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Asian Paints: It is taking shape

May 11, 2005

Performance Summary
Asian Paints, the leader in the Indian paint sector, announced its results for 4QFY05 and FY05. While the topline for FY05 registered a 14% YoY growth, margins were under pressure due to rising raw material and packing material costs. Bottomline grew by 18% due to significant reduction in the interest costs and rise in other income. For 4QFY05, topline and bottomline grew by 9% YoY and 34% YoY respectively.

Standalone results
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 4,067 4,425 8.8% 16,966 19,415 14.4%
Expenditure 3,480 3,816 9.7% 14,272 16,477 15.4%
Operating profit (EBIDTA) 587 609 3.7% 2,694 2,938 9.1%
Operating profit margin (%) 14.4% 13.8%   15.9% 15.1%  
Other income 97 91 -6.2% 217 316 45.6%
Interest 10 6 -40.0% 53 28 -47.2%
Depreciation 120 112 -6.7% 480 476 -0.8%
Profit before tax 554 582 5.1% 2,378 2,750 15.6%
Extraordinary items (68) 1   (68) (42) -38.2%
Tax 180 173 -3.9% 836 970 16.0%
Profit after tax/(loss) 306 410 33.9% 1,474 1,738 17.9%
Net profit margin (%) 7.5% 9.3%   8.7% 9.0%  
No. of shares (m) 95.9 95.9   95.9 95.9  
Diluted earnings per share (Rs)* 12.8 17.1   15.4 18.1  
Price to earnings ratio (x)         20.9  
(* annualised)            

What has driven performance in FY05?
Impact on revenues: Revenues recorded a 14% YoY growth driven by good performance by the interior emulsions and exterior paints during the year. Besides decoratives, industrial coating was also a key growth driver, registering a 48% growth YoY due to strong growth in the protective coatings and road markings segment. Chemicals business recorded a 24% YoY growth. However, during 4QFY05, sales were impacted due to uncertainties with regard to the implementation of VAT, which resulted in inventory pile-up. This is just a temporary blip and once the scenario on VAT becomes clearer, volumes are likely to pick up.

Margin pressure continues: The company continued to face pressure on its margins due to the steep rise in raw material and packing material costs, the impact of which was more severe during 2HFY05. Prices of one of the key raw material i.e. titanium dioxide witnessed a rise in price due to demand-supply gap. Employee costs in 4QFY05 also witnessed a sharp rise due to reduction in gratuity liability in 4QFY04. Currently, with the crude prices showing no signs of abating, the margins of the company are likely to remain under pressure in FY06.

Bottomline scenario: Bottomline grew by 18% YoY due to rise in the other income (profit on disposal of the company’s property in Mumbai) and a 47% YoY reduction in interest costs. The topline and bottomline numbers are in line with our FY05 estimates and we continue to believe that the domestic story is intact and is highly dependent on the overall economic performance.

Consolidated performance better: The consolidated performance for the year was better than the standalone results. In the international markets, sales crossed the US$ 100 m mark and volumes increased by 17% YoY. Berger International recorded an 11% YoY growth in revenues. Looking ahead, the company’s international operations will continue to outpace domestic market led by the Middle East and select South East Asian markets.

Consolidated numbers
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 5,615 6,227 10.9% 22,179 25,605 15.4%
Expenditure 5,008 5,521 10.2% 19,208 22,255 15.9%
Operating profit (EBDITA) 607 706 16.3% 2,971 3,350 12.8%
EBDITA margin (%) 10.8% 11.3%   13.4% 13.1%  
Other income 117 58 -50.4% 264 324 22.7%
Interest 31 17 -45.2% 152 108 -28.9%
Depreciation 179 170 -5.0% 706 691 -2.1%
Profit before tax 514 577 12.3% 2,377 2,875 21.0%
Extraordinary items - -   - -  
Tax 222 182 -18.0% 940 1,061 12.9%
Profits from associates 21 -   39 2 -95.4%
Profit after tax 313 395 26.2% 1,476 1,816 23.0%
Net profit margin (%) 5.6% 6.3%   6.7% 7.1%  
No. of shares (m) 95.9 95.9   95.9 95.9  
Diluted earnings per share (Rs)* 13.1 16.5   15.4 18.9  
Price to earnings ratio (x)         20.0  
(* annualised)            

What to expect?
At 379, the stock is trading at a price to earnings multiple of 15.6 times our consolidated earnings estimate for FY06. Going forward, we believe that the management’s ability to foresee trends much ahead of the competition, strong distribution presence and consistent performance are the core strengths of the company. The Chennai paint plant has commenced production in January 2005 with an initial installed capacity of 30,000 million tonnes (MT) per annum and the company is planning to increase it further to 100,000 tonnes per year. The estimated capex investments in FY06 is Rs 1.2 billion, which will be utilised for capacity expansion of the Chennai plant and to finance the company’s industrial paints expansion in Taloja. This plant will have a capacity of 14,000 MT after the completion of Phase 1, which is expected to take 10 months.

We had recommended the stock at Rs 345 in February 2005 with a target price of Rs 475 with a two to three year investment horizon. We maintain our Buy view even at the current juncture.

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