Asian Paints Q2 results: Valuations expensive; surging input cost key risk
The September quarter was the fourth consecutive one of double-digit volume growth for Asian Paints Ltd, buoyed by the performance of its decorative paints segment. This was despite an extended monsoon resulting in sluggish consumer demand in key regions of western and central India.
In a post-earnings conference call, the management said it does not consider the company’s volume growth for the September quarter to be an indication of an economic recovery, but they added that offtake has increased after the good monsoon.
A part of the positive impact of an early Diwali this year has been reflected in the September quarter, said some analysts.
Consolidated net profit grew 18.1% to Rs494.76 crore on a year-on-year (YoY) basis for the September quarter, while consolidated income from operations rose 10.2% to Rs4,232 crore YoY.
Consolidated Ebitda (earnings before interest, taxes, depreciation and amortization) margins improved by more than 100 basis points (bps) to 16.85% YoY, but on a sequential basis, gross margins declined.
This drop was purely due to rise in raw material cost and not due to a change in the product mix. A basis point is one-hundredth of a percentage point.
No price revision happened during the quarter, but the management highlighted that prices of raw materials linked to crude and titanium dioxide have inched up sequentially, so a price hike may be in the offing if input costs shoot up sharply.
Apart from that, the rate at which goods and service tax (GST) is implemented would also have a bearing on pricing.
The stock’s one-year forward price-to-earnings of 50.09 times is much higher than peers.
Brokerage house JM Financial is of the view that though Asian Paints’ business opportunities remain compelling, valuation looks extremely stretched.
“We believe the stock prices in all positive aspects of Asian Paint’s business model, but not the risks of lower margins and investments in new initiatives,” Religare Institutional Research’s result review report said.
Shares of Asian Paints have rallied 37% in the past one year and touched a 52-week high of Rs1,230 on the BSE on 13 October.