Asian Paints: Volumes remain a bright spot but at the cost of margins

Led by volumes, net sales rose 9.4 per cent and Ebitda margin was up 60 bps in Q2; earnings visibility still looks strong, say analysts

Volume growth of 14 per cent (analysts estimate) in the decorative paints segment was a bright spot for Asian Paints in the September quarter (Q2), and it was better than growth expectations of 8-12 per cent. However, an unfavourable product mix weighed on margins and profit growth.

While the company’s top line grew by 9.4 per cent year-on-year to Rs 5,051 crore, India’s largest paints maker registered a 13.9 per cent year-on-year rise in profit before tax to Rs 852.3 crore. Analysts, according to Bloomberg, had pegged these two figures at Rs 5,214 crore and Rs 898.7 crore, respectively. The 67 per cent year-on-year jump in profit after tax was mainly due to lower tax rates, so it will not be a fair comparison.

In Q2 also, the double-digit volume growth was driven by low-cost economy products like distemper and putty, mainly in rural areas. Premium products, demand for which mostly comes from metro cities, witnessed sluggish growth. According to the management, slower growth in metro/urban areas affected premium end of the products. In fact, the company took measures like price cuts to push its economy portfolio, and believes that its strategy to focus on the bottom of the pyramid helped during a challenging demand situation.

Faster growth in low-cost products, coupled with higher promotional spend (reflected in the 156 basis point year-on-year increase in other expenses as a percentage of sales) restricted operating margin gains and, hence, net profit growth.

Earnings before interest, tax, depreciation and amortization (Ebitda) margin expanded by just 60 basis points year-on-year to 18.9 per cent in Q2. The gains were helped by benign input costs, which as a percentage of sales fell sharply by 257 basis points year-on-year in Q2. The lower input cost trajectory, though, is likely to continue at least in the near term, thereby supporting earnings outlook.

“Crude oil inflation is unlikely to increase sharply, which keeps Asian Paints’ earnings visibility strong for near to medium term,” says Vishal Gutka, AVP, Phillip Capital. Notably, the management believes that the product mix should improve in the year’s last two quarters, which are seasonally strong mainly for high-margin premium products.

Having said that, while the outlook for Asian Paints remains bright, its current stock valuations of 51 times its FY21 estimated earnings (25 per cent above long-term historical average) could limit further upsides in the near term.