Slow demand recovery weighs on Asian Paints despite margin resilience

Asian Paints' Q3FY26 performance highlighted resilient margins and easing input costs, but slower-than-expected demand recovery and muted volume growth have raised concerns among investors and analyst

Asian Paints’ third quarter (Q3FY26) revenue missed consensus with 4 per cent year-on-year (Y-o-Y) growth, but gross margins rose due to lower raw material costs. Domestic volumes grew 7.9 per cent Y-o-Y with rural growth beating urban. The international segment grew 6 per cent Y-o-Y (4.2 per cent in constant currency). The operating profit margin was 20.1 per cent. 

Management guided for mid-single-digit revenue growth and operating profit margin sustained at 18 per cent to 20 per cent. While the market responded negatively, investors could look at low raw material inflation, lower competitive intensity, cost-saving initiatives, and premiumisation as positives. 

Gross margin expanded by 194 basis points due to lower raw material costs, and possible lower competitive intensity. Operating profit grew 8.8 per cent Y-o-Y to ₹1,780 crore with a margin expansion of 94 basis points Y-o-Y to 20.1 per cent. Recurring net profit grew 9.6 per cent Y-o-Y to ₹1,220 crore. In the 9MFY26, net sales, operating profit and adjusted net profit grew 3 per cent, 9 per cent and 6 per cent, respectively. 

The exceptional items of ₹158 crore included a one-time expense of ₹634 crore, with an increase in gratuity liability by ₹53 crore and rise in liability of compensated absences by ₹11 crore due to the Labour Code. An impairment loss of ₹94 crore was taken on acquisition of Obgenix Software. 

Domestic decorative volumes rose 8 per cent Y-o-Y, lower than consensus. Shorter festive season and an extended monsoon may have reduced activity, and demand recovery is slow. The management says demand recovery is gradual with near-term volume growth in the 8-10 per cent range and value growth of 5 per cent. 

An acceleration of demand would be a key monitorable. Consolidated sales grew 4 per cent Y-o-Y to ₹8,870 crore. Decorative business in India saw volume growth of 8 per cent and revenue growth of 3 per cent Y-o-Y (lower than Q2 volume growth of 11 per cent) 

The industrial segment grew 17 per cent Y-o-Y with volume rising 8.3 per cent and value growth of 4.4 per cent. The bath business declined 4 per cent, while the kitchen revenue was up 2.6 per cent. White Teak revenue grew 12 per cent, while Weather Seal revenue was up 59 per cent. International value growth of 6.3 per cent (4.2 per cent in constant currency) was due to performance in key markets of the UAE, Sri Lanka, and Ethiopia. 

Management said that demand in October was muted due to the short festive period, and extended monsoon. However, marginal demand recovery was seen in November and December. In Q3FY26, the value and the volume gap were about 5 per cent, compared to earlier gaps of 6-8 per cent and this gap is expected to remain the same, with similar demand trends for the next two quarters and competitive intensity staying at current levels, or higher. 

Consumer demand seems to show changing patterns, with reduced painting frequency. Premium segment is seeing growth on the back of rising demand in the luxury housing segment. Waterproofing is also seeing demand. 

The company expects gradual demand improvement and is focussed on innovation, brand salience, regionalisation, and execution excellence. Operating profit margin will sustain at around 18-20 per cent with continued investments in marketing, and branding.

 

Management is confident of achieving market share gains over 12-18 months. New products contributed 16 per cent of overall revenues with a focus on premium and luxury portfolio. Home decor contributed 4-4.5 per cent to revenues, while the Beautiful Homes Network expanded to 74 stores. B2B is growing faster than the retail business, with demand from factories, hospitality, and government. The company added 3,500-4,000 retailers over 9MFY26 and has over 160,000 retail outlets. 

Analysts are looking at earnings downgrades, given the downbeat demand projections. Asian Paints has always been highly valued and several analysts have “Reduce” or “Sell” recommendations.