In contrary to what had been observed, Asian Paints has under performed both Goodlass Nerolac and Berger Paints on the stock market over the last one year. We analyse in brief the reasons for the same and how the company is placed to capitalize on the long-term growth opportunity.
If one were to consider the performance of Asian Paints with the peers, clearly, the company has outperformed other on a point-to-point basis, as is evident from the graph below. One of the reasons why the company was able to outperform was the fact that new products introduced in the last five to six years, especially exterior paints and wood finishes, contribute to an estimated 15% of revenues. In fact, the company achieved market leadership in the exterior paint segment last year.
However, consider another graph that highlights the YoY sales growth of Asian Paints and its peers over the last seven quarters. As is evident, Goodlass and Berger have managed to outgrow Asian Paints at the topline level consistently. However, it has to be mentioned that on parameters like operating margins and return ratios, Asian Paints ranks higher. Goodlass, as the dominant player in the automotive paint segment, has reaped the benefits of the upturn in automotive demand. Though Asian Paints also has presence in this segment, it is a 50:50 joint venture with PPG of USA and it does not reflect in the standalone numbers. So, the underperformance at the topline level has to be viewed in this context, which to us is not a cause of concern from a long-term perspective.
Another important factor that has played its part in the company under performing in the stock market is due to input costs related pressure. Crude prices have traded strong right before the Iraq war and more recently, the prices had shot up. So, this has had a negative impact on operating margins, as is seen from the graph below. Considering the hardening of prices, we expect margins to continue to remain under pressure for the next six months.
According to us, the more important reason is the company's presence in the overseas market. Post the acquisition of Berger International and SCIB, Asian Paints has significant exposure in the international market, which we believe, will take time to reflect in terms of higher profitability. After the takeover of Berger, one is already seeing a marked improvement. In fact, we believe that the subsidiaries could outgrow the parent major in the long-term. One has to also remember that the company has strong growth prospect in the domestic market as well.
The stock currently trades at Rs 312 implying a P/E multiple of 15.5x our estimated FY05 earnings. Perhaps the big area of concern is the raw material related pressure and the magnitude of impact this factor is likely to have on the profitability of the company remains to be seen. To that extent, the risk profile of the stock increases.
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