Asian Paints, the market leader in the Indian paint segment, has planned to set up its fifth paint production unit. The company currently has four manufacturing units at Kasna, Bhandup, Pattancheru and Ankhaleshwar. The company has been contemplating to set up a new manufacturing unit for quite sometime.
Asian Paints currently has 163 THTPA (thousand tonnes per annum) paint manufacturing capacity with a capacity utilisation close to 89%. It also manufactures resins, polyurethane and pthalic anhydride.
One of the primary reason for the company setting up a new plant could be to lower its tax outgo. Last year the effective tax rate jumped from 25.6% (in FY99) to 32% (in FY00). Even for the first half of the current year, the tax outflow has gone up by more than 30% increasing the effective rate to 33%.
This has had an adverse impact on post tax profits of the company. Despite the company’s pre–tax margins improving from 9% in FY99 to over 12% in FY00, the post tax margins have stagnated around 7.5% levels. As a result, we believe that this fresh capital expenditure for setting up the new plant would provide relief to the company in terms of lower tax outflow.
Tax squeezes margins…
Pre-tax profit margins
Net profit margins
Effective tax rate
Besides, since Asian Paints has manufacturing divisions in northern and western parts of India, a plant in Southern region would provide the company a strategic advantage into this highly lucrative region apart from savings in form of distribution costs.
The stock is trading at Rs 268 at a P/E multiple of 18.3x on annualised 1HFY01 earnings. On the estimated sales of Rs 14,457 m for FY01E, market capitalisation to sales works out to 1.2 times (market capitalisation is Rs 17,918 m). After touching its 52 week low of Rs 210 on 6th October 2000, the scrip has gained 28% in the last two months.
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