Home >Markets >Mark To Market >Before rejoicing about Asian Paints volumes, note  the  rising  input costs

Asian Paints Ltd, a leader in the decorative paints, surprised the street with a strong rebound in sales. Volumes grew 33% on a year-on-year (y-o-y) basis in the December quarter, beating consensus estimates of 12-15% by a huge margin.

A combination of favourable factors has led to this stellar recovery. These include pent-up demand from smaller cities ahead of the festive season and a rebound in tier-1 demand.

In a post earnings conference call, the management said it is cautiously optimistic on the demand momentum. However, a large portion of pent-up demand has already subsumed, it said.

Shining bright
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Shining bright

Short-term demand momentum is favourable, said analysts at JM Financial Securities. “However, some of these factors are not likely to stay for long, unless the feel-good factor returns for real to all parts of the economy soon," the analysts said in a report on 21 January.

Such volume growth performance is unlikely to continue for long. “We expect domestic decorative volume growth to normalize to 10-12% range from Q2FY22 onwards as the next two quarters will see bumper growth aided by favourable base," analysts at PhilipCapital (India) Pvt. Ltd said.

Asian Paints also reported a record operating margin growth of 26.3%. The 440 basis points (bps) Ebitda margin improvement was driven by cost rationalisation and benign raw material prices. One basis point is one hundredth of a percentage point. Ebitda is short for earnings before interest, tax, depreciation and amortisation. Gross margins rose by 210bps to 45% in the December quarter.

The management highlighted that low-cost inventory and sourcing/formulation efficiencies aided gross margins. However, input cost inflation is catching up. The management said that input cost inflation of 6-9% led by crude derivatives and monomers will impact the Q4FY21 gross margin.

Crude derivatives are estimated to form around 60% of the cost of goods sold for paint companies. Titanium dioxide (TiO2), a key pigment, forms around 25% of the total content of paint.

The management said that it is contemplating a price increase at premium end of the portfolio and some absorption at the value end. Paint companies have not taken any price hikes since December 2019.

The quantum of price hikes will decide the future course of margins, according to analysts. However, with business normalisation, some variable costs would make a comeback. So, such high margin growth is unsustainable. Also, with competition increasing, the company may take a hit on margins to push volumes, analysts said. What makes analysts more uncomfortable is the stock’s rich valuation. On a one-year forward price-to-earnings (PE) basis, it is trading at a multiple of 68 times, according to Bloomberg data.

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