The company's gross margin contracted by 270 basis points due to elevated raw material cost. However, tight cost control on employee and other expenses, led to an expansion in operating margin.
Leader in decorative paints segment, Asian Paints Ltd saw volumes growth of 48% in the March quarter compared to the same period last year. A low base coupled with pent-up demand for paints and adjacent products, pick-up in demand from metros resulted in this strong volumes growth. In value terms, it saw a year-on-year growth of 46% in the March quarter. Increased sale of premium products has helped reduce the volume and value gap, analysts said. It's industrial paints business segment also showed recovery.
As anticipated, the company's gross margin contracted by 270 basis points (bps) y-o-y to 43.2% in Q4FY21 due to elevated raw material cost. One basis point is one hundredeth of a percentage point. However, tight cost control on employee and other expenses, led to an expansion in operating margin.
Going ahead, investors in the stock need to brace up for some near-term challenges, which could weigh on its earnings. The company faces a double whammy of input cost inflation and muted demand due to the pandemic spread. It should be noted that Asian Paints did not take any price hike in Q4FY21. It is only recently that the company has raised prices by 2.8%, but this would only cushion the margins partially. So, analysts caution that the pressure on gross margin would remain for now.
Demand for economy paints from smaller cities and towns has been a key volume growth driver for Asian Paints from the past few quarters. But now with the second wave of infections fast spreading in the rural areas, the short-term paint demand could take a hit.
On the bright side, the company's management said that it continues to gain market share from the unorganised sector. Analysts say, while this positive, it would take time to reflect in earnings performance, for now, the Street is likely to be concerned about the aforementioned issues.
"Lockdowns and raw material inflation would restrict growth in the near term. Consequently, we have downward revised our earnings per share estimates for FY22E at ₹36.5 (-7.0%)," analysts at Dolat Capital Market Pvt Ltd said in a report on 12 May.