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Asian Paints - Setting new highs

Dec 5, 2000

Asian Paints, the market leader in the Indian paint segment, had reported a 20% percent rise in sales for the first half of the current year. Net profits grew by 24% backed by a significant growth in operating margins in the first quarter. However, margins dipped by 70 basis points in the second quarter due to rise in basic rutile prices. Besides, change in inventory valuation norms also subdued profits (if this was not effected, profit would have been higher by Rs 17 m). Overall, for the first half, operating margins have been maintained at the previous years levels. But, what is encouraging is the fact that volumes are growing at a healthy rate despite floods and droughts in some Eastern and Western states of India. However, we expect volume growth to slow down in the third and fourth quarter respectively.

FY00
(Rs m) 1QFY00 2QFY00 3QFY00 4QFY00 FY00
Net sales 2,287 2,727 3,018 2,630 10,662
Q-o-Q (%)   19.2% 10.7% -12.9%  
Y-o-Y (%) 10.7% 6.0% 46.0% 17.3%  
Net profit 157 239 232 346 974
Q-o-Q (%)   52.2% -2.9% 49.1%  
Y-o-Y (%) 11.7% 30.8% 47.8% 20.1%  

FY01E
(Rs m) 1QFY01 2QFY01 3QFY01E 4QFY01E FY01E
Net sales 2,495 3,481 3,395 2,919 12,291
Q-o-Q (%)   39.5% -2.5% -14.0%  
Y-o-Y (%) 9.1% 27.6% 12.5% 11.0% 15.3%
Net profit 185 305 248 381 1,119
Q-o-Q (%)   64.9% -18.6% 53.3%  
Y-o-Y (%) 17.8% 27.6% 7.0% 10.0% 14.9%

Besides, the current festive season was exactly at the end of the second quarter i.e. Diwali. Therefore, a demand for paint is expected to be subdued in each of the next two quarters. So, we expect the company to post around 12% rise in sales for the third quarter.

The company has planned to raise prices of its products during the third quarter to compensate for the increase in raw material prices. So, a significant drop in operating margins is not expected in coming quarters. Having said that, we expect margins to come under pressure in the last quarter if basic raw material prices continues to remain at the prevailing levels. However, sales would pick up in the last quarter due to the festive season in Southern India during that time.

Another key driver for volume growth will be the dealer tinting machines that the company is aggressively expanding. Infact, sales through these computerized tinting machines have been far better than conventional distribution outlets. Asian Paints has increased the number of these outlets from 648 outlets in July 2000 to 818 outlets as of 30th September 2000.

In the last year (FY00) as well as in the current year, net profit margins were suppressed by higher depreciation and tax outflow as the company continues to suffer from lack of fresh tax incentives and higher depreciation (we expect Asian Paints to pay full tax this year). Further, the strike and subsequent lock-out in the Kasna plant (Lucknow) may slow down volumes growth and pressurize margins (due to fixed costs). Despite these drawbacks, considering the first half results of the company, we have upgraded our net profit estimates to Rs 1,119 m for FY01E.

The stock is currently trading at Rs 249 a P/E multiple of 17x the annualised 1HFY01 earnings.

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