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Asian Paints (updated - 14 Aug 2009)
Consumers in metro cities may not be spending too much but the story in smaller cities is quite different. And Asian Paints, the market leader in the decorative paints category, continues to capture these spends. Surprising the Street, the company posted strong operating profit margins, up a remarkable 500 basis points to 18.9 per cent, and a 60 per cent increase in operating profit in the June 2009 quarter.

The operating margins were driven by a 17.6 per cent growth in the consolidated top line to Rs 1,460 crore, which was the result of a doubledigit increase in volumes —in the March quarter too, Asian Paints had clocked 10 per cent-plus growth in volumes. The company had effected a price cut of around 10 per cent in the second half of 2008-09, a move that appears to have allowed it to gain market share.

While it did not make any price changes in the June quarter, and therefore, saw good realisations, it cut prices by around 2 per cent in July.

Asian Paints
Much like its peers in the FMCG space, Asian Paints has outperformed the market over the past year. But it hasn’t fared as well as some others in the space. After all, paints are not a consumer staple and, in an economic downturn, spends on such items are typically lower.

At around 15 times estimated 2009-10 earnings, the stock seems a tad expensive, because the 20 per cent growth in the bottom line being pencilled in by analysts may not come through. Of course, raw material prices are coming off and there’s a low base to begin with, since net profits for the current year are expected to fall. But, revenues are expected to grow by just around 8-10 per cent, given the slowdown in the economy. If revenues were up 12 per cent at Rs 1,321 crore in the December 2008 quarter, it was partly because of the weaker rupee that meant more proceeds from exports. But the firm’s net profits crashed 50 per cent, despite it being the festive season.

That’s because prices of key inputs such as titanium dioxide and some oils have come off -in the June quarter, the cost of raw materials as a proportion of sales fell nearly 450 basis points. With a pick-up in residential housing, Asian Paints should continue to see increase in volumes. However, a weak monsoon could stymie demand from the new construction segment, which fetches around 30 per cent of volumes.

The demand for repainting, though, is unlikely to be hit. Business in West Asia, which accounts for half of the firm’s global sales, continues to be brisk and grew around 35 per cent during the June quarter. In the current year, the company is expected to turn in revenues of Rs 6,200 crore, a growth of 13-14 per cent over 2008-09.
Operating margins should come in a shade over 15 per cent, resulting in a bottom line growth of over 40 per cent. At the current price of Rs 1,370, the stock trades at about 22 times estimated 200910 earnings and is attractively valued.
source - BS

In fact, Asian Paints did take selective price cuts to try and drive volumes, but that didn’t work. Since the bulk of revenues, nearly 70 per cent, is earned when houses are repainted, business could be dull for at least another year. Until the real estate and automotive sectors revive, it’s unlikely volumes will pick up. In fact, there’s a fair chance business in overseas markets like South East Asia and West Asia, might be hit. Asian Paints has always managed to keep costs in check, which is why the growth in profits in recent years has surpassed the increase in its top line.

In the four years to 2007-08, the company posted an annual compounded growth in net profits of 34 per cent, while the increase in sales was 20 per cent. So, lower prices of key raw materials, including xylene, edible oils and packaging costs should at least help steady operating margins, which fell 740 basis points y-o-y to 8.3 per cent in the December quarter. But for margins to bounce back meaningfully could take some time.
source - BS

Asian Paints (updated - 13 Oct 2009)
With June quarter net profits having risen by 65%, Asian Paints has kept the promise. It has been holding out, making it one of the safest bets for any long-term investor. Sure, India’s largest paint company has underperformed the markets in the ongoing rally, but that’s in line with the defensive streak of the scrip. With strong finances, a proven business model, strong brand equity complemented with deep sales and distribution network, the company remains a classic defensive stock.

Business:
Asian Paints, India’s largest paint company, was incorporated in 1945 in Mumbai, and has three main business divisions - decorative paints, industrial paints and international business. The domestic paints business contributes more than 80% to the company’s total revenues while the international business operations constitute 17% of the company’s total turnover with the balance contributed by its chemicals business.

It is the market leader in decorative paints in India and operates in all segments of interior & exterior wall finishes, enamels and wood finishes. In industrial paints segment, Asian Paints directly operates in auto refinish, protective coatings, floor coatings and road marking paints segments.

The company is the second-largest supplier to the auto segment in India. Establishing presence in Fiji in 1978, the company now has presence in 20 countries spread over the regions of West Asia, Caribbean, South Pacific Islands, South Asia and South East Asia. The company is in the top three in all markets in decorative paints, except in Southeast Asia.

Growth Strategy:
In decorative paints business, the company intends to secure growth by spreading its distribution network, installation of more colour world machines and innovative retailing initiatives. The company is also looking at a more consumercentric approach with focus on R&D to provide new or upgraded products, providing shopping ambience and a more effective complaint redressal mechanism.

The company’s move to make its entire range of decorative products free of lead and other heavy metals is a step in this direction. The demand in tier II and III towns is buoyant and likely to be a good growth driver for the company. Asian Paints also has an eye on capacity building both in India and overseas and is incurring capex towards expanding its manufacturing capacities.

On the flip side, since the company’s industrial and automotive paints segment had suffered a serious impact in FY09, the growth in this segment is going to be challenging. Asian Paint’s international business portfolio is under continuous review by the management, which expects West Asia and South Asia to drive growth.

Financials:
The company’s net sales have grown at a compounded annual growth rate (CAGR) of 20% over the last five fiscal years to stand at Rs 5,463.2 crore in FY09. The net profit has grown at a CAGR of 23.2% during the same period to Rs 419.5 crore at the end of FY09. At a 3-year average payout ratio of 49%, the company’s dividends have grown at 15.5%, lower than the CAGR at which company’s net profits grew. The company has been generating steady cash flows from its operations.
It incurred capex of Rs 240 crore in FY09 and has planned a capex of Rs 300 crore for FY10 primarily towards spends for its plant in Rohtak. The

fiscal year FY09 was difficult for the company on account of lower consumer demand, rising raw material costs and depreciating rupee. However, the company gained some market share in the decorative business unit. With recovery in economic conditions, the consumer demand is likely to surge back to normal. The company’s performance during the first quarter of this fiscal already bears the sign of revival in its business. The net profit jumped by 65% and revenue increased by 18%, along with surge in operating profit margin.

Valuations:
At the current state of recovering business, the company’s net sales are estimated to grow by 20% to Rs 6,555.8 crore and net profit by 29% to Rs 518 crore in the current fiscal. At current market price, this pegs the company’s forward P/E multiple at 28, lower than the current P/E of 30.8. Long-term investors are recommended to accumulate Asian Paint’s stock on lower levels currently than later when the recovery in company’s business is complete and it resumes its normal annual growth levels.
source - BS

Asian Paints (updated - 18 Nov 2009)
The series of price cuts taken by Asian Paints over the past six to eight months, totalling 12 per cent, is paying off. That’s reflected in the strong volume growth of 20 per cent year-on-year in the September 2009 quarter.

Of course the festival season set in earlier this year and, therefore, a comparison with 2008 is not valid. Moreover, the environment last year had been vitiated with the global financial crisis and consumer spending had virtually collapsed. Nevertheless, despite the low base effect, the increase in stand-alone revenues, up 19 per cent at Rs 1,387 crore is creditable.

What’s also impressive is the jump in the operating margins of 460 basis points to 20 per cent which pushed up the operating profit 54 per cent to Rs 278 crore. If the net profit before exceptionals was up 103 per cent, it was due to a much higher other income, alower effective tax rate and lower interest costs.

Apparently, input costs not having risen till now could change in the coming months as crude oil prices pick up. It’s possible Asian Paints will be able to pass on some of the cost increase since it does have pricing power, but it’s hard to see operating margins expanding from here on.
However, the company’s strong product portfolio and increasing share of higher valueadded paints such as emulsions, should help grow volumes and the top line. Emulsions, according to analysts, account for as much as 35-40 per cent of revenues with sales brisk both in the metros and small towns.

Consolidated revenues for Asian Paints are expected to grow 21 per cent to Rs 7,700 crore in 2010-11 with estimated net profits expected to grow at asimilar pace. The Asian Paints stock has already been re-rated following strong numbers in the March and June quarters; analysts believe the stock could trade at forward multiples of 23 times. At the current price of Rs 1,674, the stock trades close to 22 times estimated 2010-11 earnings.
source - BS