Asian Paints: Volumes driven by strong distribution; low-end products

The last of a five-part series on firms that withstood the FY16 slowdown looks at how the paint giant leveraged its product portfolio

It is not without reason that Asian Paints has emerged an outlier in a market otherwise grappling with slowdown blues. The country's largest decorative paints major has leveraged its product portfolio cleverly, using its distribution reach and marketing muscle to turn in the volumes in 2015-16.

At a time when consumers are opting for affordable paint products, it is the economy segment that is churning the volumes for Asian Paints, analysts tracking the Mumbai-based firm say. It helps that Asian Paints has a plethora of options in that segment, including distempers and wall putty.

In fact, the performance of the economy segment reflected throughout the first nine months of 2015-16. For the three months ended December 2015, for instance, Asian Paints reported its best-ever volume growth, coming in at 15 per cent, ahead of street expectations. Before that, Asian Paints had reported seven-eight per cent volume growth in the September quarter and 11 per cent volume growth in the June quarter. These figures ensured that Asian Paints reported an average volume growth of 11-12 per cent in the first nine months of 2015-16, Latika Chopra, analyst at JP Morgan said in a recent report.

The consensus estimate is that the March 2016 quarter will retain the double-digit volume growth trajectory that Asian Paints has seen over the first nine months of 2015-16. While the firm did announce a two per cent price cut across its decorative paints portfolio last month, those gains are likely to accrue in the June quarter than the March quarter, analysts tracking the firm say.

The price cut, which came after a year - Asian Paints previously announced a two per cent price cut in February 2015 - was due to lower commodity prices. The firm, like most paint companies, has gained from cheaper titanium dioxide and crude oil-linked derivatives that are used as inputs in paints. On a year-on-year basis, titanium dioxide is down around 7.5-8 per cent, while crude is down 33 per cent, analysts say.

While the price cut is expected to support volume growth for the next few months, analysts have cautioned that the firm will have to keep an eye on operating margins to ensure there is no erosion on that front.

In her report, Chopra of JP Morgan said, "Asian Paints saw nine per cent revenue growth and a 240 basis point year-on-year improvement in operating margins over the first nine months of 2015-16. If volume growth does not pick up further and there are no incremental price changes, our earnings estimates for 2016-17 will face a downside risk."

For now though, Asian Paints is riding the volume wave. HDFC Securities said it expected Asian Paints to close 2015-16 with operating margins of 18.1 per cent, higher than its previous estimate of 17.4 per cent for the year, due to strong volume growth and lower commodity prices. The brokerage also said 2016-17 would see Asian Paints hover in the 18 per cent range in terms of operating margins, though this could come down if commodity prices were to harden.

Series concludes