Higher demand, lower costs drive Asian Paints’ profit

Higher demand, lower costs drive Asian Paints’ profit

Asian Paints’ business can be broadly divided into domestic paints, chemicals, automotive & industrial and international. Standalone sales, which reflect largely domestic paint sales, grew by 18.6% to 1386 crore year-on-year. Demand for paints was strong but uneven across geographies, with the Eastern region being a strong performer.

Operating profit margin during the quarter improved by 460 basis points during the quarter. This was primarily because of savings on raw material costs. They increased only by 9% y-o-y, less than half the rate at which sales grew. Asian Paints compiles a material price index to measure its cost levels, and this index stood at 91.43 in the September quarter, compared to 125.55 in the same period in 2008. But the company expects commodity prices to rise and says the current margins are not sustainable. Some of this may be offset by price hikes by the company. Besides, an improving economic outlook augurs well for demand both in the decorative and industrial segments.

Automotive sales are improving due to higher car sales while the industrial business is suffering because of a deferral of capex plans by Indian industry. Asian Paints’ performance hinges on its Indian paint business, which contributed 78% to consolidated sales. A recovery in the real estate market and rising consumer confidence should enable it to tide over higher material costs. Moreover, last year’s second half was tough, as the slowdown affected demand. Usually, the second half is a strong period for paint sales.

Asian Paints’ net profit during the first half ended September rose by 102%, partly aided by a five-fold increase in other income. The stock jumped by 10% last Friday to 1,676 as investors cheered the results. Even after this jump, it trades at a price to earnings multiple of about 18 times, for a company whose first half operating profit in fiscal 2010 is already 89% of the previous year’s level. That explains investor confidence in the company.

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