The company’s performance will be modest till consumer spends pick up.
Much like its peers in the FMCG space, Asian Paints has outperformed the market over the past year. But it hasn’t fared as well as some others in the space. After all, paints are not a consumer staple and, in an economic downturn, spends on such items are typically lower. At around 15 times estimated 2009-10 earnings, the stock seems a tad expensive, because the 20 per cent growth in the bottom line being pencilled in by analysts may not come through. Of course, raw material prices are coming off and there’s a low base to begin with, since net profits for the current year are expected to fall.
But, revenues are expected to grow by just around 8-10 per cent, given the slowdown in the economy. If revenues were up 12 per cent at Rs 1,321 crore in the December 2008 quarter, it was partly because of the weaker rupee that meant more proceeds from exports. But the firm’s net profits crashed 50 per cent, despite it being the festive season. In fact, Asian Paints did take selective price cuts to try and drive volumes, but that didn’t work. Since the bulk of revenues, nearly 70 per cent, is earned when houses are repainted, business could be dull for at least another year.
Until the real estate and automotive sectors revive, it’s unlikely volumes will pick up. In fact, there’s a fair chance business in overseas markets like South East Asia and West Asia, might be hit. Asian Paints has always managed to keep costs in check, which is why the growth in profits in recent years has surpassed the increase in its top line. In the four years to 2007-08, the company posted an annual compounded growth in net profits of 34 per cent, while the increase in sales was 20 per cent.
So, lower prices of key raw materials, including xylene, edible oils and packaging costs should at least help steady operating margins, which fell 740 basis points y-o-y to 8.3 per cent in the December quarter. But for margins to bounce back meaningfully could take some time.