Asian Paints

Asian Paints’ revenue and profit margin are going up
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 :

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.