Asian Paints loses colour on high marketing spend, stock falls 2.3%

Focus now lies on how it balances volume growth, pricing, and profitability

The Asian Paints stock, which was under pressure on Thursday given the expectations of a weak March 2019 quarter, closed 2.3 per cent lower at Rs 1,355.8 apiece as its results came below the Street’s expectations. 

The paint leader clocked 11.7 per cent year-on-year (YoY)  growth in net operating revenue to Rs 5,018 crore, against the Bloomberg consensus estimate of Rs 5,223 crore. Net profit declined by 1.7 per cent to Rs 487.5 crore, which was 19 per cent lower than the Street’s estimates.

Higher advertising and promotional spends weighed on the overall performance of the company, even as volume growth at 11-12 per cent was not disappointing. 

However, heightened competitive intensity in the industry led the company to offer higher rebates and discounts, which restricted the growth in realisation despite cumulative price hikes of 7 per cent in FY19.

This, along with a higher share of low-margin products and higher raw material prices, impacted Asian Paints’ margin profile and earnings. 

Low-margin products such as putty grew at a comparatively faster pace than the premium ones. 

While the gross profit margin contracted by 168 basis points YoY to 41.6 per cent, the Ebitda (earnings before interest, tax, depreciation and amortisation) margin plunged 233 basis points to 16.4 per cent. 

The Ebitda margin was below analysts’ estimates of 18-19 per cent, and the lowest since the March 2015 quarter. The company purchases key raw material such as titanium dioxide from the US and Taiwan, which were up around 9 per cent YoY, said an analyst. 

There was pressure on the operating margin across all its segments. While the home improvement segment continued to report losses in the March 2019 quarter, segment (profit before interest and tax) margin from the paints segment plunged 282 basis points YoY to 16.4 per cent. 

The management told analysts that challenges on a macro level and the monsoon will have a bearing on the demand situation. 

Therefore, the focus will be on how the company balances volume growth, pricing and profitability. The stock is currently trading at 47 times its FY20 estimated earnings.