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Asian Paints: Margins fail to excite - Views on News from Equitymaster

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Asian Paints: Margins fail to excite

Jul 27, 2010

Asian Paints announced 1QFY11 results. Top line grew 25% YoY while bottom line too registered a healthy growth of 26% YoY. Here is our analysis of results.

Performance summary
  • Top line grew 25% YoY in 1QFY11.
  • Operating margins were flat when compared to the first quarter of the previous fiscal. Operating margins stood at 19% as compared to 18.9% in 1QFY10.
  • Net profits registered 26% YoY growth in 1QFY11 on the back of strong revenue growth and decline in interest expenses.

(Rs m) 1QFY10 1QFY11 Change
Sales 14,602 18,302 25.3%
Expenditure 11,844 14,831 25.2%
Operating profit (EBDITA) 2,758 3,471 25.9%
Operating profit margin (%) 18.9% 19.0%  
Other income 156 184 17.9%
Interest 72 42 -41.1%
Depreciation 198 269 35.9%
Profit before tax 2,645 3,344 26.5%
Tax 844 1,013 20.0%
Minority interest 40 109 174.6%
Profit after tax/(loss) 1,760.8 2,221.9 26.2%
Net profit margin (%) 12.1% 12.1%  
No. of shares (m)   95.9  
Basic & diluted earnings per share (Rs) *   23.2  
P/E ratio (x) *   26.5  
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • Net sales increased 25% YoY in 1QFY11 driven by favorable demand for decorative paints across the country. However, demand conditions for international and industrial businesses continue to remain challenging. Worsening demand situation in Middle East has come in as a negative surprise. In light of raw material price inflation the company had increased blended prices twice by about 4.8% in May and 2.6% in July. However, there is no respite from price increases with the company again planning to increase the prices by about 1.2% in the month of August. The company’s Rohtak plant in Haryana has commenced operations and it has also acquired land in Maharashtra to set up another plant.

  • Asian Paints’ operating margin stood at 19% in 1QFY11, an improvement of 0.1% over 1QFY10. With raw material prices increasing significantly and no additional capacity expected to come on stream in the near future margins are likely to subside to historical levels. Advertising expenses as a percentage of sales are likely to remain in the tight band prevailing in the historical past.

  • On the back of strong growth in the topline net profits surged 26% YoY in 1QFY11.

What to expect?
At the current price of Rs 2,438, the stock is trading at 20 times our estimated FY13 earnings. Asian Paints’ top line growth was impressive during the quarter led by price increases. However, margins were flat and are likely to remain under pressure over the next few quarters due to raw material price inflation. With no additional raw material capacity expected to come on stream at least in the near future it remains to be seen whether the company passes the price escalation or absorbs the same internally to remain competitive. While we like the company’s business, the stock’s current valuations ResearchPro subscribers can view latest updates here (For RPro subscribers) do not leave much upside for the medium term future.

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