Asian Paints: volumes recover but margins slip
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The good news for Asian Paints Ltd’s investors is that volume growth of its decorative business has recovered as the demonetisation impact has receded. Volume growth in this segment bounced back to low double- digits in the March quarter from low single-digits in the previous quarter.
The performance of its auto-coatings joint venture (JV) also improved, aided by good demand conditions in the auto original equipment manufacturer and general industrial business segment, the management said in a press release.
In the industrial coatings JV, industrial liquid paints, road marking paints and the powder coating segment registered good growth in the March quarter, it added.
While volume growth has improved, the bad news is with respect to rising input cost.
Its impact is reflected in declining operating margins. Consolidated Ebitda (earnings before interest, taxes, depreciation and amortization) margins contracted by 100 basis points to 18% year-on-year. Consolidated cost of raw materials jumped 10% year-on-year and other expenses too rose. A basis point is 0.01%.
Prices of titanium dioxide, one of the key raw materials for paint makers, hit a four-year high in April 2017. Also, prices of other crude oil-derivatives and monomers have inched up. Asian Paints had earlier announced a price hike of around 2.5% that came into effect this month. If raw material prices continue to surge, then one cannot rule out more price hikes.
Raw material prices have moved up in the last two quarters, necessitating price increases to protect margins, the management admitted.
Consolidated net profit surged by 10% year-on-year to Rs462.22 crore and revenues too jumped by 9% year-on-year, but what would be closely watched is the movement in Ebitda margins. Though not the lowest, but Asian Paints’ operating margins have come off from the peak of 20%-plus seen in the past (see chart). Peer Kansai Nerolac Paints Ltd too witnessed a similar trend, where Ebitda margin fell to 17.43% in the March quarter from the peak of 19.8% seen in the September quarter.
Clearly, the days of sharp margin improvement are over for paint makers.
Meanwhile, on the valuation front, Asian Paints is trading at a one-year forward price-to-earnings ratio of 50 times and is the most expensive bet in the paints sector. Such high valuations need to correct since raw material costs are escalating and some near-term disruption is expected once the goods and services tax is implemented.