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Asian Paints: Robust beginning - Views on News from Equitymaster
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Asian Paints: Robust beginning
Jul 30, 2007

Performance summary
  • Revenues grow by 24% YoY due to strong growth in both the business segments namely decorative and industrial.

  • EBDITA margins expand by 80 basis points (0.8%) due to the lower other expenditure (as percentage of sales). This is despite the rise in raw material costs.

  • PAT grows by 35% YoY led by the strong performance at the operating level, lower depreciation charges and higher other income.

Consolidated results
(Rs m) 1QFY07 1QFY08 Change
Net sales 7,773 9,605 23.6%
Expenditure 6,738 8,251 22.5%
Operating profit (EBIDTA) 1,035 1,354 30.8%
Operating profit margin (%) 13.3% 14.1%  
Other income 62 89 43.6%
Interest 40 49 22.6%
Depreciation & amortisation 143 141 -0.9%
Profits from associate company (2) - -
Profit before tax 912 1,252 37.3%
Tax 322 422 31.0%
Profit after tax 589 830 40.8%
Minority interest (13) 15 -
Net income 603 815 35.3%
Net profit margin (%) 7.8% 8.5%  
No. of shares (m) 95.9 95.9  
Diluted earnings per share (Rs)*   31.5  
Price to earnings ratio (x)*   27.6  
(*trailing 12-month earnings)

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 112 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 28% over the last five years in topline (PAT CAGR at 22% during the same period).

What has driven performance in 1QFY08?
Robust revenue growth: For 1QFY08, revenues on a standalone and consolidated basis grew by 23% YoY and 24% YoY respectively. On a consolidated basis, the strong growth in the topline was largely led by the paints business, both in India and the Middle East. The Indian business was driven by the decorative segment, led by a rise both in the volumes and realizations. In the industrial segment, while the company has not divulged details, all the three, namely automotive, powder and protective coatings reported strong growth. Growth in the international business was led by strong performance by the regions of Middle East and South East Asia.

Cost break-up
(% of sales) 1QFY07 1QFY08
Raw material costs 57.5% 58.5%
Staff costs 7.8% 7.7%
Other expenditure 21.4% 19.7%
Stability in margins: The company managed to expand its margins by 80 basis points (0.8%) during the quarter despite the 100 basis points rise in raw material costs, which we believe is commendable. The rise in the raw material costs could be attributed to the firm crude prices prevailing during the quarter. Hence, the company was able to improve its margins largely due to the strong volume growth and control over its other costs.

Bottomline picture: Though net profit growth (up 35% YoY) has outpaced the growth in operating profit at the consolidated level during the quarter, in our view, Asian Paints has 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, Berger International's operating margins are expected to improve going forward.

What to expect?
At the current price of Rs 774, the stock is trading at a price to earnings multiple of 27.6 times its trailing twelve months earnings. The growth of the paint sector, on an average, is pegged at 1.5 to 2 times the GDP. With the latter expected to grow at a strong pace, the topline of Asian Paints is expected to register strong growth going forward. While the decorative business will continue to do well, the company is likely to garner good market share in the industrial segment, especially the powder coatings business. Having said that, the management has opined that the inflation and the rising interest rates are a cause for concern going forward. Also, at the bottomline level, it will be some time before Berger International makes a significant contribution. We shall soon update our research report on the company.

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