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Asian Paints: Profits take a beating
May 12, 2009

Performance summary
  • Revenues grow by 24% YoY during FY09 led by the decorative paints business, while the industrial coatings business witnesses a slowdown.
  • EBDITA margins shrink by 2.7% during the year due to a substantial rise in raw material costs (as percentage of sales).
  • Besides the tepid growth in operating profits, higher interest costs and depreciation charges lead to the 3% YoY decline in the bottomline.
  • The Board recommends a total dividend of Rs 17.5 per share for the year (dividend yield of 2%).


Consolidated results
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 11,359 14,249 25.4% 44,072 54,632 24.0%
Expenditure 9,779 12,459 27.4% 37,467 47,938 27.9%
Operating profit (EBIDTA) 1,581 1,791 13.3% 6,606 6,694 1.3%
Operating profit margin (%) 13.9% 12.6% 15.0% 12.3%
Other income 110 114 3.2% 596 517 -13.3%
Interest 39 75 91.0% 212 263 24.4%
Depreciation & amortisation 154 201 30.2% 592 744 25.7%
Profit before tax 1,497 1,629 8.8% 6,399 6,204 -3.0%
Tax 477 530 11.0% 2,034 1,974 -2.9%
Prior period items (23) (2) (16) (23)
Extraordinary item 2 (12) (68) (12)
Profit after tax 999 1,084 8.5% 4,281 4,195 -2.0%
Minority interest (54) (73) - (189) (216) 14.7%
Net income 945 1,011 7.0% 4,092 3,978 -2.8%
Net profit margin (%) 8.3% 7.1% 9.3% 7.3%
No. of shares (m) 95.9 95.9
Diluted earnings per share (Rs) 41.5
Price to earnings ratio (x) 21.4

What has driven performance in FY09?
  • For FY09, revenues on a consolidated basis grew by 24% YoY. The year was challenging for Asian Paints. While the company reported a robust performance in 1HFY09, things took a turn for the worse in 3QFY09, wherein revenues and profits fell sharply. The same was attributed to a reduction in demand, as a result of which inventory had to be written off. However, demand conditions looked up in 4QFY09, enabling the company to post a strong growth in topline for the full year.

  • As far as the decorative business is concerned, the first half of the year was buoyant and the company reported higher sales on account of an early Diwali and price increases undertaken across products leading to high stocks with dealers. While the third quarter saw demand falling, the company resorted to price cuts to spur demand and this led to an improvement in the fourth quarter. Thus, during the year, the company took 6 price increases totaling 16.7% and then 3 reductions totaling 9.9%.

  • The economic slowdown, however, took its toll on the industrial paints business and while industrial liquid paints and powder coatings reported a marginal growth in revenues, the sales of the automotive JV (APPG) witnessed a decline. Revenues of the international business grew by 29% and were led by its operations in the Middle East and South Asia. Volumes recorded a 20% YoY growth.

  • Asian Paintsí operating margins during FY09 shrunk by 2.7% during the year largely due to a substantial rise in raw material costs (as percentage of sales) from 58.5% in FY08 to 61.7% in FY09. Material costs were significantly high during the first three quarters of the year due to the rise in prices of pigments, monomers and solvents. While prices came down considerably in the fourth quarter, it was not enough in offsetting the higher prices during 9mFY09 resulting in an overall increase of 20% YoY in material costs for the full year. As far as the international business is concerned, EBIT grew by 21% YoY and was largely driven by the Middle East and South Asia. While the Caribbean region witnessed a decline in profits, South East Asia continued to be mired in losses.

  • Due to the tepid performance at the operating level, net profits too declined by 3% YoY during FY09. Reduction in other income and higher depreciation and interest costs also contributed to the decline.

What to expect?
At the current price of Rs 940, the stock is trading at a multiple of 11 times our estimated FY11 earnings. Despite the overall slowdown, Asian Paints intends to build capacity for the future. The construction of the plant at Rohtak is on schedule and the first phase is expected to be commissioned by April 2010. Further, the company is also looking to acquire land for its seventh plant in Western Maharashtra. The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. 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. However, in the medium term atleast, the management has opined that the slowdown in the economy is likely to take its toll on demand conditions. Overall, we maintain our positive view on the stock.

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