×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Rising costs negate Asian Paints’ hefty volume growth

Rising costs negate Asian Paints’ hefty volume growth
Comment E-mail Print Share
First Published: Wed, May 11 2011. 10 25 PM IST
Updated: Wed, May 11 2011. 10 25 PM IST
Home makeovers are a rage today, as anybody staying in an apartment complex would know. Renovating flats has become a national pastime. If the sounds and smells of renovation in the vicinity are not enough proof, a look at Asian Paints Ltd’s financial results offers further evidence.
In fiscal 2011 (FY11), the paints firm sold 17% more paint by volume in the domestic market, on top of a 16% volume growth in the previous year. The addition to new houses across the country and repainting of existing and resold houses have contributed to this sizeable growth. Rising disposable incomes have given consumers the ability to spend on renovation, egged on by marketing campaigns from the paint companies.
In the March quarter, Asian Paints’ volume growth was about 12%, according to a research note from Emkay Global Financial Services Ltd. That is good, considering that it now had to show growth on a relatively higher base. Its stand-alone sales rose by about 24% year-on-year during the March quarter, aided by a cumulative price increase of about 12% during the full year.
Apart from the domestic market for decorative paints, the company’s international business contributes about 13% to sales. Growth during the quarter was affected by the unrest in the Middle East, its largest region by sales.
Asian Paints’ automotive and industrial paints sales were up by about 24% during FY11, chiefly due to higher automotive paint sales. Consolidated sales during the quarter rose by 23% on a comparable basis (the company has changed the reporting period for its overseas subsidiaries).
Though the company hiked prices, it wasn’t enough to cover rising costs, especially in the March quarter. Key raw material for paint companies are pigments, solvents, oils and other chemicals. Packaging is a key cost, too.
Rising costs saw its material costs rise by 31% on a stand-alone basis and by 10% at the consolidated level. Consequently, Asian Paints’ operating profit margins fell by about 2 percentage points. The company has taken price hikes to compensate for rising costs. Apart from the price hike in FY11, it has raised prices by 4.3% in May.
In FY12, margins are likely to moderate somewhat, depending on how raw material prices behave. If disposable incomes keep rising, price hikes will not materially affect volume growth, but if economic growth slows, the impact will become visible. Its international business will continue to be a drag, till the Middle East returns to normalcy.
The stock fell by about 0.5% on Wednesday and trades at 30 times FY11 earnings per share. Its sales growth justifies that valuation, and if it can successfully ease margin pressures though price hikes, so will earnings growth. The key risks are from a slowdown in the volume growth and continued increase in raw material costs.
Graphic by Yogesh Kumar/Mint
We welcome your comments at marktomarket@livemint.com
Comment E-mail Print Share
First Published: Wed, May 11 2011. 10 25 PM IST