The Hindu Business Line : Asian Paints: Buy

Strong growth prospects for decorative paints arising from the higher pace of construction activity and a ramp-up in revenues from international operations could aid sales growth over the next couple of years.

Profit margins may receive help from moderating input prices and an appreciation in the rupee. At the current market price of Rs 820, the stock trades at a price earnings multiple of about 21 times expected FY08 earnings, on par with the FMCG universe.

This appears justified given Asian Paints' strong earnings trajectory. The company's consolidated operations have delivered a compounded annual growth of 18.3 per cent in sales and 25 per cent in per share earnings over the past three years.

Decorative paints, accounting for about three-fourths of sales in FY07, is the key revenue driver and consistently high construction activity over the past three years is likely to translate into robust demand for this segment over the next few years.

The price increases taken by the company over the past year also suggest a return of pricing power and improved ability to pass on raw material costs. This apart, the company's efforts in recent years to diversify its revenue stream both in terms of products and geography are also likely to bear fruit.

A string of overseas acquisitions have helped Asian Paints acquire a significant pan-India presence. International operations, which accounted for a fifth of FY07 sales, have recently turned profitable.

The company's efforts to broadbase its industrial paints/coatings portfolio through acquisitions may also help it to tap into the opportunities arising from domestic capacity additions in automobiles and consumer durables.

Signs of moderation in crude oil prices from their peak and appreciation in the rupee (the company's inputs are mainly imported) could help alleviate cost-side pressures. The key risks to earnings arise from increased competition from global paint majors foraying into India and a renewed flare-up in input costs.

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