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Asian Paints: Margin pressure

Jul 25, 2003

Asian Paints is ranked as the tenth largest decorative coatings company in the world. It is India's largest paint company and commands an estimated market share of 36% (FY03). The company has posted a 10% rise in revenues in the first quarter FY04. However, net profit growth was stagnant.

(Rs m) 1QFY03 1QFY04 Change
Sales 3,448 3,789 9.9%
Other Income 28 44 54.6%
Expenditure 2,873 3,255 13.3%
Operating Profit (EBDIT) 575 533 -7.4%
Operating Profit Margin (%) 16.7% 14.1% -
Interest 30 15 -51.6%
Depreciation 114 115 0.6%
Profit before Tax 460 448 -2.6%
Tax 171 160 -6.5%
Profit after Tax/(Loss) 289 288 -0.3%
Net profit margin (%) 8.4% 7.6% -
No. of Shares (m) 64.2 64.2 -
Earnings per share (Rs)* 18.0 17.9 -
P/E (x) - 22.5 -

The revenues include income arising out of processing charges for products manufactured for its joint venture, Asian PPG Industries Ltd., as well as its wholly owned subsidiary, Asian Paints Industrial Coatings Ltd. Also included in the above are lease rentals received on account of certain equipments (Rs 64 m). Certain discounts which were earlier included in sales have been accounted as overhead expenses due to which sales are up by Rs 221 m (196 m for 1QFY03).

Operating margins have shown a decline of almost 2.5% YoY. This drop in operating margins is due to a rise in raw material and packing expenses by 18% YoY. Raw materials as a percentage of revenues shot up from 52% in 1QFY03 to over 56% in the current June quarter. The rise seems largely on account of strength in crude prices vis-a-vis last year. Titanium dioxide is a key material for paint companies, prices of which are directly linked to the crude prices. In additon, an under performance by the company's chemical division was largely responsible for the stagnant growth in profits.

Interest expense has reduced to half. This along with a significant 55% growth in other income has helped the company maintain its net profits. The company declared a bonus of 1:2 in May 03 which has been approved in the general meeting held recently. The enhanced share capital after the allotment of bonus shares would stand at 96.28 m shares.

The stock is currently trading at Rs 403 implying a P/E multiple of 23x its1QFY04 annualised earnings. Though the company's first quarter performance has been rather lacklustre in terms of bottomline growth, the topline growth trend is likely to continue for the rest of the year. Moreover, a GDP growth expectation of 6.5% in FY04 is a good sign for Asian Paints.

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