A combination of factors propelled Asian Paints Ltd’s performance in the December quarter that came in ahead of analysts’ estimates. Some of these factors were known. The December quarter was expected to see the full effect of the festival season demand for repainting homes and the decline in the price of a key input, titanium dioxide, which had seen a steep increase in previous years.
The rupee too fared well versus the dollar in the December quarter, compared with what was seen in the September quarter. Asian Paints’ raw material costs are linked to international prices, and a depreciating rupee adds to its input costs.
But sales growth has been better than expected and, combined with falling costs, have had a better-than-expected effect on margins. A late Diwali was one reason, but demand improved too, according to the company.
Asian Paints’ stand-alone business revenue, which contributed to over four-fifths of consolidated revenue, rose by 20% from a year earlier. This was better than the 16.2% growth seen in the September quarter.
Higher spending behind advertising and promotions (A&P) could be one factor, as other expenses (which include A&P) have risen by 23.2%.
A falling raw material price situation had seen the company refrain from hiking prices in the September quarter, and even the December quarter is expected to have seen no significant increase in prices. A combination of stable prices and a strong marketing push may have helped it exceed market expectations. Asian Paints did well at the group level too, with sales rising 18.7%. The international business contributed to this, with Middle East and Asia reporting good growth.
As gross margins rose in the quarter because of lower raw material costs, operating profit rose 26% over the year-ago period. The company’s index of raw material costs for the decorative business fell by 4.8% sequentially. A decline in interest costs and higher other income helped net profit rise 31.5%.
Asian Paints has delivered a sound performance during a tough economic period. Consumers are cutting back on discretionary spends, and a slow real estate market means that primary demand for paint should be weak as well. A benign raw material price scenario should allow it to focus on volume growth and sustain its improved margins through a better product mix.
The company trades at a price-to-earnings multiple of about 39 times its estimated FY13 earnings per share (EPS), and 29 times its estimated FY14 EPS, according to estimates polled by Thomson Reuters. That is expensive, but if it can repeat its December quarter performance in subsequent quarters, then it seems justified.
Its hold in the domestic market, an improved global business profile and falling raw material prices are key factors in its favour. If the macro-environment improves, then its performance can be expected to improve further. In the near to medium term, if the Reserve Bank of India cuts interest rates and brightens the outlook for the real estate and automobile sectors, it will rub off on Asian Paints’ performance and valuations.