• MAY 28, 2003

Asian Paints: 4QFY03 pressure

Asian Paints has posted a 20% rise in revenues and a 24% increase in net profit for the full year ended March 2003. While the nine months performance of the company at the operating level was impressive, FY03 numbers have been depressed by raw material cost related pressure in 4QFY03. Operating profit margins have suffered significantly during the quarter.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Sales 3,178 3,587 12.9% 13,160 15,738 19.6%
Other Income 83 32 -61.3% 156 142 -8.5%
Expenditure 2,602 3,060 17.6% 10,938 13,097 19.7%
Operating Profit (EBDIT) 576 528 -8.3% 2,222 2,641 18.8%
Operating Profit Margin (%)18.1%14.7% 16.9%16.8% 
Interest 3 16 384.2% 146 83 -42.7%
Depreciation 153 112 -26.5% 418 451 8.0%
Profit before Tax 503 432 -14.1% 1,814 2,248 23.9%
Extraordinary items (10) (14)  (10) (14) 
Tax 187 136 -27.2% 661 815 23.3%
Profit after Tax/(Loss) 306 282 -7.7% 1,143 1,420 24.2%
Net profit margin (%)9.6%7.9% 8.7%9.0% 
No. of Shares (m) 64.2 64.2   64.2 64.2  
Earnings per share (Rs)* 19.0 17.6   17.8 22.1  
P/E (x)     17.2  

At first glance, the company seems to have outperformed at the topline level (against our estimate of 12%, net sales growth stands at 20%). However, the management has re-classified some of the discounts that used to be a part of net sales calculation previously into overheads from FY03. This has resulted in net sales increasing by Rs 898 m in the same period. If one were adjust for the same, revenue growth stands at 12.4%, which is in line with our estimates. The continuation of robust growth in exteriors and success of new products has benefited Asian Paints, which commands an estimated 36% market share in the organised paint market.

Compared to a 220 basis points rise in operating margins in 9mFY03, Asian Paints finished FY03 with a marginal dip in margins. This is on account of significant rise in raw material costs in 4QFY03 in line with the spurt in crude prices. Raw material costs as a percentage of sales have increased from 55% in FY02 to 56% in FY03. Just to highlight the level of rise in 4QFY03, raw material cost to sales stood at 58% as compared to 52% in the same period last year. However, the company has managed to boost net profit by reducing interest costs significantly. There has been significant reduction in working capital, as a result of which it has been able to squeeze cash. We expect the cash conversion cycle to have come down to around 30 days in FY03 as compared to 37 days last year.

Despite poor monsoon and its consequent impact on the agricultural sector, the FY03 performance of the company is commendable. Though monsoon will play a vital role in paint demand during FY04 also, the robustness in housing sector is likely to provide some cushion in the medium-term. Housing finance disbursement is expected to grow at 25% in FY04. Given the widespread distribution and brand strength, Asian Paints is likely to benefit from such industry trends. As against 12% in FY03 (including discounts), we expect revenues to grow by 10% in the coming fiscal.

The stock currently trades at Rs 381 implying a P/E multiple of 17.2x FY03 standalone earnings. The company has proposed a bonus issue of one share for every two shares held (1:2) and has declared a final dividend of 65%. Total dividend for FY03 as a result stands at Rs 11 per share (dividend yield of 2.8%). While we remain positive on the 3-5 year domestic growth prospects of the company, on a consolidated basis, profitability growth is likely to remain muted in the near term. Following the acquisition of SCIB and Berger International, the company has initiated a restructuring exercise, which will take some time to reflect at the consolidated level.

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