Asian Paints Ltd has bounced back smartly after the weak performance in the December quarter. The slowdown in the economy late in 2008 had led to flat volumes in the domestic paints business, which coupled with high raw material costs had led to a 41% drop in operating profit in the October-December period.
In the March quarter, the company has reported a much healthier 13% growth in operating profit on the back of a 25% growth in revenues. The domestic paints business grew by 27.5% in value terms, indicating decent volume growth. In the December quarter, the domestic paints business had grown by 12.4% in value terms while volumes were flat. The company took price cuts late last year, mainly to pass on benefits of a reduction in excise duty.
The lower prices seem to have helped demand. Operating margin stood at 12.6%, much higher than the margin of 8.3% reported for the December quarter. This is primarily because the prices of raw materials, especially those linked to crude oil, started declining since late 2008. Of course, margins are still lower on a year-on-year (y-o-y) basis (down 135 basis points), but note that the rupee has depreciated sharply on a y-o-y basis. Most of Asian Paints’ raw materials are imported and a depreciation in the rupee increases its costs.
For the year ended March, sales grew by a healthy 24%, but operating profit was flat owing to higher input costs and rupee depreciation.
Since the prices of the company’s main raw materials have come off sharply in recent months, analysts expect a reversal in its fortunes. While the rupee is still weaker when compared on a y-o-y basis, it has appreciated by about 5% from its lows of 52 to a dollar earlier this year.
The Asian Paints stock has done reasonably well since the market crashed, falling by only 28% from its peak in January 2008. But with current valuations at 21.6 times trailing earnings, there seems to be a case for further correction. The company may report decent earnings growth this year thanks to margin expansion, but volumes are likely to be under pressure.
Apart from the drop in new construction activity, lower income levels are likely to cause delays in “repainting” decisions. Of course, the company may well have a positive surprise in store, but since valuations are already rich, there’s little room for error.
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