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Paints: Will growth sustain? - Views on News from Equitymaster
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  • Dec 19, 2000

    Paints: Will growth sustain?

    Asian Paints and Goodlass Nerolac, the market leaders in the decorative and industrial paint segment respectively, have been rallying on the bourses for the last one-month. What could be the rationale behind this rally? We take close brief look at the performance of both the companies in the first half of the current year (figures in table below are the combined financial performance of Asian Paints and Goodlass Nerolac).

    Despite reports of drought and flood in some of the Eastern and Western states of India, sales have grown by 19% in the first half of the current year. Since Asian Paints has a strong presence in the decorative segment, growth in sales is higher compared to Goodlass. Goodlass, on the other hand, was affected due to slow down in automobile sales for the first seven months of the current year. Both companies have been aggressively expanding their computerized tinting machines outlets (sales through these outlets have been far better than conventional dealer sales).

    Accelerating growth…
    (Rs m) 1HFY00 1HFY01 change
    Sales 7,479 8,856 18.4%
    Other Income 77 122 58.4%
    Expenditure 6,486 7,592 17.1%
    Operating Profit (EBDIT) 993 1,224 23.3%
    Operating Profit Margin (%) 13.3% 13.8%  
    Interest 171 152 -11.1%
    Depreciation 190 242 27.4%
    Profit before Tax 709 952 34.3%
    Tax 219 301 37.4%
    Profit after Tax/(Loss) 490 651 32.9%
    Net profit margin (%) 6.6% 7.4%  

    However, in terms of growth in operating margins, Goodlass has outperformed Asian Paints. Margins have improved from 8.2% in 1HFY00 to 9.8% in 1HFY01. The reason for stable margins for Asian Paints could be attributed towards competition in the decorative segment and the pressure on paint companies to absorb the increase in basic raw material prices instead of passing on to the customer. But, decorative companies, including Asian Paints, had increased the prices in the first quarter by 2.5% and reduced it marginally in the second quarter of the current year (demand peaks during the second quarter on festive occasion). Besides, though the prices of titanium dioxide have gone up, other raw material prices (vegetable oil and some resins) have gone down considerably. This has, to a certain extent, brought relief to paint companies in the current year.

    So, where is the Indian paint sector heading? We believe that growth in sales would soften in the third and the fourth quarter. The primary reason for this could be the slowdown in agricultural output due to less than average rainfall.

    However, in the longer term, decorative segment would continue to grow at 14% per annum. In fact, growth has accelerated in the last two years for the decorative segment. This is why Goodlass Nerolac, which is an industrial company, has realised the need to increase its presence in the decorative segment. However, recent reports of import of cheap paints from China are the main cause for concern. This could pose a potential threat to the very survival of the Indian companies. Though the government has increased customs duty to prevent such imports, this is only a short-term measure. We believe that branding, technology and distribution network are the key factors that would separate wheat from the chaff.

    Comparitive valuations…
    (Rs m) Asian Goodlass Berger ICI
    Market Price* 277 142 91 91
    Number of shares 67 15 23 41
    Market Capitalisation 18,520 2,173 2,135 3,719
    EPS (FY00) 14.6 19.6 10.0 15.7
    P/E on MP 19.0 7.2 9.1 5.8
    Sales 12,408 6,049 5,050 8,999
    Market cap/sales 1.49 0.36 0.42 0.41
    *Prices as on 19th December 2000        



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