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Paints: Waiting for an upturn - Views on News from Equitymaster
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  • May 14, 2001

    Paints: Waiting for an upturn

    The index of industrial production for the second consecutive month ended April 2001 has fallen way below the growth rate witnessed in the year 2000. Both car sales as well as housing finance disbursements have declined compared to the previous years’ levels. Given these facts, the fourth quarter results of paint companies are expected to remain strained.

    Though the top three paint companies (Asian Paints, Goodlass Nerolac and Berger) reported a 15% growth in volume in the first nine months of the current year, these companies are facing the crunch situation now. The paint companies we spoke to said that volumes have hardly grown in the current quarter despite various initiatives taken to boost sales growth, including a reduction in paint prices. Besides, the Gujarat earthquake has also spoiled paint demand (Gujarat is one of the key market for paint companies).

    Given the lack of demand, paint companies are also witnessing marginal erosion in paint prices, which is expected to result in skewed margins in the fourth quarter of the current year. All the paint companies, incidentally, are declaring their fourth quarter results (audited) in June 2001 as against April 2001 (though some of the companies we spoke to said that they are implementing the ERP package).

    Both passenger car and commercial vehicle sales have failed to take off despite an excise duty cut in the budget and reduction in interest rates. Even the recent increase in depreciation rates is not expected to boost automobile sales in the coming quarters, as agricultural output has also declined. Having said that, housing finance approvals and disbursements have registered a 32% and 30% growth respectively in the current year.

    Though this is lower than 35% growth in 2000, the cut in interest rates could augur well for the industry. Moreover, the meteorological department is expected to report its projections on the monsoons towards the end of the month. Remember, all it needs to spur paint demand is a good monsoon (good monsoons means higher agricultural output, which in turn will boost paint demand). Not only a good monsoon but also an equitable one. This has not been the case in the last two years.

    Comparative valuations...
    (Rs m) Asian Paints Goodlass Berger ICI Snowcem
    Market Price 257 88 89 57 41
    Number of shares 64 15 27 41 11
    Market Cap 16,551 1,346 2,367 2,330 431
    P/E* 16.1 4.7 7.2 7.6 1.5
    Market cap/sales 1.3 0.3 0.4 0.3 0.3
    *On the nine months annualised earnings

    All the paint companies, barring Asian Paints, are trading near their 52-week lows, which is evident from the above table. If the monsoon turns out to be good coupled with the fact that construction is likely to pick up in the earthquake prone areas of Gujarat, the year 2002 could be a year of good fortune for paint companies.



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