Asian Paints Q1 results: Stellar quarter, but priced in

Asian Paints faces risks of investments in new initiatives because of a sharp increase in prices of raw materials


For the third consecutive quarter, Asian Paints’ volume grew in double digits, buoyed by the performance of the decorative paints segment. Photo: Mint
For the third consecutive quarter, Asian Paints’ volume grew in double digits, buoyed by the performance of the decorative paints segment. Photo: Mint

For the third consecutive quarter, Asian Paints Ltd’s volume grew in double digits, buoyed by the performance of the decorative paints segment. This is impressive, given the subdued consumer demand environment.

Consolidated revenue rose 9% on a year-on-year basis to Rs.3,590.16 crore and net profit increased by 18.5% year-on-year to Rs.552.56 crore. Ebitda (earnings before interest, taxes, depreciation and amortization) margins improved 220 basis points to 21.5%, courtesy benign raw material prices, but higher advertisement and employee costs restricted further improvement in operating margins. Revenue from the paint and industrial segments grew 10.03% and 23.68% year-on-year, respectively. A basis point is 0.01%.

It has been a stellar quarter for India’s largest paint maker and that is reflected in its valuations and share price movement. Asian Paints is trading at a price-to-earnings ratio of 51.33, higher than peers Berger Paints India Ltd and Kansai Nerolac Paints Ltd. The stock has run-up nearly 30% on a year-to-date basis. But the key questions are—is such a premium valuation warranted? Is there more upside left?

Analysts have mixed views.

Positive aspects of Asian Paints’ business model are priced in, but the risks of investments in new initiatives are not, Religare Capital Markets Ltd said in a report.

Asian Paints has earmarked overall consolidated capital expenditure of Rs.700 crore for FY17 and is augmenting capacity expansion in Mysuru. Also, it has revised proposed capacity plans for the Vizag unit and is now looking at setting up a plant with a maximum capacity of 0.5 million kilolitres, which will require capex of Rs.1,785 crore.

Concurring with that view, Reliance Securities Ltd said that while it expects Asian Paints to deliver double-digit volume growth over the next couple of years, valuations appear to be expensive at current levels.

One of the key risks would be a sharp increase in input costs, Reliance Securities cautioned.

“Raw material prices have seen some uptick in recent months and we need to monitor this trend going forward,” the Asian Paints management said in a conference call.

On a year-to-date basis, Brent crude oil prices, one of the key ingredients, have risen by 26%.

On the other hand, Edelweiss Securities Ltd believes even if inflationary pressures come back, the company has sufficient pricing power to counter them.

Asian Paints’ shares have outperformed the Sensex on a year-on-year basis.

The writer does not own shares in the above-mentioned companies.

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