Stocks

Why Asian Paints continues to draw investor interest

Bavadharini KS BL Research Bureau | Updated on October 24, 2019 Published on October 24, 2019

Strong pricing power, good volume growth in the economy products segment and a well-entrenched distribution network are key positives

The stock of Asian Paints, one of the largest paint-makers in the country, has rallied over 55 per cent in the last one year in an otherwise volatile market. This is thanks to softening crude prices and strong sales in the economy products category in the last one year.

Also, strong volumes despite slowing consumption, good pricing power aiding margins, and market share gains, are key positives boosting the company’s growth.

In the recent September quarter, the company registered revenue growth of 9.4 per cent to Rs 5,051 crore with high double-digit volume growth. The company’s profit grew 67 per cent in the September quarter aided by deferred tax reversal of about Rs 150 crore. Since the company has exercised the option to adopt the new corporate tax rate of 25.17 per cent (inclusive of surcharge and cess), there has been a significant jump in the net profit.

Economy products drive growth

Despite the slowdown in the economy, led by fall in consumption and tight liquidity conditions, Asian Paints has delivered strong double-digit volume growth driven by the decorative paints segment.

The company derives over 75 per cent of its revenue from decorative paints and the remaining from the industrial segment. The aggressive sales push efforts taken by Asian Paints at the dealer level, along with higher sales from the lower-end products such as putty, distemper and economy paints, boosted the volumes in the decorative paints segment. The stable demand in the rural and small markets is another contributing factor for revenue increase.

In addition, the company’s efforts to improve market penetration, and expand to newer markets appear to have paid off and are driving demand for decorative paints. The company’s strong initiative in promotional and marketing activities, along with market share gains, have helped revenue and profit growth of the company in the first half of this year.

The benign raw material costs (as a percentage of sales) gave respite to Asian Paints, which had taken several price hikes last year. For the September quarter this year, raw material costs (as a percentage of sales) stood at 55 per cent, 100 basis points lower than in the same period last year. While crude prices had been volatile in the recent months, it is still at around $58 per barrel, lower than in the same period previous year ($79 per barrel).

The company was able to push stocks to dealers at better rates and improve margins. Its operating margin improved to 19 per cent in the September quarter, up from 18 per cent in the same quarter last year.

While the industrial paints segment was adversely affected due to the slowdown in the automobile industry, the volume growth from the decorative paints segment was able to offset the pain to a large extent.

Going ahead, the company’s margin outlook will depend on crude price movements. Though the company had been able to pass on the crude price hikes in the past, it needs to be seen whether it has enough leeway to hike prices in future as well, given the consumption slowdown.

 

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Published on October 24, 2019
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