Painting a Rosy Picture

Asian Paint looks to be a defensive buy as the company expects to maintain strong volume growth in the near term

ASIAN Paints has reported strong recovery in its decorative paints seg-ment, though industrial paints and international business are reeling under a demand slowdown. However, strong fundamentals make the stock suitable as a defensive buy. The company maintained its consolidated net profit for FY11 at 843 crore almost same as the previous year.

This was after its net revenues grew by 15.3% to 7,706 crore. Its operating profit margins weakened 140 basis points to 17% for the whole year.The company?s net profit has been hit by rising input costs amid soar-ing inflation. It increased prices five times by about 12% in fiscal 2010-11. Asian Paints is a market leader and has price leadership in most paint segments. This makes it easier for the company to pass on the input cost burden through timely price increases.

However, slowdown in the industrial paints segment and underper-formance of international operations are concerns for the company in the long-term. The company has operations in West Asia, Asia, South Pacific and Caribbean. Except South Asia, demand in other regions is not very ro-bust. It does not expect a demand revival in Caribbean and West Asia in the near term.

The industrial paints segment will be pressured by the central bank?s monetary tightening measures that will lower industrial spending. The company expects to maintain volume growth of 15-16% in the near term. It is building new capacities and has planned a capex of 900 crore for the current fiscal. This is significantly higher than 150 crore capex last fiscal and indicates the company?s positive outlook on future demand.The company is well placed to fund its expansion plans considering its strong operating cashflows and lowly leveraged balance sheet.

It ended FY11 with a debt-to-equity of 0.11 on a consolidated basis. In fact, it also increased its dividends for the year to 32 per share that represents outgo of almost 310 crore from 27 per share last year.

On the stock market, the scrip continues to outperform the BSE Sensex consistently. In the past one year, it gained over 35% as against 11% rise in the benchmark index.

It enjoys a low beta of 0.37 indicating low volatility and higher stability. The stock is valued at 3.5 times consolidated annual revenues and is trades at 32 times its trailing 12 months earnings. These are premium valuations for a steadily growing consumer business with an average dividend payout ratio of 40% and good management track record.

Kiran Kabtta Somvanshi