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Nath Balakrishnan

SHAREHOLDERS can continue to hold on to the stock of the decorative paint major, Asian Paints, and those wanting to add it to their portfolio can contemplate doing so at declines. The stock now trades at Rs 335.

The company is the market leader in the overall paint market with a share of about 40 per cent, followed by Goodlass Nerolac and Berger Paints. The company derives upwards of 90 per cent of its revenues from the paints business, the rest coming from the manufacture and sales of chemicals such as phthalic anyhydride and pentaerythritol. Asian Paints dominates the decorative paint category, which constitutes about 70 per cent of the total paint market.

Mr. Ashwin Dani, Vice-Chairman and Managing Director, Asian Paints.

Slackening growth

The company recorded a 10 per cent rise in topline, as net sales rose to Rs 413.3 crore for the quarter ending December 2002 compared to Rs 378.8 crore for the corresponding previous quarter. The topline for the six months ending September 2002 and the nine months ending December 2002 compared to the sales during the corresponding previous period, signals a slackening of growth rates. While sales for the half-year of this fiscal rose 15 per cent on a year-on-year basis, that for the nine months ending December 2002 was 13 per cent.

Mixed bag of numbers

Raw material and packing costs, as a percentage of net sales, for the nine-month period of this fiscal, increased slightly on a year-on-year basis. This reflects the hardening of crude prices, a key determinant of raw material costs for paint companies.

Falling interest rates and a part repayment of long-term debt reduced the lower interest outgo. For the nine months ending December 2002, interest costs at Rs 6.75 crore were lower than that for the corresponding previous period by 52 per cent (Rs 14.25 crore).

Operating profit, as a percentage of net sales, for the quarter ending December 2002, was 19.7 per cent and 20.4 per cent for the quarter ending September 2002. Net profit, as a percentage of net sales, was 10.1 per cent for the nine months ended December 2002, up from 9.8 per cent for the six months ending September 2002.

Business outlook

Typically, the demand for paints tends to peak in April-September, driven by purchases just before the onset of the festive season. In spite of a disappointing monsoon this year, Asian Paints had a healthy second quarter, registering a robust growth in both revenues and earnings.

Going forward, the escalation of raw material costs, especially crude, would be a cause for concern. The war clouds looming over Iraq could send crude prices further northwards, and keep the operating margins under pressure for the quarter to follow. Asian Paints has proactively sought to widen the domain of its business influence by aggressively entering global markets. To that end, it acquired of SCIB Chemical SAE of Egypt, which is the fifth largest paint player.

The acquisition gives Asian Paints a foothold in an emerging market and also opens the possibility of exporting to neighbouring countries.

Slew of small acquisitions

The other significant acquisition that the company made was of the Singapore-based Berger International in which it acquired a 50.1 per cent stake.

Consequent to that, Asian Paints has access to 12 additional manufacturing facilities across the world with a presence in the Caribbean, West Asia and South-East Asia as also China. Moreover, these are geographies that do not overlap with any of Asian Paints' extant international manufacturing locations, thereby providing for complementarity of operations.

These acquisitions immediately give access to both emerging markets and those in which Berger International has a strong presence.

The benefits of the acquisitions are likely to play themselves in the long-term once the integration of the operations of the various new plants that come under the Asian Paints fold is complete.

In the industrial coating segment, the company acquired Hawcoplast Chemicals in November 2001 for Rs 22 crore, which provided it with a presence in the growing powder coating segment.

Asian Paints would be in a position to take advantage of a general upturn in the industrial segment.

Stock outlook

At the current market price of Rs 335, the Asian Paints stock quotes at a price-earnings multiple of 15 times its trailing 12-month earnings. This multiple is at a fair premium compared to its peers in the industry and reflects the higher rating that companies with a premier position in the market tend to garner.

Notwithstanding the concerns that surround an escalation in raw material costs in the event of the hostilities in West Asia and the consequent impact on the bottomlines of paint companies, Asian Paints continues to be the best play in the sector.

With a slew of marketing initiatives, such as the Asian Paints Helpline and the launch of its painting solutions service, the company has infused a dash of colour to what is otherwise perceived as a low-involvement category.

Shareholders can remain invested as the stock holds appreciation potential over the long term. Those wanting to add the stock to their portfolio could take advantage of any price declines and enter at around Rs 300.

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