The Hindu Business Line : Margin pressure tells on Asian Paints

DESPITE turning in a full-year performance well within market expectations, the Asian Paints stock has been largely range-bound primarily on concerns over narrowing profit margins.

The pressure on profit margins is mainly on account of the upturn in raw material prices, which appear to be headed northwards on the back of firm crude oil prices.

Raw material costs have risen by seven per cent during the year and as the company did not pass on the hikes, it has been forced to absorb them, which has in turn lowered profit margins. However, sales growth was quite robust, helped partly by the fact that the company did not pass on material hike costs to the consumers.

According to Ms Rajee Lodha, analyst with P-Sec, the company will have to compromise on margins in order to maintain market share.

"The pricing power the company used to command is slipping. While it is known to outperform the industry, this year there has been a reversal in trend. Going forward one expects margins to be under pressure," she said.

"Asian Paints has been able to grow fairly well during the economic slowdown years but last year its performance was not up to expectation mainly because it has been facing competition from other players in its decorative segment,'' said an analyst. "If its stock value comes down a notch or two, it will make attractive buying.''

On Tuesday the stock closed weak at Rs 292.75 with around 82,419 shares traded on the BSE.

On its part, Asian Paints remains unperturbed. It expects demand outlook during the current fiscal to improve from last year's levels.

The company has reiterated that it will place emphasis on driving topline growth and increase market share by aggressive pricing and new offerings in economy segment, place more focus on top of line products. The company also agrees that the raw material situation does not look good.

"Even though margin pressure continues to persist, volume growth is now beginning to pick and long-term story remains intact,'' says a Merrill Lynch report on Asian Paints.

Though in the short term the stock price does not seem to be going firmly northwards, analysts are of the view that the company's fundamentals remain strong.

According to a company official, the current fiscal should augur well for its international business as the focus will be on its newly acquired businesses.

Berger International, in which Asian Paints owns controlling stake, has reported profits for the first time in the last six financial years.

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