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Asian Paints: The shade brightens

Oct 28, 2004

Performance Summary
Asian Paints, the market leader in the Indian paint sector, has posted mixed results for the second quarter ended September 2004. While the standalone topline growth was 8%, owing to a significant rise in raw material and packing material costs, operating margins declined in 2QFY05. On a consolidated basis, the international operations have been turned around impressively and consequently, there has been an upgradation to the earlier topline growth guidance. The company has declared an interim dividend of Rs 4 per share (1.3% dividend yield).

Standalone numbers…
(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 4,952 5,344 7.9% 8,745 9,496 8.6%
Expenditure 4,130 4,534 9.8% 7,382 8,070 9.3%
Operating profit (EBDITA) 821 810 -1.4% 1,363 1,426 4.6%
EBDITA margin (%)16.6%15.2% 15.6%15.0% 
Other income 45 95 113.9% 84 137 63.3%
Interest 15 6 -58.1% 29 14 -53.7%
Depreciation 121 122 1.1% 239 242 1.2%
Profit before tax 731 777 6.4% 1,178 1,308 11.0%
Extraordinary income/(expense) 2 (5) - 2 (4) -
Tax 263 285 8.2% 423 480 13.6%
Profit after tax/(loss) 469 488 4.0% 757 823 8.7%
Net profit margin (%)9.5%9.1% 8.7%8.7% 
No. of shares (m) 95.8 95.8   95.8 95.8  
Diluted earnings per share (Rs)* 19.6 20.4   15.8 17.2  
Price to earnings ratio (x)     17.4  
(* annualised)      

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 paint 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, USA, also has presence in the automotive paint segment. The company has significant global presence through acquisitions, which are being restructured.

What has driven performance in 2QFY05?
Industrial coatings gains momentum: While the company's topline growth on a standalone basis at 8% is in line with our full year estimates. The key growth drivers on the decorative side, as per the company, are exterior and interior emulsions. Besides decorative, what is also impressive is that the industrial side has also grown at a faster clip. We believe that the industrial paint division is likely to grow at a faster rate than the decorative segment in the medium-term. While the chemical division grew by only 3% in 2QFY05, as per the company, growth is likely to be higher in the next two quarters.

Higher raw material cost hits margins: With crude prices increasing sharply in the last six months, there has been an escalation in both raw material and packaging material costs in 2QFY05. While titanium dioxide prices, one of the key raw materials, has increased by around 4% YoY, select packaging material costs has increased by more than 25%. This has impacted margins in 2QFY05. The overall margin decline in lower in 1HFY05 on account of better performance of the chemicals division. Since three months prior to diwali is a crucial period for paint sales, the company did not undertake any product price increases, which has added to the pressure. However, we expect prices to be revised upwards in 4QFY05.

The consolidated picture is much better: As far as the consolidated financial performance goes, the joint venture with PPG of USA that services automotive companies, has witnessed a 19% growth in sales in 2QFY05. The company has benefited from the rise in automotive sales (it is a supplier to the likes of Hyundai and other American car manufacturers in India). As far as international operations are concerned, volume sales in 1HFY05 increased by 23% with Middle East growing much faster. The company has revised its earlier topline guidance to 12%-13% (around 10% earlier) growth for FY05.

Consolidated snapshot…
(Rs m)2QFY042QFY05Change
Operating profit (EBDITA) 894 892 -0.2%
EBDITA margin (%)14.5%13.0% 
Profit after tax 473 487 3.1%
Net profit margin (%)7.7%7.1% 
No. of shares (m) 95.9 95.9  
Diluted earnings per share (Rs)* 19.7 20.3  
Price to earnings ratio (x)  14.7  
(* annualised)   

What to expect?
The stock currently trades at Rs 299 implying a price to earnings multiple of 14.7 times consolidated 2QFY05 annualised earnings. While the 1HFY05 numbers are in line with our full year estimates, we feel that the pressure on operating margin is unlikely to ease for the rest of the fiscal. Amidst promising long-term growth prospects in the domestic market and impressive show on the international side, the fact is that crude prices are showing no signs of cooling off. To that extent, the near-term is clouded with uncertainity.

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