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Asian Paints: Margins erode on cost pressures

Oct 28, 2011

Asian Paints has announced the second quarter results of financial year 2011-2012 (2QFY12). Topline increased 24.3% YoY while bottomline declined 2.8% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Topline grew 24.3% YoY in 2QFY12. Growth from the decorative business segment was impacted on account of extended rainfall. However, demand conditions in the industrial segment showed signs of improvement despite slowdown in many industries.
  • Operating margins declined to 14.3% this quarter as compared to 18.3% in 2QFY11. Even on a quarterly basis operating margins were down by 300 bps due to raw material price inflati0n. It may be noted that raw material price index for the decorative products stood at 116.9 in 2QFY12 on a base of 100 compared to 114.0 in 1QFY12.
  • Net profits declined 2.8% YoY in 2QFY12 as the company absorbed raw material price increases.
  • The company declared an interim dividend of Rs 9.5 per share during the quarter.

Consolidated financial snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 18,108 22,508 24.3% 36,410 45,112 23.9%
Expenditure 14,793 19,279 30.3% 29,624 37,961 28.1%
Operating profit (EBDITA) 3,315 3,229 -2.6% 6,786 7,151 5.4%
Operating profit margin (%) 18.3% 14.3%   18.6% 15.9%  
Other income 249 292 17.4% 433 598 38.0%
Interest 46 88 93.6% 88 153 74.7%
Depreciation 284 300 5.5% 553 591 6.8%
Profit before tax 3,234 3,133 -3.1% 6,578 7,004 6.5%
Tax 984 955 -3.0% 1,997 2,110 5.6%
Minority interest 103 91 -11.4% 212 171 -19.7%
Profit after tax/(loss) 2,147 2,087 -2.8% 4,369 4,724 8.1%
Net profit margin (%) 11.9% 9.3%   12.0% 10.5%  
No. of shares (m)         95.9  
Basic & diluted earnings per share (Rs)         49.2  
P/E ratio (x) *         33.3  
*On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Net sales increased 24.3% YoY in 2QFY12. The growth was led by buoyancy in demand from the industrial segment. However, demand conditions in the decorative segment were impacted due to extended monsoon.

  • As far as the international operations are concerned the Asian and South Pacific markets registered strong growth during the quarter. However, growth from the Middle East region was subdued due to uncertain political environment.

  • The construction work at Rohtak plant was initiated during the quarter. The company plans to add 50,000 kilo litres of capacity at Rohtak by 1QFY13. Further, it may be noted that the construction work at Khandala plant is progressing on schedule.

  • The operating margin stood at 14.3% in 2QFY12, a decline of 400 bps over 2QFY11. On a quarterly basis too, margins declined by 300 bps. Significant raw material price inflation has been impacting the margins of the company. Although the company is undertaking a gradual and a calibrated price increase it is insufficient to shield margins. Further, it may be noted that the company refrained from increasing prices in the latest quarter in order to safeguard its market share.

  • Bottom line declined 2.8% YoY during the quarter due to weak performance at the operating level and higher interest expenses.
What to expect?
At the current price of Rs 3,055, the stock is trading at 20.6 times our estimated FY14 earnings. Going forward, raw material price inflation would remain a key concern. However, with crude & crude derivatives showing signs of cooling down, we do not expect further margin erosion from current levels. However, the recent rate hike means that the demand from automotive and industrial segment would continue to suffer in the near term. Even the environment in international markets continues to remain challenging. In light of these factors, we maintain our negative view on the stock.

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