Asian Paints: Little scope for a sharp recovery in near-term revenue growth

Valuations of 50x FY21 estimated earnings are rich

Asian Paints’ December quarter (Q3) numbers were a mix bag. The decorative paints major clocked 8.4 per cent year-on-year (YoY) growth in profit before tax to Rs 1,057.3 crore, which was above the consensus estimate of Rs 1,032 crore, according to Bloomberg.  
 

However, it disappointed on the revenue front despite an estimated 11-12 per cent volume growth in the decorative paints, which forms over 80 per cent of its sales. Revenues grew 3 per cent YoY to Rs 5,420.3 crore, against the Street’s estimate of Rs 5,692.3 crore. The lower growth in revenue compared to volumes shows realisations were muted. Reported revenue growth was also the lowest in the last seven quarters. This, along with the overall bearish market trend, led to a 1.8 per cent decline in Asian Paints’ stock to Rs 1,778.3.

While net profit grew 20 per cent YoY to Rs 779.7 crore, it was driven mainly by lower corporation tax and thus not comparable with the year-ago numbers. The volume growth is on estimated basis as the company does not disclose exact figures. Inferior product mix, with a tilt towards new low-margin emulsion products, dragged down the top line. The new emulsion products are 15-20 per cent cheaper than other economy-range products. 

Further, pressure on top line growth also stemmed from the slowdown in construction activity in metro and tier-1 cities, which are 50 per cent of Asian Paints’ overall business and key markets for premium paint products.

A benign input cost trajectory, however helped Asian Paints post a 193-bp YoY expansion in gross profit margin to 43 per cent in Q3. Higher employee cost and other operating expenses though restricted Ebitda (earnings before interest, tax, depreciation and amortisation) margin improvement to 96 bps YoY to 21.9 per cent. The management expects demand conditions to remain challenging and its focus to remain on emulsion. This leaves little scope for a sharp recovery in near-term revenue growth. 

Shirish Pardeshi of Centrum Broking says: “Supportive raw material prices and likely operating leverage mainly from new commissioned Vizag and Mysore plant would keep operating margin and overall earnings profile intact.” The management too highlighted that gross margin on economy and premium products are around same levels.

While news on the margin front is positive, it is crucial for top line growth to come in at healthy levels. As any reversal in margin trajectory could hurt earnings. 

Also, it would be difficult to justify valuations, which at 50x its FY21 estimated earnings, are rich.