Asian Paints, the market leader in the Indian paint sector, has posted an impressive performance for the first quarter ended June 2002. Net profits have risen sharply by 36% to Rs 288 m on the back of success of new marketing initiatives, product launches and improvement in margins. Overall it is a commendable performance from the paint major.
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The most encouraging aspect is the sharp spurt in sales by 17% to Rs 3,216 m. There are various factors that could have led to this robustness in revenues. Firstly, new product launches continue to remain the growth driver for the company. New products witnessed growth of over 45% YoY during the quarter. Exterior wall finishes witnessed growth of more than 25% in the same period. Besides, in an effort to increase end-user participation, Asian Paints made an aggressive foray into expanding 'Colour World', the computerised dealer tinting machines. Currently, Asian Paints has an estimated 2,500 such installations across India. It has been observed that sales in outlets where such machines have been installed are almost 50% higher than conventional outlets. Another marketing initiative, Asian Paints Home Solutions, is also believed to be performing well (though it is still an experimental project).
Favorable raw material prices have also enabled the company to increase its operating margins significantly in 1QFY03. This combined with the supply chain management project undertaken by the company last year has started to yield positive results. The rise in margins is above our estimates of around 16%. By squeezing its working capital requirements, the company has managed to reduce interest costs sharply in 1QFY03. Asian Paints generated free cash flow of Rs 103 m in FY02. The 36% net profit growth came despite a sharp spurt in depreciation and tax outflow.
The stock currently trades at Rs 349 implying a P/E multiple of 19x 1QFY03 annualised earnings. The stock had run up sharply over the last few weeks on the back of acquisition rumours. However, the management has been conservative on this front in the past and one can expect similar stand in the future as well. Leave alone acquisitions, the growth prospects of the paint industry are still promising considering the current usage levels and the large presence of unorganised segment. The facet of the sector is slowly changing with few large players now eating into the share of the unorganised players. This combined with Asian Paints' brand and marketing strategy makes it a formidable player in the industry in the long run. At the same time it needs to be mentioned that there has been a minor reversal on raw material prices front in recent months. If raw material prices keep heading north in the coming months, it is hard to sustain such high margins. The management has provided a guidance of 10%-12% rise in net sales for FY03.
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