Asian Paints: June quarter earnings lose sheen hit by GST, high input costs
Volume growth at Asian Paints Ltd’s domestic decorative business slipped back to the low single-digits in the June quarter. According to analysts, the segment has registered 3% growth in the first quarter of the current fiscal year.
“It was a challenging quarter both on domestic and international front. Sales in the decorative paints segment were impacted by de-stocking in the trade channel ahead of GST (goods and services tax) implementation especially in the month of June. Sales in the kitchen and sleek business (home improvement segment) also reported low growth impacted by GST. Currency devaluation in Egypt and forex unavailability in Ethiopia, impacted the overall performance of international operations,” the management said in a post-earnings conference call.
In the March quarter, this segment had posted nearly 11% volume growth as the impact of demonetisation receded (see chart).
Lower-than-anticipated volume growth in the June quarter led to a miss on the net profit front. Consolidated net profit declined 20.23% year-on-year to Rs440.74 crore, below Bloomberg analysts’ estimate of Rs545.7 crore.
On the other hand, the performance of its auto-coatings joint venture improved, aided by good demand conditions in the auto OEM (original equipment manufacturer) and general industrial business segments.
While decorative volume growth is expected to recover thanks to the good monsoon and restocking as the new tax regime gets streamlined, the worry on rising input costs remains.
Consolidated cost of raw materials jumped 11% year-on-year. Other expenses including employee cost also had a bearing on operating margins. Thus, consolidated Ebitda margins declined more than 500 basis points year-on-year to 17.4%. Ebitda stands for earnings before interest, tax, depreciation and amortization. A basis point is 0.01%.
“Among raw materials, prices of monomers and titanium dioxide (TiO2) were elevated. Monomer prices had gone up due to capacity imbalance due to shutdowns. While some correction in prices of monomers is foreseen as capacity comes back on stream, prices of TiO2 are unlikely to cool down sharply in the near-term,” added the management in the conference call.
In the last one year, prices of TiO2 have surged 33%. As the chart shows, gross margins too have taken a sharp hit, falling to 42% in the June quarter.
In a bid to protect its margins, the company took a price increase of around 5.5% since 1 March 2017. If input cost continues to head northwards, the management would resort to further price hikes.
Meanwhile, the Asian Paints stock trades at a rich one-year forward price-to-earnings multiple of 42 times, making it the most expensive paint stock.
Despite raising prices twice in the last four months, Asian Paints has not been able maintain gross margins, said analysts. Also, sharp inflation in raw material costs would keep margins under pressure going ahead as well; hence, they feel valuations need to correct.