The firm has cashed in on the purchasing power in smaller cities.
Consumers in metro cities may not be spending too much but the story in smaller cities is quite different. And Asian Paints, the market leader in the decorative paints category, continues to capture these spends. Surprising the Street, the company posted strong operating profit margins, up a remarkable 500 basis points to 18.9 per cent, and a 60 per cent increase in operating profit in the June 2009 quarter.
The operating margins were driven by a 17.6 per cent growth in the consolidated top line to Rs 1,460 crore, which was the result of a double-digit increase in volumes — in the March quarter too, Asian Paints had clocked 10 per cent-plus growth in volumes. The company had effected a price cut of around 10 per cent in the second half of 2008-09, a move that appears to have allowed it to gain market share. While it did not make any price changes in the June quarter, and therefore, saw good realisations, it cut prices by around 2 per cent in July.
That’s because prices of key inputs such as titanium dioxide and some oils have come off — in the June quarter, the cost of raw materials as a proportion of sales fell nearly 450 basis points. With a pick-up in residential housing, Asian Paints should continue to see increase in volumes. However, a weak monsoon could stymie demand from the new construction segment, which fetches around 30 per cent of volumes.
The demand for re-painting, though, is unlikely to be hit. Business in West Asia, which accounts for half of the firm’s global sales, continues to be brisk and grew around 35 per cent during the June quarter. In the current year, the company is expected to turn in revenues of Rs 6,200 crore, a growth of 13-14 per cent over 2008-09.
Operating margins should come in a shade over 15 per cent, resulting in a bottom line growth of over 40 per cent. At the current price of Rs 1,370, the stock trades at about 22 times estimated 2009-10 earnings and is attractively valued.