Muted volume growth hampers Asian Paints' December-quarter figures

Demand conditions continue to be a cause of concern

Asian Paints has reported muted December quarter numbers, led by a single-digit volume growth of its domestic decorative paints segment, which accounts for over 80 per cent of its consolidated revenues.

While standalone revenue growth came in at 11.9 per cent over the year-ago quarter, consolidated revenue growth was at 10.9 per cent.

Analysts had estimated consolidated revenue growth to be around 20 per cent on the back of 15 per cent volume growth in the domestic decorative business. The company’s management has indicated that while there has been some recovery after demonetisation and the implementation of the goods and services tax (GST), demand for the paints sector continue to be subdued. Demand, according to the company, is yet to reach pre-GST levels.

Over the last five quarters, the company has hit double-digit growth only once. For most other quarters, growth in the domestic decorative paints has been mid-single digits. Factors such as higher exposure to the South Indian market, which has slowed down due to extended monsoons, coupled with most festivals falling in the September quarter, are responsible for the company’s muted show.

Analysts say the company has been trailing behind its competitors for the past five quarters, with slowing volume growth. Rival Kansai Nerolac has reported 15-20 per cent growth, indicating that Asian Paints may be losing share. This trend could continue as recovery hopes in the second half of FY18 now depend largely on the March quarter performance. The international business, which accounts for about 13 per cent of overall revenues, also saw some headwinds, given currency devaluation in Ethiopia and Egypt.

Given higher competition, slowing growth and GST-related disruption, the company has not been able to take price hikes despite the rise in commodity costs. The last price hike was taken in May last year. Commodity costs, both based on crude oil derivatives as well as other chemicals such as titanium dioxide, have been inching up and the outlook continues to be negative for Asian Paints. However, the company, aided by cost-control efforts and investments in renewal energy, brought down power, fuel and other costs. This helped cut other expenses as a proportion of sales by 100 basis points to 14.9 per cent. Operating profit growth and margins at 17.7 per cent and 20.9 per cent, respectively, were better than expectations.

While the firm’s management is non-committal about the demand outlook, the Street will look at any signs of volume growth in the March quarter. Lacklustre volume growth could then lead to downward revisions in volume and revenue estimates.