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Asian Paints: Despite double-digit volume growth, the picture isn’t pretty
Harsha Jethmalani
Shares of Asian Paints Ltd fell 2.6% on Thursday, after the company reported a dull performance in the March quarter. The leader in the decorative paints segment missed expectations on most key parameters. Consolidated net profit at Rs473 crore fell 1.6% year-on-year, lower than Bloomberg’s consensus analysts’ estimates of Rs587 crore. Revenues of Rs5018 crore also disappointed, falling short of consensus analysts’ estimate of Rs5223 crore.
“While the company has taken prices hikes amounting to 6% during fiscal year 2019, the price growth of around 2% for the quarter was disappointing. The product mix is more likely to be skewed towards low-end products such as Putty, which would have led to lower price growth. This has resulted in lower than expected revenue growth for the quarter," Naveen Kulkarni, senior head of research, Reliance Securities Ltd said in a note.
Operating margins also fell, impacted by high raw material costs and advertisement spends. Further, the management said that challenging business conditions affected operations in some of its key overseas markets, especially Egypt, Ethiopia, Bangladesh and Sri Lanka.
The only bright spot in the results was a double-digit volume growth in its decorative paints business. But investors shouldn’t get carried away by this.
After all, the much-talked about India’s consumption story has hit a rough patch. March quarter earnings of Hindustan Unilever Ltd showed that FMCG companies are feeling the heat. So, for consumer discretionary products such as paints, an elongated consumption slowdown could translate into subdued demand going ahead.
Also, analysts point out for Asian Paints this volume growth has come at expense of realisations, as indicated by its below-than-estimated revenue growth. And considering the current volatility in crude prices, it is difficult to gauge if raw material pressure is completely out of the way. Since most of the inputs are imported, a further depreciation in the Indian rupee could add to the pain. Also, in the absence of robust demand, taking further price hikes to protect margins would be tough.
Asian Paints’ shares have corrected about 12% from their highs in April this year. But as for valuations, akin to most companies in the consumption basket, Asian Paints’ price-to-earnings (PE) multiple remains high. As the alongside chart shows, the stock trades at one-year forward PE of 46 times and is the most expensive listed Indian paint stock. No doubt these valuations are expensive and what makes them look even more unjustified is this lackluster earnings performance.
