There are shades of brightness in paint maker Asian Paints Ltd’s March quarter financial results. The decorative paint business in India has registered double-digit volume growth, thanks to better demand conditions. What’s not to like about that? Especially when this comes after three quarters of single-digit volume growth. Besides, operating profit margin rose, aided by the growth in volumes and some price increases.

But the cheer hasn’t spread all the way down to profits. A higher tax outgo and a decline in other income took a toll on net profit. It grew at a much slower pace of 4% to Rs496 crore, and was lower than Street expectations.

And that’s not all. Things are a bit dull when it comes to the company’s full-year numbers. At the beginning of fiscal year 2018 (FY18), Kotak Institutional Equities had forecast Asian Paints to grow its earnings per share by 20% from FY17. The company eventually ended up growing earnings by only 2.5%. Needless to say, that’s a big miss. The gap between expectations and actual performance was large in FY17 as well.

“Expectations from FY2018 were high to begin with; GST (goods and services tax), good monsoons, busy state election cycle and the then-benign raw material environment were seen as a potent combination of tailwinds," wrote Kotak analysts in their note to clients. In this backdrop, performance has fallen far short of expectations. It’s little wonder that the company’s shares have underperformed the market in the past year.

Still, valuations are rich at 48 times estimated earnings for this fiscal year. Investor expectations remain lofty, despite big misses on past expectations.

Kotak’s analysts say, “Clearly, narrative is the only thing that matters for the Indian FMCG (fast-moving consumer goods) stocks, for now. Poor delivery? No fuss."

Going ahead, there isn’t much relief on the costs front either. Raw material prices of titanium dioxide, rutile and other crude oil-based inputs are inching up and these should weigh on profit margins in the coming quarters.

The silver lining is that Asian Paints has taken price increases to offset cost inflation, and that has helped in revenue growth. But whether earnings growth catches up with the company’s sky-high valuations this year, that’s another matter altogether.

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