Asian Paints has reported a 9.0% increase in its topline while its net profits grew by nearly 8.0%. The company has out performed the Indian paint market, which is estimated to have grown by 6.5%. Lower raw material costs and improved operational efficiencies enabled the company to increase its margins. The company acquired Hawcoplast Chemicals in FY02, which is in line with its strategy to enter in to the high growth powder coatings segment.
Highlights of the analyst meet:
Overall demand growth for paints in FY02 was marginally lower than in FY01. Decorative coatings segment grew by 7.0%. Exterior segment grew by nearly 20.0%. Industrial coatings grew between 6.5-7.0%. Powder coatings was the fastest growing segment under industrial coatings. This segment grew nearly 12.0% in FY02.
The paints business of the company recorded a 10.9% growth in value terms and a volume growth of 9.6%. A healthy topline growth was seen due to a robust housing demand and large spending on infrastructure projects. Operating margin of the company has improved marginally over the last year. Asset sweating, reduction in working capital and reduced overheads have lead to improved operating margins.
The employee expenses have been increasing more than the growth in sales. This has been a concern for the company and it was addressed in the meet. The management been incurring high costs on retaining management talent from premier management institutes. The staff costs have gone up by 26%. The marketing and advertising costs have gone up marginally to 3.8% of net sales from 3.6% last year, this indicates thrust to expand market and improve reach.
Interest costs have come down as the company retired part of its debt. Depreciation costs have gone up due to setting up of a large number of colour world outlets. The total number of out lets has gone up to 2,500. To decrease the financial burden on the company, the colour mixing machines are being financed with the help of Citibank. Already 145 machines have been financed through this deal. Colour world dealers now constitute more than 50% of the total sales.
To tap the high growth powder coatings segment Asian Paints acquired Hawcoplast Chemicals for a total consideration of Rs 226 m (including working capital). The company has initiated market expansion drives such Asian Paints Home Solutions Scheme. This scheme provides integrated painting services.
International operations account for nearly 6.0% of turnover. The company will be commissioning its Bangladesh venture shortly. Its units in Australia, Sri Lanka, Oman and Mauritius are yet to turnaround.
Raw material scenario:
The drop in crude prices has helped the company reduce its raw material expenses in FY02. While concerns were raised during the meet, the management clarified that the prices of rutile titanium dioxide (30% of raw material costs) were indirectly dependent on the fuel prices, as the preparation of the compound is a fuel intensive process. The prices of turpentine (8% of raw material costs) were however dependent on the international crude prices. Nevertheless, raw material costs as a percentage of sales have been on the decline over the last two years due to alternate procurement strategy.
Outlook for FY03:
Mr Dani said that good growth in the housing and infrastructure sector has made the paint industry attractive. Demand for premium paints will be boosted due to larger number of educated consumers with high aspirations. He also added that an industrial revival would aid the emerging high growth industrial coatings segment.
The company expects a 10-12% growth in the net sales for 2000-03.
Capital expenditure will be restrained and minor improvements to be made in working capital as per the company. This is estimated at around Rs 500 m.
The reduction in customs duty (35% to 30%) is likely to benefit the paint industry as 25-30% of raw material is imported. Therefore, Mr Dani expects to maintain operating margins in the next 6-9 months.
The company expects to maintain a ROCE of more than 35% for the next two years. We expect the company to record net profit of around Rs 1,350 m in the coming fiscal.
The stock currently trades at Rs 300 implying a P/E a P/E multiple of 14x FY03E earnings. Market capitalisation to sales works out to 1.4 times.
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