(Photo: Mint)
(Photo: Mint)

Asian Paints: Despite double-digit volume  growth, picture isn’t  pretty

  • Volume growth has come at the expense of realizations, as seen by its lower-than-estimated revenue growth
  • Consolidated net profit at 473 crore fell 1.6% year-on-year, lower than Bloomberg’s consensus estimate of 587 crore

Shares of Asian Paints Ltd fell 2.3% on Thursday after the company reported a dull performance in the March quarter. The leader in the decorative paints segment missed expectations on most key parameters. Consolidated net profit at 473 crore fell 1.6% year-on-year, lower than Bloomberg’s consensus estimate of 587 crore. Revenue of 5,018 crore was also disappointing, falling short of the consensus estimate of 5,223 crore.

“While the company has taken price hikes amounting to 6% during fiscal year 2019, the price growth of around 2% for the quarter was disappointing. The product mix is more likely to be skewed towards low-end products such as Putty, which would have led to lower price growth. This has resulted in lower than expected revenue growth for the quarter," Naveen Kulkarni, senior head of research at Reliance Securities Ltd, said in a note.

Operating margin also narrowed, impacted by high raw material costs and advertisement spends. Further, the management said that challenging business conditions affected operations in some of its key overseas markets, especially in Egypt, Ethiopia, Bangladesh and Sri Lanka.

The only bright spot in the results was a double-digit volume growth in its decorative paints business. But investors shouldn’t get carried away by this.

After all, the much-talked about India consumption story has hit a rough patch. March quarter earnings of Hindustan Unilever Ltd showed that fast-moving consumer goods firms were feeling the heat. So, for consumer discretionary products, such as paints, an extended consumption slowdown could translate into subdued demand going ahead.

Analysts also point out that this volume growth for Asian Paints has come at the expense of realizations, as indicated by its below-than-estimated revenue growth. And considering the current volatility in crude oil prices, it is difficult to gauge if raw material pressure is completely out of the way. Since most of the raw materials are imported, a further depreciation in the rupee could add to the pain. Also, in the absence of robust demand, taking further price hikes to protect margins would be tough.

Asian Paints’ shares have declined about 12% from their highs in April this year. But as for valuations, akin to most firms in the consumption basket, its price-to-earnings (P-E) multiple remains high. As the alongside chart shows, the stock trades at a one-year forward P-E of 46 times and is the most expensive listed Indian paint stock. No doubt these valuations are expensive and what makes them look even more unjustified is this lacklustre earnings performance.