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Higher raw material costs hurt Asian Paints

Higher raw material costs hurt Asian Paints
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First Published: Tue, Jan 25 2011. 09 51 PM IST
Updated: Tue, Jan 25 2011. 09 51 PM IST
Asian Paints Ltd posted robust consolidated revenue growth of 30% year-on-year to around Rs2,100 crore, driven by strong 37% revenue expansion from the domestic business, which was helped by good demand for decorative paints and a late Diwali. Also, the September quarter had seen extended monsoons affecting demand, some of which would have shifted to the December quarter.
But, it was the operating performance that disappointed the Street. Operating profit margins slumped 320 basis points to 16.4% from 19.6% in the same period last year due to higher raw material costs and other expenditure.
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Higher raw material costs have been a key concern for paint companies for a while now and Asian Paints has been raising prices periodically to counter this. So far this fiscal year, the company raised prices by around 11% in the decorative segment. The company raised prices by 2.9% in December and the full impact of this should be reflected in the current quarter’s financials.
The Street was expecting an operating margin of 18%. In the first two quarters this fiscal year, Asian Paints managed to deliver operating margin in the range of 18-19%.
According to Manoj Menon of Kotak Securities Ltd, “While input cost inflation is starting to hurt FMCG companies now (palm oil for HUL and GCPL, copra for Marico, LLPO for Marico, Dabur, etc.), TiO2 (titanium dioxide), a key input for paints, has been inflationary since the beginning of CY2010 and the paint industry has managed gross margins well.” The poor operating performance hit net profit, which increased at a much slower pace of 11% to Rs.220 crore against the higher revenue growth.
Asian Paints has outperformed the BSE 100 index since the beginning of the fiscal, making it fairly valued at current levels.
Graphic by Ahmed Raza Khan/Mint
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First Published: Tue, Jan 25 2011. 09 51 PM IST