Asian Paints: Dull show likely to continue

Analysts likely to trim their full-year estimates following subdued quarterly performance

Asian Paints posted weak numbers for the September  quarter (Q2) on multiple fronts. Consequently, Q2 numbers came in visibly lower than analysts estimates. Softening demand in the domestic decorative paints segment, which contributes around 80 per cent to Asian Paints’ top line and in its key international markets, Nepal and Egypt, impacted net sales in the quarter. While a delayed festive season compared to FY15, too, had a bearing on the top line, it is the weak net realisations that seem to have taken a toll. The management, in the post-results concall, said that domestic decorative paints volume growth stood stable in high-single digits, which analysts were estimating at around 10 per cent. High single-digit volume growth and a mere four per cent rise in net sales suggest net realisations were down. While the company claims it has not taken any price cuts in this quarter, weak realisations seem to be a result of dealer schemes and offers. Nevertheless, net sales at Rs 3,731 crore (up four per cent) grew at the lowest quarterly pace in the past 10-11 years, and missed Bloomberg consensus estimate of Rs 3,918 crore by nearly five per cent.

The industrial segment, though, continued to do well on the back of healthy demand in industrial liquid paints, road markings, refinish segments, among others, but its small size didn’t help much.

Healthy earnings before interest, taxes, depreciation and amortisation (Ebitda) margin was the only saving grace and boosted the bottom line. Benign input costs fuelled Ebitda margins leading to a double-digit growth in net profit. Thanks to lower crude oil prices, the ratio of input costs to sales fell to 52.3 per cent compared to 60.85 per cent in the year-ago quarter. Consequently, Ebitda margin expanded 162 basis points to 16.6 per cent. Although higher minority interest and tax rate partly offset the margin gains, net profit grew 15 per cent to Rs 399 crore and was nearly 10 per cent lower than estimates of Rs 442 crore.

Going forward, Asian Paints’ management remains cautious on demand in both domestic and international markets. Weak monsoon is likely to impact rural demand, partly offsetting the gains from the upcoming festive season. While Nepal market is gradually recovering after the massive earthquake, it will take some time to gather pace. Egypt, too, grew slower than expected and is likely to be under pressure in the near-term. Asian Paints' home improvement business (Sleek and Ess Ess acquisitions), too, is feeling the heat of slowing demand environment. With the company continuing to invest in this business, the same should weigh on its earnings in the interim.

In this backdrop, analysts could trim their FY16 and FY17 estimates for the company. Consequently, the stock, which on Friday's closing price of Rs 857, trades at rich valuations of 37.9 times FY17 estimated earnings, could see some pressure.