Asian Paints - A strong finish

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.

COLOURFUL PALETTE
in Rs crore	FY 09A	FY 10E	FY11E
Net sales	5,463.0	5,950.0	6,702.0
Operating profit	669.0	776.0	884.0
Adj net profit	401.0	467.0	538.0
EPS (Rs)	41.8	49.0	58.0
PE (x)	26.5	22.6	19.1
E: analyst estimates

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 has meant that excise duty on paints has come down from 14 per cent to 10 per cent. These events have allowed paint players like Asian paints to pass on some gains (price cuts) to customers. Nonetheless, margins are likely to improve to 13.5-14.0 per cent levels seen in the past (excluding 2008-09).

Beyond domestic borders
International operations add around 17 per cent to consolidated revenues with regions like Middle-East contributing substantially. The Middle-East region along with emerging markets of South- Asia 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 short-term pressures (in some markets), the longer-term 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.

Outlook
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 a healthy premium over the latter. Investors with a long-term perspective can consider the stock on dips.