Home >Markets >Mark To Market >Demand from smaller cities saves Asian Paints, but stock stays pricey

In a dull quarter severely hit by the coronavirus crisis, Asian Paints Ltd’s double-digit volume growth in its decorative paints business paints a consoling picture.

Its June-quarter earnings were much better than what many analysts had pencilled in. Thanks to lower tax expenses, the fall in profit-after-tax was contained to a certain extent.

Still, the consolidated net profit in the June quarter plunged 66.7% year-on-year (y-o-y). Revenue from operations also declined 42.7% y-o-y.

Lower raw material prices and stricter cost-control measures helped expand the company’s margins in the quarter.

But wait. Before one gets carried away, note that these figures come on very low expectations as the discretionary sector has been the worst hit by the covid-19-led lockdown. More importantly, it remains to be seen if this demand growth trajectory in June persists.

An expensive bet
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An expensive bet

A key concern is that much of this volume growth, driven by smaller cities and towns, may be pent-up demand.

In a post-earnings conference call with analysts, the management said April was a complete washout. However, demand from tier-II, -III and -IV cities was much better in June. On the other hand, business in tier-I cities and metros was much slower.

“There could have been some pent-up demand from March, which may have come in May. But the demand in June may not necessarily be entirely pent-up demand. There could have been fresh business in terms of re-painting. Metros and many tier-I cities now continue to be impacted by covid. West India was most strongly affected for us, overall," the management said.

Akin to many other companies, Asian Paints’ management refrained from providing any “guidance" regarding volumes or margins. “We are looking at the situation from a quarter-to-quarter perspective in terms of how soon business normalcy returns. But in terms of greater demand, tier 2-4 cities and towns have far outgrown metros and tier-1 cities," the management added.

Meanwhile, the shares of the company ended Friday’s session in the red at 1,717 on the NSE. From its recent lows in March, the stock has re-couped losses.

However, some analysts caution that the coronavirus-induced pain may not be completely wished away, since the general outlook for the consumption sector for fiscal year 2021 is bleak.

Further, uncertainty regarding income growth and employment opportunities could curb discretionary spending.

As for valuations, the stock now quotes at a rich one-year-forward price-to-earnings ratio of 49 times.

Although this is lower than that of peer Berger Paints India Ltd, considering the dim discretionary demand outlook, it is expensive.

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