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Asian Paints: India is the key - Views on News from Equitymaster
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Asian Paints: India is the key
Jul 28, 2006

Performance summary
Asian Paints, the market leader in the domestic paint sector, has begun FY07 on a strong note, reporting 17% YoY and 38% YoY growth in 1QFY07 consolidated topline and bottomline respectively. On a standalone basis, while revenues have grown by 18% YoY, net profits are up 31% YoY. However, despite a spike in raw material costs, consolidated operating margins have expanded by 1%, mainly on the back of stock related adjustments. Due to this, and lower depreciation costs, net profit growth has outperformed growth in the topline.

(Rs m) 1QFY06 1QFY07 Change
Net sales 6,626 7,773 17.3%
Expenditure 5,812 6,738 15.9%
Operating profit (EBIDTA) 814 1,035 27.2%
Operating profit margin (%) 12.3% 13.3%  
Other income 55 62 13.9%
Interest 24 40 67.2%
Depreciation & amortisation 144 143 -0.6%
Profits from associate company 0 (2) -
Profit before tax 701 912 30.0%
Extraordinary items (15) 0 -
Tax 250 322 28.8%
Profit after tax 435 590 35.4%
Minority interest (2) (13) -
Net income 438 603 37.7%
Net profit margin (%) 6.6% 7.8%  
No. of shares (m) 95.9 95.9  
Diluted earnings per share (Rs)*   23.8  
Price to earnings ratio (x)*   24.5  

What is the company's business?
Asian Paints is the market leader in the Indian paint industry. It has an overall market share of around 49% in the decorative paints segment. It has benefited from steady transition in the industry towards consolidation, 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, US, also has presence in the automotive paints segment. The company has significant global presence through acquisitions, which are being restructured. The management of the company is acclaimed for consistently outperforming industry and its peers in the last decade. Though conservative in nature, the company is well focused on its core business of paints and has posted a CAGR of 14% over the last six years in topline (PAT CAGR at 16% in the same period).

What has driven performance in 1QFY07?
Its India propelling topline: While consolidated topline was higher by 17% YoY, on a standalone basis, revenues grew at a faster clip of 18% YoY. As has been the case in the last three quarter, growth was not only witnessed in decoratives, but also on the industrial front. In fact, the industrial side has been growing at a much faster clip than decoratives, which is also the case in this quarter. We expect the topline to grow at a CAGR of 15% over the next three years. We maintain our view that the company will gain market share in the industrial segment (powder coatings especially) and also consolidate its standing on the decorative front. Though details about geographical performance are unavailable, the consolidated topline is higher by 29% as compared to the standalone numbers. The company is susceptible to foreign exchange fluctuations at the consolidated level, which is a cause for concern.

(Rs m) 1QFY06 1QFY07 Change
Paints 4,927 5,915 20.1%
PBIT 731 950 29.9%
margin 14.8% 16.1%  
Others 341 344 0.8%
PBIT 24 43 79.6%
margin 7.0% 12.5%  

Margin edge higher: Despite petrochemical prices hardening and higher crude prices, Asian Paints has managed to improve operating margins at the consolidated by 1% in 1QFY07, which is commendable. Looking at the segmental margins, while the chemical division's contribution to the overall PBIT has increased during the quarter, much of the expansion was on account of superb show by the paint division. We have actually factored in higher raw material costs in our estimates going forward, given the uncertainty on the crude price front.

Status quo at the net level: Though the net profit has outpaced the operating profit growth during the quarter, in our view, there is a significant scope to unlock efficiencies in its global operations. Though some of the South East Asian operations will continue to remain a drag on the consolidated performance, we expect Berger International's operating margins to improve over the next three years. Also, the current high rate of working capital at the consolidated level will also be pruned with the implementation of SAP, which benefited Asian Paints in India noticeably.

What to expect?
At Rs 585, the stock is trading at a price to earnings multiple of 18.0 times our estimated FY08 earnings, which is our sell limit. We have been cautious in our consolidated estimates, given the high crude prices. Overall, while the stock looks adequately valued from a medium-term standpoint, considering the long-term potential of the sector, the stock is a must in one's retirement portfolio.

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