Asian Paints Q3: Volumes slip, surging input costs, GST rate key
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After four consecutive quarters of double-digit volume growth, Asian Paints’s domestic decorative business saw growth slipping to low single digits, largely the fallout of demonetisation.
In the quarter ended December, the decorative business is estimated to have grown in the 2-3% range, partially aided by the festive season, according to some analysts. Nevertheless, given the uncertainty, the impact on volumes has not been as severe as anticipated.
In a post-earnings conference call, the management said, while the overall domestic market is likely to remain uncertain in the short term, the hope is that demand may not be weak for long. Asian Paints hopes to continue to grow marginally faster than the industry.
Its auto-coatings joint venture (JV) saw good demand conditions in the auto original equipment manufacturer (OEM) segment and good growth was observed in the industrial coatings JV. On the flip side, the two-wheeler OEM segment was adversely impacted by demonetisation.
Consolidated net profit increased 1.5% year-on-year (y-o-y) to Rs489.31 crore in the December quarter, while total income from operations rose 2.56% y-o-y to Rs4,353.99 crore. A Bloomberg poll of 21 analysts estimated consolidated net profit at Rs503.6 crore.
Consolidated Ebitda (earnings before interest, taxes, depreciation and amortization) margins contracted by 80 basis points (bps) to 19.7% y-o-y, hit by higher staff costs and other expenses.
Blended raw material costs saw a 1.3% sequential increase and continues to head northwards in the current quarter. The management said that it is closely monitoring raw material costs and will take action on the pricing front as required. Asian Paints had last announced a price cut in February 2016.
Gains that the company made on margins have been a key driver of profits in the past few quarters, but now that input costs continue to harden, some impact on the company’s profit growth trajectory is expected over the near term.
FY17 capital expenditure will be around Rs600 crore and expansion at the company’s new plants in Mysore and Vizag will be done in phases depending on the demand environment.
Meanwhile, sharing views on good and service tax (GST), the management said when value added tax (VAT) was put into practice, some disruption and destocking was seen and a similar situation may arise with GST too. Effective indirect tax rates currently for the company are 11-12% of excise plus sales tax, with the average being 14%. GST is slated to roll out from 1 July 2017.
Shares of the company are trading at a one-year forward price-to-earnings of 48.08 times, higher than peers. Apart from recovery in volumes, movement in raw material prices and the rate at which GST is implemented on the paint industry will also have a bearing on the stock going ahead.