Recommendation from Paints & Varnishes Sector
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.
ASIAN PAINTS - BRIGHT AND COLOURFUL
HERE IS WHY
☛Leadership position
☛Good growth prospects
☛Benefit of reduced raw material cost.
Asian Paints is engaged in the business of manufacturing, selling and distribution of paints, coatings, products related to home decor, bath fittings and providing of related services. Its decorative coatings’ segment, which is the largest contributor to the group’s revenues, features a comprehensive portfolio, including paints, painting tools, water-proofing solutions, wall coverings, and adhesives. It has also forayed into the home improvement space including two categories of kitchen and bath fittings comprising ranges of modular kitchens and sanitary ware.
The company has good operating and net profit margins. This is due to large economies of scale with gross sales nearly three times that of the next biggest player. The group enjoys a dominant share of over 50 per cent in the organised domestic paints’ market. In the decorative paints segment, which comprises about 70-75 per cent of the Indian paints industry, the group has a share of about 60 per cent.
During the year, Asian Paints commissioned two large paint manufacturing units of 300,000 KL per annum, one each at Mysore and Visakhapatnam. This additional production capacity would be sufficient to provide for the growth expectations over the next few years. On the channel front, the company has opened more than 3,000 new outlets, bringing the total strength to over 60,000. It has increased its ‘Colour Idea’ stores to over 400 and the ‘Colour World’ network exceeds 46,000. The strong channel network helps the company maintain its leadership position.
The home improvement segment’s sleek kitchens and ‘Ess Ess’ bath fittings have done exceptionally well, growing by over 20 per cent, and are expected to be growth drivers of the future. The home improvement segment in India is currently in a nascent stage with no big organised player in this segment. As such, Asian Paints will surely be able to gain in this segment with its already established brand loyalty among Indian consumers.
On the financial front, the company’s consolidated revenue for the quarter Q3FY20 was Rs.5,420.28 crore as against Rs.5,263.04 crore in the corresponding quarter last year, registering 3 per cent YoY increase. The EBITDA(excluding other income) for the quarter grew by 7.7 per cent YoY to Rs.1,189.39 crore as against Rs.1,104.42 crore in the corresponding quarter last year, with a corresponding margin expansion of 96 bps. The EBITDA margin for the quarter stood at 21.9 per cent. The PAT for the quarter was Rs.760.50 crore as against Rs.631.95 crore in the corresponding quarter last year – a YoY increase of 20.34 per cent.
It has manageable debt and enough cash on books to take care of the interest payments. The interest coverage ratio is above 50x. Crude and crude derivatives account for a significant part of the company’s COGS. The recent fall in crude oil prices would be beneficial for the company. This will result in improved operating margins. The stock has seen significant correction in the last one month. This tilts the risk-reward trade-off in favour of the investor. With better earnings from reduced expenditures the stock would see good growth going forward. By virtue of these factors, we recommend our readerinvestors to BUY this stock.
