Asian Paints : Losing some colour

The growth in profits at Asian Paints, the market leader in decoratives, may be a shade lower in 2008-09 than it was last year. To begin with the base is high because the growth in 2007-08 was strong 46 per cent. But that apart, key consuming sectors such as construction and automobiles are in bit of a slump, putting pressure on revenues at the Rs 4,404 crore firm.

Moreover, with consumer sentiment weak in a slowing economy, revenues earned from re-painting in existing homes could also be hurt. Already, higher raw material costs affected the net profits in the six months to September 2008—they were up just 21 per cent.That’s despite revenues having grown at a strong 30 per cent, driven by a 20 per cent increase in volumes. Thanks to its strong brand portfolio, the company has been able to pass on most of the increase in the prices of inputs. While the raw material bill could be lower in the second half of the year, since several products are derivatives of crude oil, the revenue growth may lose some momentum.

As such, the operating profit margin, which declined by 120 basis points to 14 per cent in the first half of 2008-09, may remain under pressure. The management has indicated that construction activity appears to be slowing down across geographies.

Moreover, with fewer cars being sold — sales volumes for most auto makers have dropped in the last couple of months — demand for paints from this space too could see a fall. What’s more, the international operations, which posted a strong growth of 25 per cent in the six months to September, driven by some brisk business in the middle east, too could be impacted now that construction activity there is tapering off. The Asian Paints stock has outperformed the market this year like many of its FMCG peers, though off late it has been a bit of an underperformer. At the current price of Rs 877, the stock trades at around 18 times estimated 2008-09 earnings.