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Asian Paints: Solid start to FY05

Jul 28, 2004

Introduction to results
India's largest paint company, Asian Paints, has declared respectable results for the 1QFY05. The topline of the company has grown by 10% YoY during the quarter. Despite firmness in crude prices, operating margins has improved in this quarter, which consequently led to the bottomline outpacing the topline growth.

(Rs m) 1QFY04 1QFY05 Change
Net sales 3,794 4,152 9.5%
Other income 39 41 5.8%
Expenditure 3,252 3,536 8.7%
Operating profit (EBDITA) 542 616 13.8%
Operating profit margin (%) 14.3% 14.8%  
Interest 15 7 -49.3%
Depreciation 119 120 1.3%
Profit before tax 448 530 18.4%
Tax 160 196  
Profit after tax/(loss) 288 335 16.1%
Net profit margin (%) 7.6% 8.1%  
No. of shares (m) 64.2 95.8  
Diluted earnings per share (Rs)* 12.0 14.0  
P/E ratio (x)   22.2  
(* annualised)      

Business profile
Asian Paints is the market leader in the Indian paint industry. It has an overall market share of around 30% and a 50% market share in the decorative paint segment. It has benefited from steady transition in the industry with top four organised players eating into the market share of the unorganised segment that controls 50% of the Rs 65 bn paint industry. Asian Paints, through a 50:50 joint venture with PPG Industries, USA, has also presence in the automotive paint segment. Off late, the company has gone on an acquisition spree that would increase contribution from international operations significantly in the coming years.

What has driven performance in 1QFY05?
Stable domestic performance: Asian paints classify its operations amongst two divisions namely paints and chemicals. On standalone basis, revenues have increased by 10% on the back of 9% growth in paints sales and around 23% YoY growth in chemical division sales. Chemical division had a poor FY04 and it was expected that this division will post better results in FY05 (the key reason being better petrochemical prices), Historically paints sector has grown by around 1.5 times the GDP growth. Normally sales during the first half is subdued because of various reasons like monsoon and off-season. But the second half is very significant as far as topline growth is concerned because of festival season.

International operations turning around: On a consolidated basis, revenues increased by 12%YoY. The overseas operations as percentage of sales stood at 19% of consolidated sales as compared to 18% in the same quarter last year. Some of its subsidiaries like Berger International Ltd, SCIB Chemicals have posted profits in this quarter as compared to losses posted in the same quarter last year.

No crude shock for now: Operating margins have improved marginally because of reduction in the material consumed. Percentage of raw material and packaging material consumed to total sales has come down marginally (down 50 basis points). This, despite firm crude prices is commendable. But volatile crude prices in the global market and the recent rupee depreciation are concerning factors for the remaining quarters in FY05.

Other income helps matter: Net profit margins increased by 50 basis points. Higher other income is due to Asian Paints receiving dividends worth Rs 15 m from Asian PPG (the joint venture company that manufacturers automotive paints), which was nil last year. Interest expense was lower due to repayment of some of its debentures.

What to expect?
At the current price level of Rs 310, the stock trades at a P/E multiple of 22.2x annualised 1QFY05 earnings. Going forward, on the back of the robustness in housing demand, the company's decorative segment is expected to grow at CARG of 13% for next two years. The key growth drivers are likely to be exterior paints and industrial paint division (more than 30% growth). As far as the international operations are concerned, the topline is expected to grow by 12% with a net margin of 3%. Asian Paints had plans to cut prices of some products in the economy segment to gain market share. This highlights the intensity of competition from other key players in the organised segment like Goodlass, Berger and ICI and the change in the company's strategy. This combined with volatile crude prices and rupee depreciation is likely to keep operating margins under check.

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