Asian Paints: Bright outlook

While the domestic demand for decorative paints is robust, margin pressures are likely to ease in the coming quarters

Asian Paints’ robust sales growth of 30 per cent at Rs 2,100 crore during the December quarter was in line with expectations.

Extended monsoon during the September 2010 quarter, with Diwali falling in the December 2010 quarter (unlike the September 2009 quarter), aided a 37 per cent jump in domestic revenues (over 75 per cent of overall sales) to Rs 1,754 crore. Robust volume growth of 30 per cent in domestic decorative paints, eight per cent price rise in the first half of 2010-11 and an improved product mix boosted revenues.

However, international operations reported flat growth of a little over one per cent due to a challenging scenario in the overseas markets, mainly in West Asia, which contributes 50 per cent to international revenues.

The continuous uptrend in raw material prices (titanium dioxide, mineral turpentine) and high advertising expenditure (included in other expenses) took sheen off margins. While the operating profit margin tanked 320 basis points (bps) to 16.5 per cent, the net profit margin dipped 176 basis points to 10.5 per cent.

Going ahead, pressure on margins is likely to ease, as benefits of a three per cent rise in prices (effected in December) will be reflected in the March quarter. Moreover, a further 2.5-3 per cent price increase is expected in February. Since raw material prices have also stabilised since December 2010, investors can expect a sequential improvement in margins. However, downside risk persists, as advertising expenses are likely to remain high due to intense competition. The domestic demand for decorative paints continues to be robust despite price rises, especially in Tier-II and III cities. However, the outlook for the international business and industrial paints remains challenging.

To accelerate the growth of non-decorative coatings business, the company plans to expand the user industries under the existing 50:50 joint venture (JV) with PPG Industries, as well as a second JV to be operational by the third quarter of 2011-12.