Prices of raw materials soared, while net profits of India's largest paints company “Asian Paints” increased by as much as 30%?

Over the past 12 years, Asian Paints has succeeded in overturning the traditional rule that rising crude oil prices often affect the performance of paint manufacturers. The recent performance of the Indian paint giant further confirms the exact opposite: there is a strong positive correlation between rising oil prices and the company's operating profit margin.

In the latest quarterly results, the second consecutive quarter of double-digit growth in sales and profit margins of Asian Paints again surprised Wall Street. The future of India's largest paint company looks more colorful as demand recovers and consumption taxes fall.

In the first quarter of this year, the company's revenue grew 15% to 43.985.9 billion rupees, mainly due to 13% growth in domestic business and 3.3% growth in total prices in the past two quarters. The company's decorative coatings business volume achieved double-digit growth year on year.

In terms of profits, the company surprised Wall Street by expanding gross profit margins by 40 basis points to 43.2%, despite inflation in raw material prices (crude oil prices rose by 40%), operating profit margins rose by 250 basis points to 19.9%, and net profit rose by Rs. 5.71 billion, 30% year-on-year, more than expected.

Trends in all areas are positive - decorative coatings and industrial coatings. In a conference call with analysts, management said that the pace of recovery in sales continued to improve, and the decline in the GST would lead to increased demand for organized participants.

GST interest rates have now fallen from 28% to 18%. Although tax benefits have to be passed on due to strict anti-windfall laws, companies will continue to earn higher profits from operating leverage.

In the first quarter, EBIDTA's profit growth far exceeded its gross profit (before management fees and other expenses) due to lower management costs. Capacity utilization rate is slightly higher than 75%, higher production will help.

Ethiopia's overseas operations have been affected by the lack of currency/foreign exchange supply and macro factors in other markets such as Egypt, Sri Lanka and Bangladesh. However, as overseas business accounts for nearly 12% of total sales, this has not weakened overall performance.

All the fundamentals predict a strong year for Asian coatings. Although the stock has risen 15% in the past month, with FY19 estimated at 57 times and expected FY20 earnings at 50 times, the stock still has some momentum. Almost all analysts tracking companies raised their target prices by 10-15%. On Wednesday, the stock closed at 1450 rupees.