Asian Paints: Weak show to test rich valuations

Poor volume growth and slower pick-up in new businesses might trigger earnings downgrade

A weak performance of the decorative paints segment (80 per cent of consolidated revenues) and mixed growth trends in the international business led to a dismal show by Asian Paints in the December quarter. Consolidated net sales grew 5.6 per cent year-on-year (y-o-y) to Rs 3,603 crore, lower than the Bloomberg consensus estimates of Rs 3,980 crore.

Low single-digit volume growth, estimated at one-two per cent, hit top line growth. Analysts were expecting 10-12 per cent volume growth, given that the company had maintained double-digit volume growth for the past three quarters. The lower-than-expected volume growth is the key reason for the results falling short on other parameters as well.

“We registered single-digit volume growth in the decorative paint segment in India due to sluggish demand. Growth in the current quarter was also impacted due to the early festival season,” said K B S Anand, managing director and chief executive, Asian Paints.

The home improvement segment was also impacted by weak demand. Acquired in the current financial year, the business witnessed 7.2 per cent sequential decline in revenues to Rs 24 crore, as Ebit (earnings before interest and taxes) losses grew to Rs 5 crore versus Rs 5 lakh in the same period. Benefits of lower raw material costs, down 297 basis points to 51.1 per cent of sales, were partly offset by higher other expenses (up 188 basis points to 21.8 per cent). Margins in international business remained muted. Consolidated Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin witnessed an uptick of 45 bps to 16.2 per cent in the quarter. Consequently, net profit grew 11.8 per cent y-o-y to Rs 368 crore and was 14 per cent below consensus estimate of Rs 430 crore.

International business, forms 12-13 per cent of consolidated revenues, posted mixed numbers with double-digit growth in Bangladesh, Nepal and Emirates and the muted show of other countries due to political events and macro uncertainty.

Following weak set of numbers, especially volumes, analysts could trim their FY15 and FY16 earnings estimates for the company. While continued demand slowdown in domestic markets is a key downside risk, easing crude oil prices will rub-off favourably on profitability. The stock fell 3.2 per cent after the results were announced. At current levels, it is trading at rich valuations of 42 times FY16 estimated (pre-results) earnings per share, and could remain under pressure if the management gives a weak forecast in the analysts’ call scheduled for Friday.