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Paints: Where is the stimulus? - Views on News from Equitymaster
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  • Apr 3, 2001

    Paints: Where is the stimulus?

    After an eventful FY00, paint companies are feeling the pinch of slow down in the current year. Both realisations and margins have been under pressure due to the ever-rising input prices and subdued paint demand. Given these factors, prospects for the fourth quarter are bleak.

    The estimates of volume growth have been lowered to 12% as opposed the average growth of 14%, which the industry has been registering till now (paint demand actually accelerated post FY96 thanks to a shift from industrial paints led growth to a decorative paints led growth). This is one of the primary reasons why Asian Paints, the market leader in the paint segment, has managed to gain considerable market share of the Indian paint industry thanks to its pure decorative play strategy. The company also reported a 23% growth in volumes in FY00 (the highest for the last twenty years).

    (Rs m) Asian Paints Goodlass
      4QFY00 4QFY00
    Sales 2,630 1,382
    Other Income 56 18
    Expenditure 2,084 1,201
    Operating Profit (EBDIT) 546 181
    Operating Profit Margin (%) 20.8% 13.1%
    Interest 27 16
    Depreciation 67 33
    Profit before Tax 508 150
    Tax 162 44
    Profit after Tax/(Loss) 346 106
    Net profit margin (%) 13.2% 7.7%

    However, car sales during January and March 2001 have registered marginal growth in sales, which should bring some respite to companies like Goodlass Nerolac. In fact, Maruti has registered its highest ever growth in sales for the past 18 years (40,487 units). However, for the first eleven months of the current year, Maruti has reported an 11% growth in sales. Toyota Kirloskar, another customer of Goodlass Nerolac, has also registered significant growth in sales.

    Besides, the slow down in the agricultural output and the declining industrial growth rates also do not augur well for the industry. Though Asian Paints is expected to post around 10% growth in sales, margins would continue to remain strained despite rise in paint prices by the company. But, all its need is a good monsoon, which will perk agricultural output and in turn paint demand.

    Market Price 242 89 91 60 42
    Number of shares 64.4 15.3 26.6 40.9 10.5
    Market Capitalisation 15,585 1,362 2,421 2,436 444
    P/E on MP 15.1 4.8 7.3 7.9 1.6
    Market cap/sales 1.3 0.3 0.4 0.3 0.3



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