Asian Paints: Nifty membership helps, but budget adds to blues

1 inShare Asian Paints Ltd. BSE 3092.20 17.75 (0.58%) Vol:477 shares traded NSE 3085.00 13.75 (0.45%) Vol:10207 shares traded Prices|Financials|Company Info|Reports RELATED ARTICLES Union Budget 2012-13: Budget has taken the reality of India's situation, says Swraj Paul Budget 2012-13 allocates only Rs 2,430 crore for Environment and Forests Ministry Budget 2012: How your market wealth can be affected Budget 2012 blues: Many people rated proposals from below average to poor Union Budget 2012-13: Fuel speed ahead as govt steers clear of petrol bomb For India's largest paints company, last week was one of mixed fortunes. The company has regained a spot in the Nifty 50 - the benchmark equity index of the National Stock Exchange. But the Union Budget dealt a blow with a rise in the standard rate of excise duty from 10% to 12%. While the inclusion in the Nifty may lead to more institutional investors buying into the stock, the company may find it difficult for passing on the higher tax burden to its consumers. Consumption of paints is discretionary in nature. During an inflationary phase and during an economic slowdown, consumers typically defer discretionary consumption. The company has not been able to fully pass on the increase in raw material cost yet (on account of rise in crude oil prices). This is being reflected through the drop in operating profit margins over the last three quarters. The consolidated EBITDA margin for the nine months ended December 2011 was 15.7% against 17.8% a year ago. The raw material to net sales ratio during the same period rose by 230 basis points y-o-y. The company may find it tough to pass on the 2% increase in excise on to consumers. However, it was not that the budget did not offer anything for the paints company. /photo.cms?msid=12374034 The import duty on titanium dioxide, a key ingredient in the manufacture of paints, was reduced by 2.5% to 7.5%. However, this is going to be insufficient - considering that the price of the ingredient has risen significantly since the beginning of 2012. The company's performance has been modest in the first nine months of this fiscal year. Its international operations, contributing 13% of consolidated revenues, have been impacted owing to poor demand in the markets in the Middle East and profitability has gone down due to inflationary pressure. The industrial paints business is also facing challenges such as a slowdown in the manufacturing sector. Further, the rupee depreciation has led to an increase in the price of imported raw materials. In such a scenario, while the company will be battling with its business challenges, institutional investors, who buy into stocks that are part of the Nifty 50 Index, are likely to include Asian Paints stock in their portfolio. This should definitely provide support to the company's stock price despite its weak business outlook.