108 1,783 61.0% 3,259 4,901 50.4%
Tax 357 537 50.3% 1,068 1,556 45.8%
Extraordinary items - 0 - (71)
Profit after tax 750 1,246 66.1% 2,191 3,274 49.4%
Minority interest 38 58 - 48 135 184.4%
Net income 712 1,189 66.9% 2,144 3,139 46.4%
Net profit margin (%) 7.6% 10.1% 7.9% 9.6%
No. of shares (m) 95.9 95.9 95.9 95.9
Diluted earnings per share (Rs)* 39.7
Price to earnings ratio (x)* 27.7
(*trailing 12-month earnings)

What has driven performance in 3QFY08?
  • For 3QFY08, revenues on a consolidated basis grew by 26% YoY. The strong growth in topline was largely led by the paints business in India, Middle East and South Asia. Paints being a seasonal business, the company benefited from the Diwali season during the quarter enabling it to log in higher growth rates. As far as the industrial operations are concerned, powder coatings grew over 20% and demand for high performance coatings was fuelled by petrochemical and power projects and engineering goods. While the numbers of the international business are not available, the management indicated that the Middle East and South Asia were instrumental in driving sales.

  • Asian Paints managed to expand its operating margins by 260 basis points (2.6%) during the quarter despite firm crude prices owing to favourable impact of the rising rupee. Lower other expenses and improving profitability of the international operations also played a role in perking up margins.

    Cost break-up
    (% of sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Raw material costs 60.8% 58.7% 59.6% 58.6%
    Staff costs 7.0% 6.5% 7.2% 6.9%
    Other expenditure 19.1% 19.1% 19.9% 19.1%

  • Asian Paintsí net profit growth (up 67% YoY) outpaced the growth in operating profits at the consolidated level during the quarter. This was largely due to higher other income (up 72% YoY owing to higher income on its investments) and lower depreciation charges.

What to expect?
At the current price of Rs 1,100, the stock is trading at a price to earnings multiple of 27.7 times its trailing twelve months earnings. The growth of the paint sector, on an average, is pegged at 1.5 to 2 times the GDP. With the latter expected to grow at a strong pace, the topline of Asian Paints is expected to register strong growth going forward. The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. The company is also likely to garner good market share in the industrial segment, especially the powder coatings business. Having said that, the management has opined that firm crude oil prices are a cause for concern 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. Despite the positives, the stock at the current levels appears fairly valued.

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