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Nath Balakrishnan

A well-stacked up basket of offerings.

FRESH exposures can be contemplated in the stock of Asian Paints, the leading player in the decorative paints market in the country, at the current price of Rs 305.

In the backdrop of a good monsoon, the prospects for the paints industry, as a whole, and Asian Paints, in particular, appear attractive.

Financial performance: For the quarter ended June 2003, Asian Paints registered a growth in topline of 10 per cent at Rs 378.8 crore.

This could have been higher but for the nation-wide trucker's strike for the best part of April.

Raw material costs have a significant impact on the operating profit margin (OPM) and it was no different in the quarter under consideration.

With raw material costs accounting for as much as 63.4 per cent of net sales, the operating profit margin fell 220 basis points to 15.2 per cent. In the corresponding previous quarter, the proportion of raw material costs to net sales was 59 per cent.

However, raw material prices have been hardening since September 2002, mirroring the rise in prices of crude (the raw materials are derivatives of crude), and touched a peak at the height of the Iraq conflict. Subsequently, crude prices cooled off and are expected to ease further.

To compensate for the rise in raw material costs, the company effected two price hikes: One last September last year and another this May.

However, given the company's pre-eminent market standing, these hikes are not likely to negatively impact the offtake.

Additionally, a strengthening rupee should make imports cheaper and provide an impetus to earnings this fiscal.

Another reason for the dip in overall operating margins is the sharp slump in the performance of the company's chemicals division, which makes phthalic anyhydride and pentaerythritol.

The OPM for the recently-concluded quarter from this division was 3.1 per cent compared to the healthy 21.4 per cent in the corresponding previous quarter.

The fall in operating profits was offset partially by a lower interest outgo and a 3.7 per cent drop in provision for taxation at Rs 16.2 crore.

The net profit for the quarter was Rs 28.8 crore, the same as in the corresponding previous quarter.

Business prospects: As a market leader, the company is poised to cash in on the pick-up in rural demand — which rests on how well the monsoon plays out — and the boost in offtake that manifests itself prior to the festival season. Last year, the drought that hit parts of Northern and Western India took the sheen off the company's numbers.

With the forecast for a normal monsoon this year, rural demand should provide a dash of colour to the company's financials in the current quarter.

Repainting homes, that takes place during the pre-Diwali season, would also provide impetus to earnings. Two other factors that will ensure a strong demand for paints are the increase in the demand for housing that continues to grow at a brisk pace as well as the government's thrust on infrastructure spending.

The acquisitions of Berger International (Singapore) and SCIB (Egypt) are likely to be part of a long-term story and the near-term performance will be determined by how the company fares in the domestic market.

Asian Paints, with its distribution strengths and a complement of strong brands, should benefit from the upturn in business fortunes. This makes the stock a suitable investment candidate at the current levels.

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