Asian Paints firing on all cylinders

All-round growth in Q2, along with healthy prospects, to support high valuations

Continued momentum in domestic decorative paints segment, coupled with healthy margin expansion, aided Asian Paints' performance in the September quarter (Q2). Its net sales growth of 9.6 per cent on a year-on-year basis to Rs 3,721 crore was largely driven by volumes. Company continued to post low double-digit volume growth in the domestic decorative paints segment. Notably, though the demand momentum was healthy, Asian Paints did witness some pressure in western and central India thanks to a prolonged monsoon. Industrial paints, as well as automotive coatings segment, grew well in Q2.

Input cost tailwinds, as well as reduction in total expenses, enabled Asian Paints' operating profit margin to expand 125 basis points to 19.2 per cent in Q2. Savings in interest costs, along with higher other income, largely offset the impact of uptick in tax rate in the quarter. As a result, consolidated net profit grew 18.1 per cent year-on-year to Rs 495 crore.

A key positive in the results was better growth in home improvement segment, which houses the Sleek and Ess acquisitions. This segment's revenue growth improved to 38.4 per cent at Rs 80 crore in Q2, but more importantly, it narrowed its losses by 40 per cent to Rs 8 crore in Q2. International markets performed well, driven by Nepal, Fiji, even as Ethiopia continued to be under pressure.

Asian Paints stands to gain from improving rural demand on the back of implementation of One Rank One Pension, higher pay to government employees, good monsoon, strong leadership, and shortening repainting cycle. Most analysts believe the company is likely to sustain double-digit volume growth in the domestic decorative paints segments. Growth, as well as profitability of its home improvement business, has improved in Q2 and sustainability of this trend will add another growth engine for the company.

  Company is closely monitoring input costs, which have started to inch up. "If prices continue to shoot up, definitely we will have to take price increase action," said the management in a post-results call with analysts. Asian Paints plans to launch new products in its adhesives portfolio, which will take time to sell through its non-paint dealer networks.

Current valuations of 50 times its FY17 estimated net profit seem to capture most of the positives adequately. Though the valuations cap meaningful upsides from here on, the stock is unlikely to correct given the presence of strong growth catalysts, believe analysts.