Pent-up demand, rural markets drive Asian Paints’ performance2 min read . Updated: 22 Oct 2020, 09:37 PM IST
Its volumes in the key decorative paints business grew over 11% in the quarter, the management said in a call with analysts
Asian Paints Ltd is not the kind of stock where huge earnings surprise. It has been rewarded for its consistent pace of earnings growth. But pent-up demand after the lockdown in Q1, and demand for economy paints in rural areas helped it beat earnings estimates significantly in the July-September period.
Its volumes in the key decorative paints business grew over 11% in the quarter, the management said in a call with analysts. What’s more, earnings before interest, tax, depreciation and amortization (Ebitda) jumped 32% year-on-year to ₹1,265 crore, 10-12% higher than analysts’ estimates. Kotak Institutional Equities analysts, for instance, had estimated its Q2 Ebitda at ₹1,120 crore.
Volumes continued to be supported by demand for economy paints from rural areas ahead of the festive season. Dealer channel checks show demand for low-end interior and exterior paints increased in late June. According to dealers, except for west India, the sales momentum continued for such products in the quarter.
In a post-earnings conference call, the management said decorative paints demand was supported by tier-II and tier-III markets. It’s little wonder that sales grew 6% in value terms, far lower than the 11% increase in volumes.
The management refrained from giving any outlook on sustenance of demand. However, the company is hopeful that a good monsoon and government support would continue to aid the rural economy.
Another positive was the continued improvement in margins. Gross margins and operating margins improved by over 200 basis points y-o-y. One basis point is one hundredth of a percentage point. Margins were helped by lower raw material costs. “Paints raw material index was down 9% y-o-y in Q2, but deflation much more significant on one-quarter lag basis (-19%), which coupled with operating leverage would drive strong earnings growth," JM Financial Institutional Securities Ltd analysts had said in a preview note.
Besides, some cost rationalization, primarily due to low promotional expenses, helped as well. The management said it will continue to incur critical expenses in view of the overall economic uncertainty. Considering that crude prices won’t spike in a hurry, analysts are not too worried about the rise in input costs. However, ad spends are likely to rise in the December quarter owing to the festive season. So, some margin compression is likely compared to Q2 levels.
But while earnings in Q2 were impressive, they were not enough to support Asian Paints’ rich valuations. The stock is trading at a one-year forward price-to-earnings (PE) multiple of 59 times. In fact, the lack of new triggers for the stock, and pricey valuations prompted investors to book profits post Q2 results. Despite decent results, the stock corrected after earnings were announced on Thursday, ending the day’s session in the red.