Asian Paints’ volume growth hints at a recovery
That demand is recovering even a little after the slowdown caused by the goods and services tax (GST) roll-out is some good news. Asian Paints Ltd’s decorative paints business saw high single-digit volume growth in the September quarter, pulling back from a low single-digit growth in the June quarter. Dealers cut down on purchases then, as they destocked in the run-up to GST.
The Asian Paints management said, in a post-results conference call, that the impact of GST continued through July but September saw a recovery. Surge in volumes was also aided by an earlier festive season this time. Analysts peg the volume growth in the September quarter at 9%.
The management expects demand conditions to improve going ahead, now that the trade channel has stabilized, adding that most of its dealers have migrated to GST. However, inventory levels at the dealers’ end are below pre-GST levels.
Analysts estimate the company will report double-digit volume growth in the second half of the fiscal year. It should be noted that peer Kansai Nerolac Paints Ltd reported 18% volume growth in decorative paints in the September quarter.
Even though Asian Paints’ volumes recovered, margins witnessed a compression.
Higher raw material prices, especially of titanium dioxide (TiO2), hit gross margins, which fell to a multi-quarter low. Prices of imported TiO2 were nearly 11% higher during the second quarter. The contraction in its consolidated Ebitda margin was restricted partially by decline in other expense/employee cost during the quarter, say analysts. Ebitda stands for earnings before interest, tax, depreciation and amortization.
While there was no price revision in the September quarter, Asian Paints will closely watch movement in raw material prices to decide on price hikes and thereby protect further margin erosion. The company has taken two price hikes, totalling 5%, since March this year.
Meanwhile, following the result announcement, the stock closed on Tuesday at Rs1,220.50, up by 4.1% on BSE. On a year-to-date basis, the stock has rallied 38%, outperforming the Sensex, but underperforming Kansai Nerolac.
On the valuation front, Asian Paints remains the most expensive domestic paint stock. For this to sustain, the company needs volume growth to keep trending up so that it gets the confidence to hike prices, without hurting demand, to compensate for input cost inflation.
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