An unexepectedly good show from the paints company indicates it could go on to do better.
It’s possible the company has gained market share from other organised players and has also upped it share in some regions, such as South India. Besides, the company earns a fair share of revenues from new construction activity, a segment that appears to have contributed more in the March quarter. However, operating profit margins slipped a 135 basis points to 12.6 per cent despite other expenditure coming off by nearly 200 basis points. That’s because inflation in raw materials continues to pinch. However, although titanium dioxide, a key input, remains expensive, prices of other raw materials, some derived from crude oil, have eased and the benefits should be seen in forthcoming quarters. Also, since about a fourth of the inputs are imported, a weak rupee has pushed up costs in the recent past but that trend could now reverse.
While Asian Paints has done remarkably well —analysts hadn’t quite factored in the bottom line growth of 7 per cent for the quarter, the challenging macro-economic environment in overseas markets, especially the Gulf region, could mean pressure on overseas revenues for some more time; also while the home market does show signs of resilience, it may be too soon to call a complete turnaround.
In the current year, Asian Paints is expected to turn in revenues of close to Rs 6,000 crore while net profits are estimated to come in at around Rs 470 crore, implying an earnings growth of just under 18 per cent. The stock has been underperforming the market for quite some time now; at Rs 898, it trades at 18 times estimated 2009-10 earnings and is reasonably valued.