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Asian paints: It is topline that counts

Oct 31, 2003

India’s largest paint company, Asian Paints, has declared good results for 2QFY04. The company has reported a 13% increase in the bottomline while the topline has grown at a faster rate of 16% YoY. However, both operating and net profit margins during the quarter remained under pressure.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Sales 4,258 4,942 16.1% 7,760 8,731 12.5%
Other Income 35 54 55.9% 63 98 55.3%
Expenditure 3,491 4,134 18.4% 6,416 7,390 15.2%
Operating Profit (EBDIT) 767 808 5.3% 1,344 1,341 -0.2%
Operating Profit Margin (%) 18.0% 16.3%   17.3% 15.4%  
Interest 19 15 -22.7% 49 29 -40.4%
Depreciation 114 117 2.4% 229 231 1.1%
Profit before Tax 669 731 9.2% 1,129 1,178 4.4%
Tax 257 263 2.3% 428 423 -1.2%
Profit after Tax/(Loss) 413 468 13.3% 701 756 7.8%
Net profit margin (%) 9.7% 9.5%   9.0% 8.7%  
No. of Shares (m) 64.2 64.2   64.2 64.2  
Earnings per share (Rs)* 25.7 29.1   21.8 23.5  
P/E (x)   9.44     11.68  

Operating margins during the quarter came down by 170 basis points mainly due to higher material cost (titanium dioxide) for the paint division and lower contribution from chemical business. Titanium dioxide prices are currently ruling at US$ 1,850 per tonne, which represents a 9% increase compared to December 2002. Due to the recovery in petrochemical prices in the corresponding quarter last year, the chemical division saw significant improvement in revenues and profitability. But with these benefits evaporating, margins for this division has come down significantly. Just to put things in perspective, PBIT margins of this division stood at 6% in 1HFY04 as compared to 20% in 1HFY03. That said, we have factored lower margins in our estimates for FY04. Therefore, the decline in margins should be viewed negatively.

While operating profits grew by 5% in 2QFY04, higher other income and reduction in interest outgo have enabled Asian Paints to post higher growth at the pre-tax level. Other income rose by 56% YoY due to interest received on income tax refund (39% of other income).

Decorative Paint business of the company grew by over 25% domestically. This is despite factors like transport strike and prolonged monsoon that lowered revenue growth in 1HFY04. Industrial paints business of the company has grown at faster rate of 20% in India. The company has launched the road marking range in paints considering the huge potential due large government spending in road projects. Similar to exterior paints, we expect industrial paint contribution to increase in the next three years.

Internationally, in spite of 10% increase in volume sales, company’s revenues dropped by 3% mainly due to the fact that Indian Rupee appreciated by 3% against US dollar. This apart, depreciation of 19% in Jamaican dollar and 33% in Egyptian pound against US dollar aggravated the situation. However, in isolation with exchange rate movement, revenues from international operation increased by 5% YoY. Overall, the company’s performance in the international markets was subdued.

Decorative coating segment will continue to perform well going forward. Asian Paints expects raw material prices to stabilse except marginal increment in titanium dioxide. Prices of other raw materials like vegetable oil are expected to go down due to good monsoons. The company expects to increase volumes by 15% in the remaining half. However, real value growth is expected to be around 10%.

Though the company has 'strategic' reasons for picking up the stake in ICI India, which owns the 'Dulux' brand of decorative paints, this move has to be viewed with caution.

At the current price level of Rs 275, the stock trades at P/E ratio of 11.7x annualised 1HFY04 earnings (10.1x FY04E earnings). The company is also planning to put up fifth paint plant in India. It will add to the production capacity of Asian Paints by 100,000 kiloliters over next five to seven years. The company will incur a capex of Rs 350 m in the current fiscal. This would add to the growth momentum. While international operations are showing subdued growth for now, we believe that subsidiaries have the potential to outgrow the parent major in the long term.

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