Monday, July 27, 2009

Asian Paints and ICI

Asian Paints - the largest paint company in India, has reported pretty staggering 1Q10 results. EBIT is up 66%!! While paint sales are up 17%, EBIT margins expanded from 15.7% in 1Q09 to 22.0% in 1Q10 in paints.

ICI India - the third largest paint company in India - also had a similar qtr - EBIT jumped 45% as sales grew 7% while paint EBIT margins expanded from 6.9% to 9.4%.

There are quarterly fluctuations in paints industry depending on dealer inventory and timing of festivals (particularly Diwali), so yoy rev growth on a quarterly basis can fluctuate. Like other FMCG categories, paints industry also probably benefitted as commodity costs fell (oil is their biggest raw material item) and media costs deflated.

Asian Paints has cut prices recently. It is unlikely margins remain this high in the industry. On that matter, I think it is very unlikely margins remain this high for FMCG companies on a substainable basis going forward - company after company has benefitted from media deflation. Stocks like HLL and Colgate are now priced at 25x-30x on all-time high margins.

Now it is true that Indian media has created a lot of inventory in the past couple of years. So some of its woes are justified. But before competing on price, FMCG companies (like HLL) will step up advertising and promotion expenses.

On ICI, company's market cap is around 2000 crore, and cash is 950 crores. Unfortunately, company has now started lending cash to Akzo Nobel India's subsidiaries. Even if it is at arm length's basis and company earns 10%, I am not investing in the stock as 50% of the company earns 10%. This is the biggest risk of investing in MNC subsidiaries in India which hold excess cash (case in point was Novartis).

On Asian Paints, the company has voluntary decided to take prices down by 2% odd. Historically, it seems that company wants to operate at a high teens margins - if margins expand beyond that, it cuts prices. As the industry is consolidated (AP, Berger, ICI and Nerolac control 70%) and everybody else follows AP price points, there is no danger of anybody else initiating a big price war. The volatility of the profit pool in this industry is lesser than in others like soaps, where Godrej Consumer is very happy at having a massive qtr, but won't do anything on price till a price war breaks out. So if Godrej Consumer is trading in line with Asian Paints (both at 25x PE - isn't it amazing!!!), there is a relative valuation mismatch.


Anonymous said...

I do not know your soource but on what basis are you stating ICI is lending Akzo subsidiary in India.

The Balance sheet shows clearly where they have parked the money and your assumption that it fetches 10% from subsidiary is not founded on facts.

Gaurav said...

I think if you call investor relations (you can find the contact information here -, they will confirm what I have mentioned.

Gaurav said...

From the link above, investor relations contact is R Guha:, Tel is +91 124 2540810. I read what I mentioned in a recent brokers note, so that might not be reflected in March end balance sheet.

Econlogic said...

hey gaurav,

would you invest in Asian Paints at current valuations?

What about Unitech?