Asian Paints: Rich colours

Besides strong demand, Asian Paints has also benefited from price hikes

Asian Paints has benefited from Diwali celebrated in mid-October this year compared with early-November in the previous year.

Analysts point out that as households advanced the painting work in their homes, the company benefited, along with the boom in commercial properties during Q2 FY07. However, the company still had to grapple with rising input costs.

As a result, Asian Paints' operating profit grew 24.1 per cent y-o-y in Q2 FY07 compared with 26.3 per cent sales growth. Operating profit margin fell slightly on a y-o-y basis to 13.4 per cent owing to a 160 basis point rise in raw material costs. The company's raw materials are derived from crude-based inputs.

Apart from strong demand in the domestic market, the company also benefited from two price increases-one in Q1 and the other in Q2. International sales, especially in the Middle East, grew 25 per cent y-o-y, helping overseas sales account for 17 per cent of its consolidated sales.

Analysts, however, point out that the company's operations in neighbouring south-Asian countries have been a drag on operating margins.

Going forward, the company's raw material costs are expected to come down, given that global crude prices have fallen more than 20 per cent in the past few weeks.

Also, with domestic construction activity still showing strong growth, it should keep demand for its paints repertoire strong. However, with the stock trading at 27 times estimated FY07 earnings, Asian Paints is expensive.

Arvind Mills: Denim blues

A deterioration in business environment in its key segment-denim-resulted in a worsening of Arvind Mills' financials as its standalone sales declined 8.3 per cent y-o-y. Operating profit margin declined 308 basis points y-o-y to 21.83 per cent.

Denim volumes fell 18 per cent and prices declined 8.9 per cent on a y-o-y basis. Even in the June quarter, volumes and realisations had dropped 20 per cent and 12 per cent respectively.

Denim prices declined to Rs 90 a metre""the lowest price in five years. Demand for the shirtings fabric business improved from the garment division, but realisations, declined by 0.8 per cent sequentially.

Arvind has increased its focus on garments business""in Q2 FY07, the contribution of garments increased to 19 per cent of sales, up from 17 per cent in Q1 FY07 and 11 per cent in Q2 FY06.

Its branded apparel subsidiary, Arvind Brands, hived off five international brands (including Lee and Wrangler) to a JV with VF Corporation, where the latter will own 60 per cent for which it received about Rs 148 crore.

The management believes it will take 12-15 months for the pressure on revenues and net profit to ease. Cotton prices are slightly higher this quarter and fuel costs will stay high due to inadequate gas supply.

The Arvind stock has halved over the past year, and even at the current price of Rs 59, it trades at an expensive 24 times FY07 earnings.