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Asian Paints: On a firm footing - Views on News from Equitymaster
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Asian Paints: On a firm footing
Jul 24, 2008

Performance summary
  • Revenues grow by a robust 29% YoY during 1QFY09 buoyed by strong growth in the decorative paint segment and the international operations, especially the Middle East.
  • EBDITA margins contract marginally by 0.2% during the quarter mainly due to higher raw material costs.

  • PAT grows by 31% YoY led by the strong performance at the operating level, lower depreciation charges and higher other income.



Consolidated results
(Rs m) 1QFY08 1QFY09 Change
Net sales 9,605 12,420 29.3%
Expenditure 8,251 10,698 29.6%
Operating profit (EBIDTA) 1,354 1,722 27.2%
Operating profit margin (%) 14.1% 13.9%  
Other income 89 103 14.9%
Interest 49 55 12.0%
Depreciation & amortisation 142 154 8.9%
Profit before tax 1,252 1,616 29.0%
Tax 422 519 22.9%
Profit after tax 830 1,096 32.1%
Minority interest (15) (29) -
Net income 815 1,068 30.9%
Net profit margin (%) 8.5% 8.6%  
No. of shares (m) 95.9 95.9  
Diluted earnings per share (Rs)*   45.5  
Price to earnings ratio (x)*   24.6  
(*trailing 12-month earnings)

What has driven performance in 1QFY09?
  • For 1QFY09, revenues on a consolidated basis grew by 29% YoY, while standalone sales grew at a much faster pace of 35%. The strong growth in topline was largely led by the paints business in India and the Middle East. Demand for decorative paints was strong during the quarter across various parts of the country. The automotive segment in comparison witnessed a tepid demand. Growth in the international markets stood at 15% YoY.

  • Given the rising input costs, the company had undertaken two price hikes, namely a 3% hike each in June and July. It further plans to undertake another 1.5% hike in August. These hikes are largely in the solvent-based paints category. Growth in revenues from the international operations was largely driven by the Middle East, which continues to witness buoyant demand on the back of a surge in construction activity.

  • Asian Paints witnessed pressure on its operating margins during the quarter as they declined by a marginal 0.2%. This was largely due to the 2% rise in raw material costs (as percentage of sales). The prices of mineral turpentine, vegetable oils and xylene increased considerably and exerted pressure on margins. However, since the company was able to keep its other costs under control, any further dip in margins was arrested. Going forward, the company expects the margins to be under pressure in the coming quarters.

    Cost break-up

    (% of sales) 1QFY08 1QFY09
    Raw material costs 58.5% 60.5%
    Staff costs 7.7% 6.8%
    Other expenditure 19.7% 18.8%

  • Asian Paintsí net profit growth (up 31% YoY) outpaced the growth in operating profits at the consolidated level during the quarter. This was largely due to higher other income and lower depreciation charges.

What to expect?
At the current price of Rs 1,144, the stock is trading at a multiple of 13.3 times our estimated FY11 earnings. The growth of the paint sector, on an average, is pegged at 1.5 to 2 times the GDP. With the latter expected to grow at a decent pace, the topline of Asian Paints is expected to register strong growth going forward. The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. The company is also likely to garner good market share in the industrial segment, especially the powder coatings business. Having said that, the management has opined that firm crude oil prices are a cause for concern and expects the margins to remain under pressure in the coming quarters. 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. We maintain our positive view on the stock.

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