The stock of Asian Paints, among the largest paint-makers in the country, gained about 1 per cent on Friday on the back of good earnings during the September 2020 quarter. The company’s pace of recovery has been better than industry estimates.
It registered a strong double-digit y-o-y volume growth during the second quarter, mainly driven by the decorative business segment, the company’s mainstay business. Revenue grew 6 per cent y-o-y to ₹5,350 crore while profit grew 1 per cent to ₹852 crore. The profit growth was dragged down mainly by high tax expenses (increased by about 40 times y-o-y) and increase in employee costs (by about 9 per cent y-o-y).
Stable raw materials price and increase in sales across product segments helped the company’s performance in the recent quarter. With softening crude-oil prices cushioning the blow for paint companies, stocks of paint manufacturers have been resilient amid market volatility due to Covid-19. Since January this year, the Asian Paints stock has surged 18 per cent.
Strong fundamentals, negligible debt levels, healthy cash flow and strong market presence of the company are key factors in the company’s quick recovery.
ALSO SEE:Asian Paints posts flat net profit at Rs 852 cr in Sept quarter
Improving business environment
Asian Paints has seen improving demand conditions across its markets since lifting of lockdown restrictions in the country since May this year. According to the management, the demand recovery was visible across its decorative product segments — premium, luxury and low-end products (putty and distemper).
Similarly, demand improvement could be seen in industrial segment as well thanks to the recovery in automobiles sales. This led to the company registering 11 per cent volume growth, mainly due to decorative business. However, in value terms the revenue grew only 6 per cent y-o-y; this could be attributed to higher sales in Tier-II and Tier-III cities. According to the management, the metro cities are yet to rebound to pre-Covid levels.
The decorative segment is the key contributor (about 84 per cent) to the overall revenue, while the remaining 16 per cent comes from international business and industrial segment including automotive and coatings.
Further, gradual recovery in the residential real estate market, particularly in the affordable housing segment, could aid the growth of Asian Paints going ahead. Also, the company, being a market leader, should benefit from improvement in industrial output and improving prospects in infrastructure.
Stable input costs
For paint companies, the cost of crude oil plays a significant role as most of their raw materials are crude oil derivatives. Benign crude price since the beginning of 2019 has translated into lower raw-material costs for paint companies and boosted their margins.
For Asian Paints, in the September 2020 quarter, the raw material cost (as a percentage of sales) stood at 49 per cent, lower than the 55 per cent in the same quarter last year. Thanks to the cost rationalisation measures taken by the company since announcement of lockdown measures this year, its operating margin improved to 25 per cent in the recent September quarter from 21 per cent in the year-ago period.
While the demand improvement seems favourable given the ongoing festive season, sustaining the volume growth, going ahead, will be key. On the raw material cost front, the crude oil prices are likely to remain stable in the next few quarters.
ALSO SEE:Paint companies’ revenue to fall for first time in 10 years: Crisil
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