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 LTD. : ROFITS IN VIVID COLOURS

HERE IS WHY
✓Huge growth potential
✓Focus on cost reduction
✓Good returns on capital employed

Asian Paints is the largest paint manufacturer in India and is also engaged in the business of manufacturing varnishes, enamels or lacquers, surfacing preparation compounds, organic composite solvents and thinners. It operates in 15 countries and has 26 paint manufacturing facilities in the world, serving consumers in over 60 countries. It also manufactures metal sanitary ware such as baths, sinks, washbasins and similar articles. It has recently introduced lightings, furnishings and furniture, thus adding more products in the home décor and interior design category.

The company reported net sales of Rs 21,712.79 crore in FY21. It had reported net sales of Rs 20,211.55 crore in FY20, posting an increase of 7.43 per cent. The company reported PBIDT of Rs 4,855.60 crore in FY21, an increase of 16.67 per cent. It had reported PBIDT of Rs 4,161.77 crore in FY20. The company reported PAT of Rs 3,178.15 crore in FY21, an increase of 16.7 per cent. It had reported PAT of Rs 2,723.45 crore in FY20. The company has reported cash from operating activities of Rs 2,631.89 crore in FY21 as against Rs 2,469.54 crore it reported in FY20. Its net sales at Rs 6,651.43 crore in March 2021 were up by 43.49 per cent from Rs 4,635.59 crore in March 2020.

Volumes grew in the domestic decorative paints segment led by pent-up demand, demand pick-up in urban, Tier I and II cities and sustained demand from rural regions along with strong pick-up in projects business and healthy performance across its home improvement businesses too. Its PBIDT was Rs 1,318.26 crore in March 2021, up 53.35 per cent from Rs 859.62 crore in March 2020. Its quarterly net profit was at Rs 864.04 crore in March 2021 as against net profit of Rs 476.29 crore in March 2020, an increase of 81.41 per cent. The company has launched a washing machine and refrigerator range on ODM model basis and thus has a full product portfolio of white goods.

Asian Paints is looking at measures like improving sourcing efficiency by reaching out to alternate vendors, improve formulation efficiency through investment in technology to ensure its customers continue to receive superior products at reasonable prices, RM replacements and strong control on overheads to drive operational efficiency. There are some key drivers for volume growth which include Tier III and IV towns and cities aided by rising agricultural income, increasing consumer aspirations leading to upgrades to emulsions, mass population in metros and Tier I cities that are also seeing a shift towards value for money offerings from branded players. 

Some other factors are under-penetration of undercoats category which is improving given awareness initiatives while low construction quality is also driving undercoats’ demand and the waterproofing segment is fuelling volume growth. With new product launches the company intends to focus on increasing penetration in the undercoat paint business. After taking a 2.8 per cent price hike effective May 1, the company may look at more price hikes as the markets opens up. It expects raw material prices to cool down in 2HFY22. The total debt to equity ratio is 0.035. On the returns front, it has ROE and ROCE of 27.78 per cent and 35.83 per cent, respectively. By virtue of these factors, we recommend our reader-investors to BUY this stock.