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Asian Paints: Catch up to do! - Views on News from Equitymaster
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Asian Paints: Catch up to do!
Feb 1, 2006

Performance summary
Asian Paints announced its third quarter results today. While the company's consolidated topline growth at over 11% was staid, despite this being a festive season. Operating profit grew at a much slower rate of 7% YoY in 3QFY06, not only on account of firm raw material prices but also due to margin decline in its chemical business. Significant fall in other income led to the profit before tax growing at a slow pace of 5% YoY in 3QFY06. For 9mFY06 however, the growth in profit before tax is at a healthy 14% YoY.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 7,375 8,182 10.9% 19,382 22,541 16.3%
Expenditure 6,349 7,088 11.6% 16,738 19,545 16.8%
Operating profit (EBIDTA) 1,026 1,094 6.6% 2,644 2,996 13.3%
Operating profit margin (%) 13.9% 13.4%   13.6% 13.3%  
Other income 109 80 -26.6% 266 203 -23.7%
Interest 30 38 26.4% 91 92 0.3%
Depreciation & amortisation 174 159 -9.0% 521 479 -8.1%
Profits from associate company 0 (0) - 2 (5) -
Profit before tax 931 976 4.9% 2,300 2,623 14.1%
Extraordinary items (0) 3 - (4) (12) -
Tax 350 350 -0.2% 878 970 10.4%
Profit after tax 581 630 8.5% 1,417 1,641 15.8%
Minority interest 20 4 - 43 (14) -
Net income 560 626 11.8% 1,374 1,656 20.5%
Net profit margin (%) 7.9% 7.7%   7.3% 7.3%  
No. of shares (m) 95.9 95.9   95.9 95.9  
Diluted earnings per share (Rs)*         21.4  
Price to earnings ratio (x)         28.7  
(*trailing 12-month basis)            

What is the company's business?
Asian Paints is the market leader in the Indian paint industry. It has an overall market share of around 49% in the decorative paint segment. It has benefited from steady transition in the industry towards consolidation, with top four organised players eating into the market share of the unorganised segment that controls 50% of the Rs 65 bn paint industry. Asian Paints, through a 50:50 joint venture with PPG Industries, USA, also has presence in the automotive paints segment. The company has significant global presence through acquisitions, which are being restructured. The management of the company is acclaimed for consistently outperforming industry and its peers in the last decade. Though conservative in nature, the company is well focused on its core business of paints and has posted a CAGR of 14% over the last six years in topline (PAT CAGR at 16% in the same period).

What has driven performance in 3QFY06?
Taking time to turnaround: While the consolidated topline growth was 12% in 3QFY06, much of it could be attributed to the company's Indian operations. Standalone revenues in 3QFY06 grew by 10.5% YoY, which is slower given the fact that this was the festive season. The company has attributed the same to prolonged monsoon during the Diwali season and expects demand to recover going forward. However, when one compares the topline growth of Asian Paints with that of Goodlass Nerolac (the No. 2 in the paint sector), the latter posted almost 15% YoY growth in topline. While one recognises the fact that Goodlass has benefited from higher automotive sales, almost 45% of its revenues is still derived from decorative paint sales and to that extent, the performance of Asian Paints has been relatively weaker. As far as the consolidated performance is concerned, the turnaround of the international operations is a time consuming exercise and the financial performance has to be viewed in this context. We also believe that unfavoravble foreign exchange has had a role to play in this slower topline growth.

Standalone paint margins healthy: Looking at the segmental performance, on a standalone basis, PBIT margins of the paint division has increased from 15% in 3QFY05 to 16% in 3QFY06, which is comparable to its peers. However, the chemicals division (that include penta and pthalic) has witnessed almost 440 basis decline in PBIT margins and weaker petrochemical prices is the key reason. On a consolidated basis, operating profit margins are lower by 30 basis points in 9mFY06. This, despite firm raw material price scenario (though packaging material costs have been softer) and restructuring of the international operations, is commendable.

Weaker bottomline performance: Apart from lower other income, share of losses in associate company (as compared profit in 3QFY05) subdued the growth in net profit in 3QFY06. While the net profit growth at 21% in 9mFY06 is in line with our estimate, weaker topline performance is a cause of concern to us. The financials as of 9mFY06 are below our full year estimates. But we do not feel there is a need to revisit our projections.

What to expect?
At Rs 614, the stock is trading at a price to earnings multiple of 19.8 times our estimated FY08 consolidated earnings. Though valuations are on the higher side, we have been cautious in our consolidated earnings estimates. Besides, if crude prices recede from the peak (key petrochemical prices have softened in the last three months), operating margins will get a boost. Keeping the upside to our estimates and stronger presence of the company in the domestic market, we maintain our HOLD on the stock.

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