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Asian Paints: Margins steal the show - Views on News from Equitymaster

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Asian Paints: Margins steal the show
Jun 1, 2010

Paint major Asian Paints has announced its FY10 results. On a standalone basis, the company has reported a 20% YoY growth in its sales while net profits have grown by 114% YoY. Here is our analysis of the results.

Performance summary
  • Standalone sales grow by 20% YoY during FY10.
  • Operating margins rise sharply to 19.7% during FY10, from 13.1% in FY09. Gains in margins largely owing to lower raw material costs.
  • Improved operating margins and higher other income aids net profits, which surge by 114% YoY during the year.
  • Consolidated sales and profits (though not truly comparable with FY09) grow by 22% and 110% respectively during FY10.
  • Recommends a final dividend of Rs 18.5 per share. Total dividend (including interim dividend) for FY10 is Rs 27 per share (dividend yield of 1.3%).


Financial performance snapshot
  Standalone Consolidated*
(Rs m) FY09 FY10 Change FY09 FY10 Change
Sales 42,701 51,251 20.0% 54,639 66,809 22.3%
Expenditure 37,088 41,151 11.0% 47,938 54,533 13.8%
Operating profit (EBDITA) 5,613 10,100 79.9% 6,701 12,276 83.2%
Operating profit margin (%) 13.1% 19.7%   12.3% 18.4%  
Other income 601 1,439 139.5% 510 1,405 175.4%
Interest 104 138 32.3% 263 285 8.2%
Depreciation 572 607 6.3% 744 836 12.3%
Profit before tax 5,538 10,794 94.9% 6,204 12,561 102.5%
Extraordinary income/(expense) (79) 253   (35) 9  
Tax 1,836 3,302 79.9% 1,974 3,731 89.0%
Minority interest NA NA   216 483 123.1%
Profit after tax/(loss) 3,624 7,745 113.7% 3,978 8,356 110.0%
Net profit margin (%) 8.5% 15.1%   7.3% 12.5%  
No. of shares       95.9 95.9  
Diluted earnings per share (Rs)         87.1  
P/E ratio (x)         23.7  
* Consolidated results are not truly comparable since FY10 includes 15
months results of overseas subsidiaries except for Asian Paints Nepal (14 months performance)

What has driven performance in FY10?
  • The general improvement in economic activity and construction, and the subsequent rise in paint demand helped Asian Paints (ASPN) record a good 20% YoY growth in its standalone sales in FY10. As per the management, demand from rural and small towns was significantly better than large towns during the year. As for ASPNís industrial paints business, strong demand was seen from the automotive and consumer durable industries. A large part of the companyís standalone sales growth was owing to higher volume of paint sold, which was up 16% YoY. The company gained from the expansion in its national distribution network and increased capacities. It has recently commissioned a plant at Rohtak with an initial capacity of 150,000 kilo-litres. The company has also acquired land in Maharashtra for setting up another plant. The total capex during FY10 stood at Rs 3.5 bn. Capex for the current fiscal (FY11) is planned at Rs 3 bn (Rs 2.5 bn in India and rest internationally).

  • As for ASPNís international business, it recorded a volume growth of 6% during the period of January to December 2009. Good performance was seen in countries like Nepal, Bangladesh, and Egypt.

  • ASPNís operating margins improved sharply to 19.7% during FY10, from 13.1% in FY09. Gains in margins were largely owing to lower raw material costs. These costs declined from 59.7% of sales in FY10 to 55.7% in FY10. The company gained from benign commodity prices during the year. An appreciating rupee (which makes imports cheaper) also helped matters as ASPN imports a large part of its raw material requirements.

  • Led by strong operating margins and higher other income, ASPNís net profits surged by 114% YoY during FY10.

What to expect?
At the current price of Rs 2,060, the stock is trading at a multiple of 21.6 times our estimated FY12 consolidated earnings. ASPNís consolidated sales and profits for FY10 have come in higher by 1% and 15% respectively as compared to our estimates. The companyís overall performance during the year has been quite satisfying. The improvement in margins is also heartening, though the management does not see these as sustainable. While we like the companyís business, the stockís current valuations do not leave much upside for the medium term future.

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