• OCTOBER 16, 2002

Asian Paints: 2QFY03 sales up 15%

Asian Paints has posted yet another stellar performance for the second quarter ended September 2002. Led by a concerted effort in reducing overheads, success of new products and robust growth in exterior paint sales, net profit in 2QFY03 has increased by 39% YoY.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Sales 3,421 3,929 14.8% 6,194 7,145 15.4%
Other Income 30 55 84.6% 48 93 91.0%
Expenditure 2,849 3,181 11.7% 5,188 5,831 12.4%
Operating Profit (EBDIT) 572 748 30.6% 1,006 1,315 30.6%
Operating Profit Margin (%)16.7%19.0% 16.2%18.4% 
Interest 53 19 -64.2% 100 49 -51.0%
Depreciation 83 114 38.1% 176 229 29.9%
Profit before Tax 466 669 43.5% 779 1,129 45.0%
Tax 170 257 50.9% 285 428 50.4%
Profit after Tax/(Loss) 296 413 39.3% 494 701 42.0%
Net profit margin (%)8.7%10.5% 8.0%9.8% 
No. of Shares (m) 64.2 64.2   64.2 64.2  
Earnings per share (Rs)* 18.5 25.7   15.4 21.8  
P/E (x)     15.6  

Off late, one of the key growth drivers for the company has been the exterior segment that is growing at an estimated 20%-22% per annum. In the first half of the current fiscal year, exterior paint sales was higher by 35% for the company. New products also saw a 35% rise in sales in 1HFY03. Asian Paint's constant efforts to boost sales through expanding its 'Colour World' outlets have also yielded positive results. The number of such outlets stood at 2,850 till 1HFY03. As we have said earlier, it has been observed that sale of paints where such machines have been installed are 50% higher than conventional retail outlets. However, the company has cautioned for the rest of FY03. As per the press release, "the prospects for the remaining financial year is dependent on the demand during the festival season. Demand was beginning to slacken during the end of the quarter (i.e. 2QFY03)".

The company's operating margins in 2QFY03 are one of the highest in recent history. Despite a rise in raw material costs during the quarter, the spurt in operating margins is commendable. Almost all raw material prices have increased due to higher demand in US, China and select South Asian countries. To pass on the rise in input cost, the company has hiked product prices by 1% in 2QFY03. With crude prices currently hovering at US$ 28-US$ 30 per barrel, we do not expect the company to maintain such high operating margins in the coming quarters. Besides, festive season always mean increased competitive pressure and consequently lower realisations.

We expect the company to generate cash flow from operation to the tune of Rs 2,240 m in FY03 on account of tighter control on working capital and increased asset sweating. The fall in interest cost during the quarter is primarily on account of accelerated debt retirement in absence of any major capital expenditure. Net profit in 2QFY03 has increased by 40% despite a spurt in depreciation and tax. However, with agricultural sector expected to register a 7% fall in FY03, we continue to remain cautious for the coming quarters. We expect the company to post a net profit of Rs 1,370 m in FY03 (20% rise YoY).

During 2QFY03, Asian Paints acquired two companies, one in Egypt and the other in Singapore. On account of increased cash flow, the company expects both acquisitions to be met from internal accruals. (More on acquisitions)

The stock currently trades at Rs 340 implying a P/E multiple of 15.8x FY03E earnings. Asian Paints has recommended the payment of interim dividend of Rs 4.5 per share. Ignoring the near-term concerns like slower economic recovery and hardening of crude prices, we continue to remain optimistic of the company's performance from a three to five year perspective.

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