Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Asian Paints: Rock steady - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Asian Paints: Rock steady

May 12, 2006

Performance summary
Asian Paints, the market leader in the domestic paint sector, has announced strong results for the fourth quarter and full year ended March 2006. The consolidated topline grew by 17% YoY, much of which was on account of impressive show in the domestic market (standalone topline was higher by 18% YoY). Despite raw material cost esclations and foreign exchange fluctuation, operating margins at the consolidated level were stable, which in our view is commendable. At the PBT level, profit growth was 36% YoY. However, the financial performance is not equally comparable because the company closed operations in two countries (a part of Berger International). Nevertheless, we believe that the company is well on its way to turnaround its international operations from a long-term standpoint.

Consolidated results
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 6,307 7,650 21.3% 25,739 30,210 17.4%
Expenditure 5,600 6,729 20.2% 22,387 26,293 17.4%
Operating profit (EBIDTA) 707 921 30.3% 3,351 3,917 16.9%
Operating profit margin (%) 11.2% 12.0%   13.0% 13.0%  
Other income 58 117 103.5% 324 320 -1.1%
Interest 17 23 35.1% 108 114 5.7%
Depreciation & amortisation 170 203 19.9% 691 682 -1.2%
Profits from associate company 0 (4) - 2 (9) -
Profit before tax 579 808 39.7% 2,878 3,431 19.2%
Extraordinary items (1) 2 - (5) (10) -
Tax 182 353 93.6% 1,061 1,323 24.7%
Profit after tax 396 457 15.5% 1,813 2,098 15.8%
Minority interest 29 (9) - 72 (23) -
Net income 367 466 27.0% 1,741 2,121 21.9%
Net profit margin (%) 5.8% 6.1%   6.8% 7.0%  
No. of shares (m) 95.9 95.9   95.9 95.9  
Diluted earnings per share (Rs)         22.1  
Price to earnings ratio (x)         29.0  

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 paints 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, US, 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 FY06?
Volumes robust, price hike helps: Total paint volume sales in FY06, on a consolidated basis, increased by 15% YoY, which was largely driven by higher demand in India. Apart from decorative paints, for the third year in succession, industrial paint sales grew by over 20% YoY. As we have mentioned earlier in our analysis, we expect the company to gain market share in the industrial paint segment (excluding automotive paints). In automotive paints, though Asian Paints is the second largest supplier to auto manufacturers, we expect Goodlass Nerolac (the market leader) to consolidate its share in the next three years. Apart from volume growth, price increases during FY06 also helped matters (overall price increase in FY06 works out to 6% in India).

On the automotive front (a joint venture with PPG, US), sales increased by 18% YoY in FY06 on the back of higher volumes sold by the likes of Hyundai and General Motors in India. Powder coatings, which was another key focus area for the company, increased by 36% YoY (this application is in consumer durable and select auto components). As far as the international operations are concerned, investors have to remember that the turnaround involves two pronged approach. One, to consolidate the company's market share in countries like the Carribean, Middle East and Egypt by launching new products. Second, restructuring some of the South Asian operations (including closure of some facilities). While the first leg of the approach is progressing well, in our view, and like we have mentioned in the past, the second leg is likely to be time consuming. With the implementation of the ERP system, we believe that the consolidated balance sheet will strengthen (lower working capital is the first benefit).

In a nut shell…

(% sales) Standalone Consolidated
FY05 FY06 FY05 FY06
Raw material 57.7% 58.3% 58.4% 59.3%
EBDITA margin 16.6% 16.7% 13.0% 13.0%
PBT margin 14.1% 14.6% 11.5% 11.6%
Net margin* 9.1% 9.5% 6.8% 7.0%
*excluding extraordinary items

Margins - Good show: Despite higher raw material costs (including higher packaging cost in light of the petrochemical cycle), the company has managed to maintain operating margins at the consolidated level. This, in our view, is commendable. We continue to repose faith in the company's ability to turnaround international operations of Berger International over the next three years. To that extent, investors have to attune their investment horizon. Of the international operations, the South Asian operations witnessed a EBDITA level loss as compared to a profit in the same period last year.

EBDITA & RoCE - International operations
('000 US$) EBDITA RoCE
2004 2005 2004 2005
Carribean 2,487 2,493 13.0% 13.0%
Middle East 2,267 3,273 14.0% 21.0%
South Asia 18 (304) -6.0% -18.0%
South East Asia 918 (3,209) 1.0% -33.0%
South Pacific 1,256 1,218 9.0% 9.0%

Subsidiary losses impact at the net level: Though PBT grew at a faster clip of 36% YoY on a consolidated basis, net profit growth was impacted due to losses in the South Asian operations of Berger International. As we go forward, we expect the company's net margin to improve in light of the restructuring, albeit steady over the next two to three years.

What to expect?
At Rs 642, the stock is trading at a price to earnings multiple of 29 times FY06 earnings. We expect paint demand in India to grow at 12% to 15% over the next three years, led by favorable GDP growth and housing sector. Even if the housing sector were to slow down, in our view, there is a huge market opportunity in the replacement side. But the replacement side is again a long-term story, as organised sector has to become competitive on the cost front on a relative basis to gain customer acceptance. We shall soon update the research report of the company.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Mar 20, 2019 (Close)


  • Track your investment in ASIAN PAINTS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks