Despite a demand slowdown, volume growth in decorative paints surprised with decent growth
Margins, in-line with expectations, improved due to easing input costs and lower expenses
Shares of Asian Paints Ltd jumped nearly 6% from their intra-day low on Wednesday after the company reported surprisingly decent June quarter results. Considering the ongoing consumption slowdown, expectations weren’t very high. But Asian Paints reported high double-digit volume growth in its key decorative paints segment. Analysts say year-on-year (y-o-y) volume growth for the June quarter works out to around 16%, higher than the 10.5% growth in the March quarter.
What’s more, the company also exceeded analysts’ expectations on other key parameters such as net profit and revenue.
Consolidated net profit at ₹655 crore was up around 18% y-o-y, beating Bloomberg analysts’ consensus profit estimate of flat profit at ₹550 crore. Similarly, revenue at ₹5,130.63 crore was better than the anticipated ₹4,885.8 crore.
In a post-earnings conference call with analysts, the company management said an aggressive channel push through incentive schemes at its dealers end aided volumes. Besides, it mentioned a low base-effect, since the company had witnessed de-stocking in the year-earlier period in anticipation of a change in goods and services tax (GST) on paints. The company also pointed to some benefits coming from the GST-led demand shift to the organized sector.
But if an aggressive channel push had a role to play, that may mean lower growth in the future. In the quarters ahead, unless demand significantly improves, repeating such a volume growth will be challenging.
After all, the automotive and industrial coatings businesses continue to be impacted by the severe slowdown in the automobile industry and the overall slowdown in the economy.
Of course, none of these challenges were reflected in the first quarter results. Margins improved on the back of benign raw material costs and a stable currency. Prices of titanium di-oxide, a key crude-based input material, have eased by around 10% y-o-y and 6% sequentially. The company took marginal price cuts in some categories to pass on the benefit to customers. Besides, lower overhead costs helped improve margins.
Asian Paints’ closing price of ₹1483.40 on the NSE is not too far away from its 52-week high of ₹1529.85 seen in April. It has largely bucked the bearish trend on the Street.
On the valuations front, the stock is trading at one-year forward price-to-earnings multiple of 52 times. It is the most expensive stock among peers. It is also one of the dearest in the consumption-focused basket of stocks.
Although June quarter earnings may have beaten estimates, there is limited clarity on a revival in consumption. Further, since the company has significant exposure to rural areas, sustaining such a performance would also depend on how the monsoon pans outs, which, so far, hasn’t been impressive. Also, challenges in the international business remain a drag on the company’s overall earnings performance.