Sustained demand momentum to drive profit growth for Asian Paints

Analysts hike earnings estimates but remain cautious over its margins

Shares of Asian Paints gave up early gains on Friday in a weak market and closed 4 per cent lower.

India’s largest paints maker, however, reported results way above Street expectations for the December quarter (Q3).

The firm reported its highest ever quarterly sales, earnings before interest, tax depreciation, and amortisation (Ebitda), and net profit in the period.

Revenues rose 25 per cent to Rs 6,789 crore, driven by 33 per cent growth in decorative-segment volumes. The gains in volumes were much higher than analyst estimates of 19 per cent.

This outperformance was led by a combination of factors including a strong festive season, pent-up demand, recovery in tier-1 and metro cities, and a pick-up in construction. 

The Ebitda margin expanded by more than 400 basis points to 26.3 per cent, driven by lower raw material costs and an improved product mix. This resulted in a 62 per cent jump in the company’s bottom line, which stood at Rs 1,238 crore against Street expectations of Rs 971 crore.

Even as some of these tailwinds would not be present in upcoming quarters, the management remains confident of sustained growth.

“Q4FY21 demand conditions are expected to be strong with robust recovery in consumer sentiment. The roll-out of the Covid vaccination programme augurs well for domestic demand recovery, which should become broad-based and well-entrenched,” said Amit Syngle, managing director and chief executive officer at Asian Paints in an investor call.

However, any surge in pandemic cases in India or abroad could have a negative impact, he cautioned. Given the demand outlook, analysts have revised their earnings estimates higher.

“Asian Paints will continue its strong volume-led growth on superior execution, innovative product offers, and penetration in tier 3-4 towns. Factoring this in, we increase our sales and earnings forecast by 4-6 per cent and 9-10 per cent, respectively, for FY23,” said Abhijit Kundu, research analyst at Antique Stock Broking.

While demand does not seem to be a problem, margins may see some moderation as raw material prices inch higher. Crude oil and derivatives linked to it account for over 60 per cent of the raw material costs and have moved up 6-9 per cent in December.

However, it does not appear to be a serious concern at the moment. Any sharp increase in prices could affect margins though the company has pricing power and could pass on some of the costs.

The Street continues to offer Asian Paints a higher multiple due to its leadership position, high corporate governance standards, a superior balance sheet, and structural tailwinds for the paints industry.

On an FY22 basis, the stock trades at nearly 68 times its earnings and hence investors are advised to accumulate the stock on correction for long-term gains, say experts. Any unexpected slowdown or reduction in demand, a substantial rise in prices of crude oil and titanium dioxide (TiO2), and resurgence in Covid-19 cases are seen as key downside risks.