ICI India’s (ICI) Q1FY2010 results are in line with our expectations. The company’s net sales grew by 5.6% year-on-year (y-o-y) to Rs240.3 crore, in line with our expectation of Rs240.8 crore.
The other income for the quarter (down by 4.3% yoy) was 2.3x the operating profit. Thus, despite a good growth in the operating profit the adjusted net profit declined by 2.4% y-o-y during the quarter.
As anticipated the core business of paints registered a moderate growth of 6.9% y-o-y to Rs236.9 crore during the quarter. The growth in the paint business was moderate on account of subdued demand due to a delay in the monsoon.
The raw material cost as a percentage of sales slumped by 631 basis points y-o-y to 51.7%, resulting in a 214-basis-point improvement in the operating profit margin (OPM) to 11.3% during the quarter.
However, a 428-basis-point surge in the other expenditures as a percentage of sales arrested the significant improvement in the margins in Q1FY2010. Thus, the operating profit grew by 30.2% y-o-y to Rs27.2 crore in Q1FY2010.
In Q1FY2010, the flattish other income coupled with the higher incidence of tax led to a 2.4% year-on-year (y-o-y) decline in the adjusted net profit to Rs69.2 crore (was marginally ahead of our expectation of Rs65.3 crore for the quarter).
The tax provision of Rs14.7 crore (against Rs8.1 crore in Q1FY2009) was higher due to a higher business profit and a lower indexation benefit on the investment income.
In keeping with the ongoing buy-back scheme, the company has bought back 0.53 lakh shares (at an average price of Rs505 per share) for an aggregate consideration of Rs2.68 crore during the quarter.
As per our calculations the company could buy back another 33.5 lakh shares (constituting 8.8% of its paid-up capital) at the current market price of Rs522.
At the current market price, the stock trades at 12.0x and 10.6x its FY2010 and FY2011 expected earnings respectively and discounts its core earnings per share (EPS; ie earnings excluding the other income) of Rs27.2 by 9.7x for FY2010.
We maintain our BUY recommendation on the stock with the price target of Rs578.