Strong Q3 volume growth adds colour to Asian Paints, net sales rises 24.1%

Revenue growth in the December quarter beat Street's expectations

Asian Paints’ revenue growth in the December 2018 quarter (the third one or Q3 of 2018-19) was ahead of the Street’s expectation, amid robust volume growth. Net sales grew 24.1 per cent to Rs 5,294 crore; analysts’ consensus estimate was Rs 4,932 crore. It is believed to have seen a 21 per cent volume growth in the decoratives segment.

There was a lower base in the year-before quarter. And, a sharp cut in July in the goods and services tax (GST) from the earlier 28 per cent to 18 per cent, helped entities in the organised sector gain market share. 

“Asian Paints’ volume growth mainly came from the festive season demand in Q3, and continued volume traction in segments such as distemper after the GST rate reduction, where competition is high from local players,” says Dhaval Dama, analyst at Equirus Securities. 

The firm’s management pointed to subdued growth in the automobile OEM (original equipment manufacturer) segment. Also, higher raw material inflation, led by surge in crude oil prices and depreciation of the rupee against the dollar, held it back. 

Key inputs such as titanium dioxide (TiO2) and monomers are linked to crude oil prices — TiO2 was costlier by 14 per cent over a year. Raw material cost as a percentage of net sales rose 127 basis points (bps) year-on-year, to 59 per cent.

As a result, the gross profit margin of the company dropped 127 bps to 41 per cent. The earnings before interest, tax, depreciation and amortisation (Ebitda) margin was down 122 bps, to 20 per cent. Net profit grew 14.1 per cent over a year to Rs 647 crore, a tad lower than analysts estimated. A 2.3 per cent price hike undertaken from October protected the margin profile. 

Nonetheless, receding inflationary pressure with a sharp correction in crude oil prices and a stronger rupee would help improve the margins in coming quarters. Supported by a 1.7 per cent price rise from last month. In fact, the management  indicates further price increases if inflation pressure returns. 

Also, analysts expect double-digit volume growth to continue in the near term. The management, though, foresees volatile raw material prices (and price increases), and the coming general election, to impact demand. 

Given the rally in its share price over the past three months (up 24 per cent, against a 7.2 per cent increase in the consumer goods index on the BSE), and a valuation of 50 times the 2019-20 estimated earnings, a rise from from the current level would seem limited.