Asian Paints Ltd, the market leader in wall paints, posted a 20% year-on-year decline in net profit for the quarter ended 30 September to Rs 214.7 crore. The company’s stock fell by 3.6% to Rs 2,503 a share after results were posted on a day when the benchmark Sensex lost 1%.
Profit fell for two main reasons. One, lower-than-expected revenue growth, and two, last year’s numbers included about Rs 63 crore on account of sale of long-term investment. That’s precisely why other income has declined sharply this time, hitting profitability. Adjusting for that, net profit growth is more or less in line with Street expectations.
However, revenue increased by just 5% to Rs 1,811 crore. Compare that with the average revenue growth estimate of 18% anticipated by six brokerages firm.
Revenue growth at both the stand-alone company and its subsidiaries was lacklustre. The company attributes poor revenue growth to the seasonal shift due to the timing of Diwali. Also, rains in August and September played spoilsport on volumes. According to the company, the extended monsoon also resulted in delayed projects and maintenance demand, impacting industrial paints’ demand. Analysts maintain most of the revenue growth would have come from price realizations than volume growth this time.
Graphic: Yogesh Kumar/Mint
Also, some dealers and stockists may have built up inventory before the price hikes. The company took price hikes in the first half of this fiscal in decorative products to offset the impact of rising input costs. It announced an increase of 4.15% effected on 1 May, 2.6% on 1 July and 1.2% on 1 August for decorative products. That’s a total 7-8% hike.
Despite poor revenue growth, the good thing is that Asian Paints was able to maintain its operating profit margin at 18%. Nonetheless, the September quarter performance has been much worse than that of the June quarter, when revenue and net profit increased by 25%.
Sustaining operating margin would be a key thing to watch out for. The company says raw material prices are expected to increase further in the coming quarter and that decorative paints would be impacted more because of this than the industrial paints segment. The performance of some subsidiaries is another concern, as some of them continue to face tough market conditions.
Volumes though, should be better in the December quarter led by better demand because of the festival season. Asian Paints’ stock has outperformed the Sensex and the BSE-100 index since the beginning of the fiscal on the back of revival in economic growth, which has improved demand for paint companies in general.