Asian Paints: Bright & dull

Industrial coatings, exterior finishes lift Asian Paints' sales

Asian Paints' results for the March quarter are a mixed bag . Net sales have grown 16 per cent to Rs 416.87 crore, but net profit has risen only 3.4 per cent to Rs 30.54 crore.

Company officials point out that a provision of Rs 6.8 crore was made for investment in overseas subsidiaries during the quarter due to which profit growth could not keep pace with sales.

In the paints segment, growth has been driven by an improvement in the industrial coatings business and exterior finishes.

As a result, revenue of the paint segment grew 19 per cent to Rs 395.09 crore in the March 2004 quarter. The company, however, had to contend with rising cost of key raw materials such as titanium dioxide and monomers. It has taken steps to hedge against these rising costs.

Although segment profitability rose 9.9 per cent to Rs 59.04 crore in the March quarter, it could not prevent a 120 basis points drop in segment operating profit margins to 15 per cent.

Performance in the company's other business division which include phthalic anhydride and pentaerythritol was lacklustre "" analysts point out that intense competition led to this division's revenue dropping 14 per cent to Rs 26.55 crore in March 2004.

And falling revenue led to this division posting a loss of Rs 16.2 lakh in the March quarter compared with a profit of Rs 1.91 crore in the previous year.

Rising cost of raw materials for the paints division and lacklustre performance in the other division resulted in Asian Paints' overall operating profit margin dropping 90 basis points to 14.1 per cent in March 2004.

Going forward, analysts point out that prices of titanium dioxide and monomers have shown signs of falling and this should help to improve the profitability of the key paints division.

Dr Reddy's changes tack in US

Dr Reddy's Laboratories' acquisition of US-based Trigenesis is expected to signal a reversal in its strategy in the US. The earlier strategy was perceived to be more risky by analysts, as patent challenges accounted for approximately 74 percent of its pending US applications.

And one adverse decision from overseas regulators, such as the US FDA barring the company from launching the generic version of Pfizer's anti-hypertension drug Norvasc, had the potential to change the fortunes of the company.

Analysts expect Trigenesis' strong product pipeline in the dermatology segment to help Dr Reddy's overcome some of its problems ""- Dr Reddy's has had no big product launch since its exclusive marketing rights for a generic version of Eli Lilly & Co's anti-depressant Prozac ended two years ago. Analysts view quick product launches as the key to growing profitability aggressively.

The company's American operations would also gain significant operational synergies through the acquisition. One advantage would be its ability to avoid large legal and marketing costs usually incurred to grow overseas sales, as it would be able to leverage the existing marketing network of its American acquisition.

Apart from lower costs to bring new molecules/ products into the market, the American dermatology segment is being viewed as very profitable market by analysts-this segment is estimated at $6 billion and is growing at approximately 10 per cent.

Also margins in this segment are approximately 22-25 per cent, compared to just around 6-8 per cent in the generics segment.

News of the US acquisition has been received well on the bourses. The Dr Reddy's stock has been more or less steady at Rs 870 levels despite a huge fall in the broad market in the last few trading sessions.

With contributions from Amriteshwar Mathur