Asian Paints: Near-term catalysts missing

Volume growth under pressure for second quarter in a row

Asian Paints’ March quarter results missed Street expectations on all fronts. Weak domestic volume growth (estimated at three-four per cent) was the key culprit for this poor show. Notably, domestic volume growth has fallen from 10-12 per cent between March 2014 and September 2014 to three-four per cent in the past two quarters.

For the March quarter, consolidated net sales grew 6.9 per cent year-on-year (y-o-y) to Rs 3,490 crore and was 4.2 per cent lower than the Bloomberg consensus estimates of Rs 3,644 crore. Subdued demand across both decorative and industrial segments impacted top line. Consolidated net profit stood at Rs 341 crore, up 18.8 per cent y-o-y, aided by strong 117 basis-point y-o-y expansion in earnings before interest, taxes, depreciation and amortisation (Ebitda) margin to 16 per cent. While the profit growth was healthy, it fell short of the Bloomberg expectations of Rs 378 crore by 10 per cent.

 

  The scrip fell 2.8 per cent to close at Rs 768 on Monday, reacting to dismal results, compared with the 1.3 per cent gain for the BSE Sensex. The stock currently trades at a rich 37 times FY16 estimated earnings. However, analysts could trim their earnings estimates for the company to factor in the weak show. Continued weakness in performance for the second quarter and the fact that the overall economic environment remains subdued indicates demand revival will be more gradual in nature. This means the stock could remain under pressure in the near term.

A sharp 720 basis-point y-o-y fall in input costs to 49.8 per cent of sales fuelled the margin expansion in the quarter. Higher other income (up 36.4 per cent y-o-y to Rs 42 crore) further aided bottom line. Titanium dioxide, a crude oil derivative and key input for paint companies, has witnessed softening prices in tandem with weakening crude prices. This, in turn, has led to significant input costs savings for the company.

However, Asian Paints took a two per cent price cut in its decorative paints segment from March 1, as it intends to pass on some of the gains to the end users. The full impact of this price cut will be visible in the current quarter and might provide some push to volumes.

Ebitda margin expansion in the quarter could have been higher but for the muted show of international business (19 per cent of revenues). While international revenues grew 11.2 per cent y-o-y to Rs 644 crore, Egypt was impacted by weak consumer sentiments. Lastly, the recent rebound in crude oil prices could also take away some of the gains on the cost front in the coming quarters, and needs to be watched.