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Asian Paints: Margins take a beating
Oct 24, 2008

Performance summary
  • Revenues grow by a robust 30% YoY during 2QFY09 buoyed by strong growth in the decorative paint segment and the international operations, especially the Middle East.
  • EBDITA margins contract by 1.8% during the quarter mainly due to substantially higher raw material costs.
  • Reduction in operating margins coupled with the sharp fall in other income restricts the growth of the bottomline to 16% YoY, much lower than the topline growth.


Consolidated results
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 11,332 14,753 30.2% 20,937 27,173 29.8%
Expenditure 9,516 12,665 33.1% 17,767 23,363 31.5%
Operating profit (EBIDTA) 1,816 2,088 15.0% 3,169 3,810 20.2%
Operating profit margin (%) 16.0% 14.2% 15.1% 14.0%
Other income 265 179 -32.4% 354 282 -20.4%
Interest 69 68 -2.0% 118 123 3.8%
Depreciation & amortisation 146 186 28.0% 287 341 18.6%
Profit before tax 1,866 2,013 7.9% 3,118 3,629 16.4%
Tax 597 634 6.3% 1,019 1,154 13.2%
Prior period items 4 (9) 8 (14)
Extraordinary item (71) - (71) -
Profit after tax 1,202 1,370 14.0% 2,035 2,461 20.9%
Minority interest (63) (55) - (77) (84) 8.8%
Net income 1,139 1,315 15.5% 1,958 2,377 21.4%
Net profit margin (%) 10.0% 8.9% 9.4% 8.7%
No. of shares (m) 95.9 95.9
Diluted earnings per share (Rs)* 47.3
Price to earnings ratio (x)* 20.0
(*trailing 12-month earnings)

What has driven performance in 2QFY09?
  • For 2QFY09, revenues on a consolidated basis grew by 30% YoY. The strong growth in topline was largely led by the decorative paints business in India and the Middle East. While demand for decorative paints was strong during the quarter across various parts of the country, it was relatively weaker in the western region due to prolonged monsoons. In line with the slowdown in the auto industry, growth in the automotive paints segment was flat.

  • Revenues from the international market registered a robust 35% YoY and 25% YoY growth in 2QFY09 and 1HFY09 respectively. Growth in 1HFY09 was largely led by the Middle East (revenues up 39% YoY) and South Asia (up 38% YoY). Revenues from the Caribbean grew by a mere 2% YoY largely due to subdued market conditions as the region largely depends upon the US, which is in the throes of a slowdown.

    Segmental snapshot
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    APL - Paints 8,644 11,369 31.5% 15,747 21,118 34.1%
    Chemicals 253 292 15.6% 537 474 -11.8%
    APPG+APICL (automotive, industrial) 642 683 6.3% 1,250 1,324 5.9%
    International 1,792 2,409 34.5% 3,402 4,257 25.1%
    Total 11,331 14,753 30.2% 20,937 27,173 29.8%

  • Asian Paints witnessed a 1.8% YoY decline in its operating margins during 2QFY09, which was largely due to the 2.4% rise in raw material costs (as percentage of sales). Due to the firm crude prices, the prices of solvents and monomers, which are crude based increased pressure on margins. Further, given that the company imports a larger part of its titanium dioxide requirements, the sharp depreciation of the rupee against the dollar aggravated matters further. Having said that, the company was able to keep its other costs under control. As far as the international operations are concerned, in 1HFY09, the EBIT margins of the Middle East and South Asia witnessed a quantum jump. South East Asia managed to report lower losses as compared to the corresponding period last year. However, profits of the Caribbean dipped into the red and those from the South Pacific regions declined by 25% YoY due to lower sales reported in these regions.

  • Asian Paintsí net profit growth was restricted to 16% YoY during the quarter despite the robust growth in the topline. This was largely due to the fall in operating margins and lower other income.

What to expect?
At the current price of Rs 885, the stock is trading at a multiple of 10.3 times our estimated FY11 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 decent pace, the topline of Asian Paints is expected to register strong growth going forward. The decorative business is expected to do well and Asian Paints would continue to lay emphasis on driving topline growth going forward. The company is also likely to garner good market share in the industrial segment, especially the powder coatings business. Having said that, in the medium term atleast, the management has opined that the slowdown in the economy is likely to take its toll on demand conditions. It has also cited inflation in material costs as a cause for concern. 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. We maintain our positive view on the stock.

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