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.

Asian Paints

Barring near-term concerns, the underlying growth potential and Asian Paints strong position in its business will help it deliver healthy returns

Beyond domestic borders

International operations add around 17 per cent to consolidated revenues with regions like Middle-East contributing substantially. The MiddleEast region along with emerging markets of SouthAsia has been the major growth drivers, each growing at above 35 per cent. Superior growth rates in these regions helped international operations to grow at 28 per cent in 2008-09 as compared to 12 per cent growth seen in 2007-08.

As the slowdown is sparing none, the resultant fall in crude prices was also anticipated to impact demand in the Middle-East markets. Analysts believe that even as there could be some shortterm pressures (in some markets), the longerterm potential is huge in these markets and Middle-East should continue to drive the company’s international sales. Meanwhile, Asian Paints is setting up a new plant in Egypt, which is perhaps some indication of the future. Overall, the company’s focused initiatives like product introductions, dealer tinting systems and also increasing operating efficiency would boost growth rates in the future.

Financials: Enviable

Barring short-term blips like the one seen in 2008, Asian Paints’ performance has been good with consolidated sales and net profits growing by 19 per cent and 30 per cent, respectively on an average in the last five years. Apart from positive cash flows for each of the last ten years, the company has also been generating high returns on the capital employed in its business (over 50 per cent in the last four years). These have helped it to payout an average 50 per cent of its net profit as dividend to its shareholders, which is high given that only a few Indian companies do so.
With the domestic economy showing signs of stability (expectations of an improvement from second half of 2009-10), the company should report decent growth in volumes. But, as realisations may not keep pace (due to price cuts), the sales growth is seen at 9-10 per cent in 2009-10. However, with prices of inputs lower, margins should improve helping the company report a profit growth of 15-18 per cent.

The average sales volume growth in the industry has a high correlation to the general economic activity, thus earlier high GDP rates has helped decorative as well industrial paints segments do well. With the economic outlook seen improving, the growth pressures should also subside. On the other hand, given India’s low per capita consumption of paint of around 750 grams; about half of China’s and much lower compared to developed market (15-20 kg), experts suggest that the demand should remain healthy in the long-run as well. The improving demographics and income levels, rising individual aspirations and planned investments in industrial and infrastructure capex are some macro factors that will provide a fillip to demand for paints. The prospect in other global markets where Asian Paints operates is also reasonably decent. Thus, expect the company to gain in the years to come. Meanwhile, analysts expect the company to clock 16-18 per cent annual growth in profits over 2009-10 and 2010-11. At Rs 1,108 the stock is trading at 19 times its estimated 2010-11 earnings. While it appears relatively expensive as compared to the BSE Sensex, it has commanded ahealthy premium over the latter. Investors with a long-term perspective can consider the stock on dips.

The decline in housing loan rates, focus on affordable housing, cut in excise duty on paints as well as on automobiles and the emphasis on infrastructure should help Asian Paints sustain decent growth rates. The relatively lower input costs are also helping the Rs 13,500 crore paint industry, two-thirds of which is controlled by the organised segment. Asian Paints is the largest domestic player with a market share of around 43-45 per cent in the organised sphere, about twice as large as its nearest competitor. Although the sharp slowdown seen in end-2008 also impacted Asian Paints, the company’s March 2009 quarter performance is reflecting visible signs of recovery and provides comfort. The company’s Rs 400 crore expansion programme is also on track for commissioning in April 2010, which will result in a 35-40 per cent increase in its domestic production capacity. This should help it capture any recovery in demand in the medium-term.

Decorative: Looking better

If experts are to be believed, the worst (for the economy) is behind us, and even though growth rates may not look up in a hurry, the current scenario should hold on. For Asian Paints, its sales volumes which were impacted in the December 2008 quarter were up by 12-13 per cent in March 2009 quarter. A combination of factors helped including strong demand in tier I and II cities, marriage season in March quarter and increased stocking by the trade post de-stocking in the December 2008 quarter.

Analysts now expect the company to clock 10-12 per cent volume growth in 2009-10, led by the improving environment and Asian Paints stronghold in the business. The company has a strong brand portfolio, which along with a presence at various price points would help reach to diverse pockets in the decorative space. Popular brands include “Tractor” in the lower-end paint range (distemper), “Royale play” in emulsions, “Utsav” in enamels in the interior walls space. Apart from leadership in interior walls space, the company has been focusing on external paints with brands like “Ace” and “Apex” and has emerged as the market leader in the external segment. Apart from its wide product range, access to distribution network of over 25,000 retail outlets ensures greater visibility for its products.

The other respite for the company has come in the form of lower costs. The paints sector uses around 300 raw materials (around 50 per cent crude-based derivatives) in the manufacturing process. The rapid fall in crude oil prices (and the rupee’s appreciation) have reduced pressure on the raw material front. Besides raw materials, the announcement of duty cuts in December 2008