Strong volume growth for Asian Paints in FY19 on improved rural demand

After single-digit volume growth in FY18, Asian Paints is expected to see an improvement in volume trajectory in the current fiscal year. The firm, which had been posting upwards of 10 per cent growth in the last two quarters, is expected to end FY19 with 13-14 per cent growth.

This is on the back of improving rural demand, a cut in goods and services tax (GST), and market share gains from the unorganised segment. With over 40 per cent of sales coming from rural markets, and a strong distribution network in the interior markets, a recovery led by higher rural spending is expected to be a key trigger. 

The recent cut in the GST rate to 10 per cent from 18 per cent earlier is also expected to help bridge the price gap with unorganised players. Given the larger presence of unorganised players in rural areas, it should help Asian Paints more than others. 

Analysts at Macquarie Research peg volume growth at 13 per cent for FY19. Over the medium term, they expect the sector to grow at 1.5-2.0 times the GDP growth. 

What the Street will keep a watch out for is the ability of the firm to pass on higher raw material costs. The sharp rise in crude oil prices and a depreciating rupee is worsening the impact on its raw material costs including titanium dioxide, a key input. 

While the company has taken a 3.5 per cent hike between March and May, analysts believe it will need to take more hikes to pass on the costs fully. 

The company has, however, refrained from taking any hikes prior to the festive season to avoid coming under the scanner of the GST anti-profiteering body. The firm is expected to take further hikes after the festival season.

While the company’s operating profit margin improved by 248 basis points year-on-year and 118 basis points sequentially to 19.9 per cent, margin gains could be capped in the September quarter in the absence of price hikes. Analysts expect some support on the margin front from volume-led operating leverage. 

While there are strong triggers for the paints market leader, investors will have to wait for a better entry point as the stock, at its current price of Rs 1,289, is trading at rich valuations of just under 42 times its FY20 earnings per share estimate.