Two price hikes in Dec qtr reverse Asian Paints' falling margin trajectory

The company expects March quarter (Q4) to be better than Q3

Two price hikes in the December quarter (Q3), which took the cumulative increase to 15 per cent, helped Asian Paints reverse four consecutive quarters of falling margins. The company posted a gross profit margin of 37.5 per cent, 180 basis points (bps) higher on a sequential basis while operating profit margins rose 540 bps sequentially to 19.6 per cent.

The company has been guarded on raising prices despite a sharp 21 per cent hike in raw material prices in the first half of financial year 2021-22 (H1FY22). The price hikes announced in H1 was 7 per cent. In Q3, input costs rose 4 per cent.

The management indicated that price increase, volume growth and cost optimisation supported the sequential improvement. However, the margins both at the gross and operating profit levels continue to trend 860 bps lower than the year-ago period.

The management believes the Q4 margin performance will be better as the full impact of the price hikes will be felt then. The company also expects inflation to moderate in Q4. However, the Street will keep an eye on crude oil prices, which will have a bearing on Asian Paints’ input cost basket. Brent crude oil prices hit a seven-year high recently and were hovering around $88 a barrel.

The price hikes are positive from a margin viewpoint, but the sales impact will need to be monitored. The company indicated that there was no impact of the hike on volumes, which rose 18 per cent year-on-year (YoY) on a high base of over 32 per cent. Sales have been pretty resilient in the metros and larger cities, while smaller towns and rural areas have been slightly weaker. As a result, the premium segment has done better than the economy segment.

The company continues to gain market share from the organised segment (2.7 per cent in Q2) with the management indicating the trends held in Q3 as well. The strong network expansion – with 5,000 new retail points added over the last seven quarters –should aid this trend.

Volumes could be soft in the near term, given the restrictions across states, though the company is confident of demand bouncing back in February as was the case with previous waves of infections. This could impact revenue growth, which rose 26 per cent YoY in Q3.

The market reacted positively to the result and the stock gained 0.8 per cent even as the benchmark indices fell over 1 per cent. Any weakness in prices, given the ongoing Omicron crisis, could be used to consider the stock.