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Asian Paints: Stellar year - Views on News from Equitymaster

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Asian Paints: Stellar year
May 12, 2008

Performance summary
  • Revenues grow by a robust 20% YoY during FY08 buoyed by strong growth in both the decorative and industrial businesses and the Middle East geography. Actual sales figure 2% higher than our estimates.

  • EBDITA margins expand by an impressive 190 basis points (1.9%) during the fiscal mainly due to softening of raw material prices leading to a fall in raw material costs (as percentage of sales).

  • PAT grows by 48% YoY during FY08 led by the strong performance at the operating level, lower depreciation charges and considerably higher other income. Actual profit figure 20% higher than our estimates, mainly due to higher than estimated operating margins.

Consolidated results
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 9,590 11,330 18.2% 36,700 44,043 20.0%
Expenditure 8,420 9,773 16.1% 31,919 37,461 17.4%
Operating profit (EBIDTA) 1,170 1,557 33.1% 4,781 6,582 37.7%
Operating profit margin (%) 12.2% 13.7%   13.0% 14.9%  
Other income 136 134 -1.8% 373 620 66.3%
Interest 43 39 -8.2% 189 212 11.9%
Depreciation & amortisation 173 154 -10.9% 611 592 -3.2%
Profits from associate company - -   (4) -  
Profit before tax 1,090 1,497 37.4% 4,349 6,399 47.1%
Tax 399 477 19.6% 1,467 2,034 38.7%
Extraordinary items (78) 2   (78) (68)  
Profit after tax 613 1,022 66.7% 2,804 4,296 53.2%
Minority interest 27 (54) - 21 189 816.0%
Net income 640 968 51.3% 2,784 4,108 47.6%
Net profit margin (%) 6.7% 8.5%   7.6% 9.3%  
No. of shares (m) 95.9 95.9   95.9 95.9  
Diluted earnings per share (Rs)*         42.8  
Price to earnings ratio (x)*         28.5  
(*trailing 12-month earnings)            
(*trailing 12-month earnings)

What has driven performance in FY08?
  • For FY08, revenues on a consolidated basis grew by 20% YoY. The strong growth in topline was largely led by the paints business in India and the Middle East. Demand for decorative paints was strong during the year. Besides the Diwali season, which was good all over northern and western India, demand remained healthy post this period as well. While the company increased prices of some of its solvent based products, it undertook price reductions with respect to its water based products. The rationale behind the same was to keep prices competitive and pursue opportunities in the market.

  • As far as the industrial operations are concerned, while the powder coatings business grew by 23% YoY, sales from the automotive JV (with PPG US) rose by 32% YoY. The international business also reported a strong growth of 12% YoY led by the Middle East and South Asian region. Having said that the Caribbean region continued to reel under pressure with topline declining by 1% YoY.

    International business: Slowly recovering…
    Sales (Rs m) CY06 CY07 Change
    Caribbean 1,520 1,500 -1.3%
    EBIT margins 2.6% 4.7%  
    Middle East 2,610 3,190 22.2%
    EBIT margins 10.3% 13.2%  
    South Asia 620 830 33.9%
    EBIT margins 3.2% 7.2%  
    South East Asia 840 890 6.0%
    EBIT margins -16.7% -4.5%  
    South Pacific 730 620 -15.1%
    EBIT margins 6.8% 11.3%  
    Total sales 6,320 7,030 11.2%
    EBIT margins 3.8% 8.3%  

  • Asian Paints managed to expand its operating margins by 1.9% during the year despite firm crude prices owing to benign material costs and favourable impact of the rising rupee. Having said that, solvent and oil prices increased sharply during the last quarter. Lower other expenses and improving profitability of the international operations also played a role in perking up margins.

  • Asian Paints’ net profit growth (up 48% YoY) outpaced the growth in operating profits at the consolidated level during the year. This was largely due to higher other income (up 66% YoY owing to higher income on investments) and lower depreciation charges.

What to expect?
At the current price of Rs 1,220, the stock is trading at a multiple of 23.6 times our estimated FY10 earnings. The growth of the paint sector, on an average, is pegged at 1.5 to 2 times the GDP. With the latter expected to grow at a decent pace, the topline of Asian Paints is expected to register strong growth going forward. The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. The company is also likely to garner good market share in the industrial segment, especially the powder coatings business. Having said that, the management has opined that firm crude oil prices are a cause for concern. As far as the international business is concerned, focus would be on increasing the market share through initiatives such as new product launches, dealer tinting systems and increasing operating efficiency. We shall soon update our research report on the company.

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