Pent-up demand for adjacent products, demand in metro cities led to robust growth in Q4
Investors were resigned to the fact that fiscal 2021 (FY21) results would be severely affected for most industries, hit as they were by the nationwide lockdown last year, and that it would be best to hope for a recovery only in FY22.
But as it turns out, the decorative paints industry is in a different league.
For them, it seems, the drop in revenues during the lockdown last year was a mere postponement of demand, with growth in the second half of the year more than making up for the loss in the first half.
Asian Paints Ltd, the leader in the decorative paints segment, reported year-on-year (y-o-y) volume growth of as high as 48% for its India decorative business in the March quarter. This comes on the back of roughly 33% growth in the December quarter. For the full year, volume growth stood at 13%, according to data collated by Jefferies India Pvt. Ltd. What’s more, for the full year, pre-tax profits rose around 20%.
For perspective, note that the market leader in the consumer goods space, Hindustan Unilever Ltd, reported pre-tax profit growth of only around 6% last fiscal. This was despite the fact its volumes were hit to a far lesser degree owing to the lockdown last year.
The company told analysts in a conference call that it has gained market share from firms both in the organized and unorganized sectors. Pent-up demand for adjacent products and better demand in metro cities led to the robust growth in Q4, the Asian Paints management said.
Analysts at Jefferies point out that even adjusted for a favourable base in Q4, the company’s two-year CAGR was strong at 21%. CAGR is short for compound annual growth rate. Increased sales of premium products helped reduce the gap between volume and value growth. Further, the company’s industrial business segment also showed a recovery in the March quarter, the management added.
While volume growth was ahead of expectations, contraction in gross margins came as a dampener. Given the sharp rise in crude-based monomers and a key input material, titanium dioxide, an adverse impact on margins was a given. Consolidated gross margins fell by 270 basis points (bps) y-o-y to 43.2% in Q4FY21. One basis point is one hundredth of a percentage point. Thanks to better operating leverage, Ebitda margin expanded by 130bps y-o-y to 19.8%. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
Near-term performance is expected to come under pressure again due to the regional lockdowns on account of the second wave. In fact, the company faces a double whammy of input cost inflation and muted demand due to the pandemic. It should be noted that Asian Paints did not undertake any price hike in Q4FY21. Effective 1 May, it has raised prices by 2.8%. Since prices of key input chemicals have increased by 10-15% in the last one year, the quantum of price hike would cushion margins partially. So analysts caution that the pressure on gross margin would remain for now.
Analysts say that while the firm’s market share gains are a positive, it would be offset in the near term by the margin pressures and the impact of the second wave. For now, the concerns about input costs have led some brokerages to trim their earnings per share and margin forecasts for FY22-FY23.
Meanwhile, the stock trades at a one-year forward price-to-earnings multiple of 64 times consensus earnings estimates. Even though the stock has corrected this year, valuations remain far ahead of the historical average.
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