Asian Paints: Colourful growth story

The largest paint company in India, with a turnover of Rs. 5463 crore, has shown a quarter of healthy volume and realization growth. Consolidated revenues were up 18% y-o-y to ~ Rs 1724 crore.

Stock and work in progress expenses were down 85% y-o-y and 75% q-o-q, boosting the bottom-line. Consolidated operating profits rose 58% y-o-y and were up 15% over Q1FY10.Adjusting for one-time income of Rs 62.7 crore through sale of investments in the quarter, profit after taxes (PAT) was up ~58.67% y-o-y. Net sales grew 19% y-o-y to Rs 1386.46 crore on a standalone basis.

Improving environment

Operating margins surged 470 basis points (bps) y-o-y, well above expectations of an around improvement of 300 bps as per an HSBC report which attributed it to lower than expected input costs. Segmental results showed that the paints business saw revenues increase by over 20% with operating margins improving by ~440 bps y-o-y.

Summing up business conditions in the quarter, PM Murty, MD & CEO, Asian Paints Limited said in a press release, “Demand conditions for our decorative business have been good in most parts of the country. The international business was impacted by the global slowdown; however South Asia and Middle East regions performed well.”

According to HSBC estimates, volume growth was around 20-25% as the unit selling price has gone down on a y-o-y basis. This suggests ‘consumer sentiment rebound’ and even possible market share gains. They believe that further price cuts are unlikely this year.

Valuation

The stock was up 9.3 % to close at Rs 1674 on 23 Oct 09. The board has recommended an interim dividend payout of Rs. 8.50 per share.

Emkay research estimates EPS for FY10 and FY11 at Rs 51.4 and Rs 58.7 respectively which translates to a current P/E valuation of 32.5 x and 28.5 x. The brokerage had an ACCUMULATE call on the stock with target price of Rs 1414.

HSBC has an OVERWEIGHT call on the stock with a target price of Rs 1850.  It has increased its EPS estimates for FY10 and FY11 by 8 % and expects to revise earnings estimates for this year as well. Key risk is higher input costs going ahead and resultant margin contraction.