Off-colour results from Asian Paints
The colour is fading from Asian Paints Ltd’s earnings performance, particularly in terms of volume growth and gross margins.
For the third consecutive quarter, the company saw its decorative paints volume growing in the low single-digits, despite a lower base due to demonetisation.
The company’s management attributed this soft growth to the weaker macro environment, adding that paint demand is yet to bounce back to pre-goods and services tax levels. Second, the extended monsoon and intensifying competition in south India, a key market for Asian Paints, impacted overall demand, it said in a post-earnings conference call. Further, early festive demand too impacted sales to some extent, added the company.
According to analysts, the paint maker has clocked around 6% volume growth in the third quarter.
Interestingly, peer Kansai Nerolac Paints Ltd has reported double-digit growth in both decorative and industrial segments in the same quarter.
Though the management is blaming subdued macro demand for disappointing volume growth, the fact that competitors continue to grow at a much faster rate is a concern, say analysts.
“For the past 4-5 quarters Asian Paints has been growing volumes much below its competitors. In 3Q Asian Paints’ volume growth was 6-7% versus nearly 12-13% volume growth for Kansai Nerolac. This divergence is yet to be fully explained, and there is a possibility that Asian Paints is losing market share. We need to watch this for a few more quarters to conclude,” Credit Suisse said in a report.
However, the company believes that it has not lost market share.
Meanwhile, Asian Paints’ operating margins surprised positively, thanks to tight cost control and lower advertisement spends, but higher raw material costs eroded gross margins. Gross margins declined sharply by more than 150 basis points in the December quarter (100 basis points equal one percentage point).
Prices of titanium dioxide (TiO2), rutile and other crude oil-based inputs are inching up. Though the company has not effected a price hike this quarter, it will take appropriate pricing action depending on input cost trends, added the management. TiO2 accounts for 20% of the company’s raw material costs.
The only way to curb further margin erosion is by way of a price increase, but some analysts are of the view that even with a price hike, Asian Paints’ gross margins would be lower on a year-on-year basis in the fourth quarter.
Worried about these issues and the company’s muted international operations, some brokerage firms have revised the company’s volumes and earnings estimates lower. The Street too punished the Asian Paints stock, which corrected nearly 2% intraday on Tuesday, ending the day down 0.76% at Rs1,167.70.
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