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Asian Paints: Margins take the cake - Views on News from Equitymaster

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Asian Paints: Margins take the cake

Oct 23, 2009

Performance summary
  • Revenues grow by 17% YoY during 2QFY10 led by the decorative paints business in India and the Middle East.
  • EBDITA margins improve substantially by 4.5% during the quarter due to a considerable fall in raw material and staff costs (as percentage of sales).
  • Led by the strong growth in operating profits and a five-fold jump in other income, net profits more than double during the quarter.
  • The Board declares an interim dividend of Rs 8.5 per share (dividend yield of 1%).

Consolidated results
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 14,759 17,239 16.8% 27,186 31,842 17.1%
Expenditure 12,666 14,011 10.6% 23,365 25,855 10.7%
Operating profit (EBIDTA) 2,094 3,228 54.2% 3,822 5,987 56.6%
Operating profit margin (%) 14.2% 18.7%   14.1% 18.8%  
Other income 174 874 403.9% 270 1,030 281.2%
Interest 68 64 -4.6% 123 136 10.9%
Depreciation & amortisation 186 200 7.2% 341 398 16.9%
Profit before tax 2,013 3,838 90.6% 3,629 6,483 78.7%
Tax 634 1,065 67.8% 1,154 1,909 65.5%
Prior period items (9) (1)   (14) (1)  
Profit after tax 1,370 2,773 102.4% 2,461 4,574 85.8%
Minority interest (55) (89) - (84) (129)  
Net income 1,315 2,684 104.1% 2,377 4,445 87.0%
Net profit margin (%) 8.9% 15.6%   8.7% 14.0%  
No. of shares (m)       95.9 95.9  
Diluted earnings per share (Rs)*         63.0  
Price to earnings ratio (x)*         25.5  
* on a trailing twelve month basis

What has driven performance in 2QFY10?
  • For 2QFY10, Asian Paints’ revenues on a consolidated basis grew by 17% YoY. Growth was led by good demand conditions and an early Diwali also helped matters. However, demand was not uniform across the country. While growth in some pockets was sluggish, the eastern region managed to log in strong growth during the quarter. The environment for industrial paints continued to remain subdued with growth remaining a challenge in the automotive paints segment as well. On the international front, almost all the subsidiaries were impacted by the global slowdown and challenging market conditions. As a result, overall growth in volumes was tepid at 2%. Having said that, Middle East and South Asia put up a strong show growing by 26% and 31% respectively. For 1HFY10, the company’s topline grew by an impressive 17% YoY.

  • Asian Paints’ operating margins during 2QFY10 improved by 4.5% to 18.7% largely due to a substantial fall in raw material and staff costs (as percentage of sales). Raw material costs fell sharply from 61.1% of sales in 2QFY09 to 56.8% in 2QFY10 as material prices stayed low inspite of the increase in crude prices. This resulted in the company reporting its strongest ever margins. However, crude prices have started rising again and the company does not expect these margins to be sustainable going forward. As far as the international operations are concerned, material costs during the quarter were significantly lower at an overall level as compared to last year because of globally reduced prices of crude and other commodities leading to improved profitability from these operations. Here too, Middle East and South Asia led the way as EBIT grew by 72% YoY and 47% YoY respectively.

  • Led by the strong growth in operating profits and a five-fold jump in other income, net profits more than doubled during the quarter. Other income increased due to the profit on sale of the company’s investment in ICI.

What to expect?
At the current price of Rs 1,606, the stock is trading at a multiple of 19.6 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 has finalized the land for its seventh paint plant in Western Maharashtra and construction is expected to commence in mid 2010.

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 as markets are yet to recover from the deferral of capex spends by industries. The company has done better on both the topline and the margin front and we may have to upgrade our numbers for the full year. We remain positive on the growth prospects of the company and advise investors to hold on to the stock.

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