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Asian Paints Ltd, the leader in the decorative paints market, displayed resilience in a quarter marred by covid-related regional lockdowns. The low base of last year pushed its volumes in this segment to an abnormally high year-on-year (y-o-y) growth of 106% in the June quarter (Q1FY22). But even on a two-year CAGR basis, which eliminates the effect of last year’s low base, volumes grew by a healthy 13%. CAGR is short for compound annual growth rate.

In a post-earnings conference call, its management said demand took a hit in mid-April and May. However, volumes recovered in June, aided by pent-up demand, so overall sales in Q1FY22 didn’t see much impact.

Asian Paints continues to gain market share from unorganized firms, which also drove sales. While regional paint-makers are performing well, those with a pan-India presence are struggling with supply chain issues and this has helped Asian Paints, the management added.

The management is upbeat on the demand outlook as the reported number of covid-19 cases continue to decline. The Asian Paints stock mirrored this optimism. Shares of the company rose 6% on Tuesday following the earnings announcement to hit a new 52-week high of 3,179 on the National Stock Exchange.

While volume growth was a bright spot, this came at the cost of realizations and margins. Revenues grew at a far lower rate compared to volume growth, indicating a push of products lower down in the value chain.

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Satish Kumar/Mint


Besides, gross margins at the standalone entity fell over 500 basis points (bps) to 39.6% sequentially and nearly 700bps compared to the same quarter last year. One basis point is one-hundredth of a percentage point.

Operating margin at the consolidated level stood at 16.4% in Q1FY22 and was at a multi-quarter low.

In a bid to tackle cost inflation, Asian Paints took a 3% price hike in the June quarter. The management said that it had the elasticity to take sharper price increases, but it chose to do it gradually to avoid destabilizing demand. The management has indicated further price hikes and aims to maintain operating margin in the 19-21% range.

Analysts say the quantum of price hike is inadequate as costs have risen by 13-15% in Q1FY22, and this is likely to keep margins under pressure unless input costs soften.

“The rally in the stock indicates that the Street’s focus is on volumes rather than margins. That could be because of new firms such as Grasim entering the industry. Investors seem to have overlooked the pressure on margins, which could lead to a negative reaction in the stock if margins continue to disappoint and earnings need to be downgraded," said an analyst with a domestic brokerage requesting anonymity. For now, investors are lapping up the growth over margins stance taken by the company, on the view that this is the right pre-emptive strategy in the light of Grasim’s entry. But note that valuations remain expensive with the stock trading at a one-year forward price-to-earnings multiple of around 80 times.

“The market expects a repeat of the pent-up demand phenomenon seen in second half of last year, and we have somewhat built those expectations (and perhaps more) into our forecasts, but yet find it difficult to justify the stock’s valuation," analysts at JM Financial Institutional Securities Ltd said.

“We are not fans of ‘buy at any price’ and while a great business does deserve a long holding period, taking some money off the table is in order (at current valuations)," the analysts said.

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