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Asian Paints: A new year, a strong start - Views on News from Equitymaster

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Asian Paints: A new year, a strong start

Jul 27, 2009

Performance summary
  • Revenues grow by 18% YoY during 1QFY10 led by the decorative paints business.
  • EBDITA margins improve by 5% during the quarter due to a substantial fall in raw material costs and other expenditure (as percentage of sales).
  • Net profits clock a robust 66% YoY growth led by the strong performance at the operating level and higher other income.

Consolidated results
(Rs m) 1QFY09 1QFY10 Change
Net sales 12,427 14,602 17.5%
Expenditure 10,699 11,844 10.7%
Operating profit (EBIDTA) 1,728 2,758 59.6%
Operating profit margin (%) 13.9% 18.9%  
Other income 97 156 61.4%
Interest 55 72 29.9%
Depreciation & amortisation 154 198 28.6%
Profit before tax 1,616 2,645 63.7%
Tax 519 844 62.5%
Prior period items (6) (0)  
Profit after tax 1,091 1,801 65.1%
Minority interest (29) (40) -
Net income 1,062 1,761 65.8%
Net profit margin (%) 8.5% 12.1%  
No. of shares (m) 95.9 95.9  
Diluted earnings per share (Rs)*   48.8  
Price to earnings ratio (x)*   27.9  
* on a trailing twelve month basis

What has driven performance in 1QFY10?
  • For 1QFY10, Asian Paintsí revenues on a consolidated basis grew by 18% YoY. While the company has not divulged details, growth was led by strong demand conditions in most parts of the country as well as the international operations in the Middle East. However, the environment for industrial paints continued to remain subdued during the quarter.

  • Asian Paintsí operating margins during 1QFY10 improved by 5% largely due to a substantial fall in raw material costs and other expenditure (as percentage of sales). Raw material costs fell sharply from 60.5% of sales in 1QFY09 to 56.1% in 1QFY10. It must be noted that material costs were significantly high during the first three quarters of FY09 due to the rise in prices of pigments, monomers and solvents. Prices came down considerably in 4QFY09 and this spilled over to 1QFY10 as well accounting for the lower raw material costs during the quarter. While the company has not divulged details, strong performance of its Middle East business could also have contributed to Asian Paintsí enhanced margins.

  • A 60% YoY growth in operating profits and higher other income put together contributed to the 66% YoY growth in the bottmline. The healthy growth was despite the 29% YoY increase in depreciation charges.

What to expect?
At the current price of Rs 1,350, the stock is trading at a multiple of 16.4 times our estimated FY12 earnings. In the paint sector, Asian Paints has the edge given the quality of its management and its strong brand and pricing power. As far as capex is concerned, the construction of the plant at Rohtak is on schedule and the first phase is expected to be commissioned by April 2010. Further, the company is also looking to acquire land for its seventh plant in Western Maharashtra. The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. 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. However, the scenario for the industrial paints business is likely to remain subdued in the medium term atleast. Overall, we maintain our positive view on Asian Paints.

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