While the company maintains its leadership position, margins could be under pressure as input costs rise.
The stock of Asian Paints keeps hitting new highs and is quoted at a steep premium to its peers. There is a reason behind this. For one, the company has maintained its leadership in the domestic market and has been spreading operations globally. No wonder the company keeps surprising analysts with its strong performance.
Consolidated revenues jumped 32 per cent year-on-year (y-o-y) to Rs 1,877 crore in the March quarter. Reason: Subsidiaries, which account for about 30 per cent of sales, rose at the highest-ever rate of 79 per cent and domestic growth was strong at 18 per cent on a high base of last year. However, domestic revenues were flat sequentially. On an annual basis, operating profit margins expanded lower than expected at 413 basis points to 16.6 per cent, as raw material costs jumped more than 50 per cent and share in revenues leaped by 740 basis points to 56 per cent. However, they remained flat on a sequential basis.
Volume growth is expected to remain strong for the leader, as its distribution network has grown to over 15,000 outlets from around 12,500 a year ago. Moreover, the company is setting up distribution centres near factories to reduce warehouse inventories. Recently, Asian Paints raised prices by three-four per cent to offset increase in input costs and excise duty. Going ahead, analysts expect that a further rise in input costs and rupee depreciation against the dollar will make things worse for the company, since 50-60 per cent raw materials are imported. Frequent steep price rises will be difficult, as demand for decorative paints is likely to be hit due to higher interest rates, affecting new home sales and subdued activity in old homes till the festival season.
However, demand for industrial paints — though a smaller division — has revived with economic growth. Thus, margins are now more vulnerable.
