News Analysis

Asian Paints puts up a strong performance

Bavadharini KS | Updated on January 22, 2021

Mainstay decorative segment drives growth

BL Research Bureau

With economy almost fully opened up across sectors and services and improvement in demand conditions, particularly during festive season, Asian Paints reported solid earnings growth during the third quarter of FY21. Its December quarter results were ahead of market expectations, driven by healthy growth in its decorative segment.

The country’s largest paint company registered a revenue growth of 25 per cent y-o-y to ₹ 6,788 crore, while its net profit grew 62 per cent y-o-y to ₹1,265 crore.

The mainstay business for the company, the decorative segment, witnessed strong double digit volume growth aided by good demand conditions, particularly in semi-urban and rural areas. The metro and urban regions which were sluggish in the last two quarters, also reported strong growth in volume, according to the management. International business, which represents a little over 10 per cent of revenue also saw recovery and grew 22 per cent y-o-y.

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Broad based recovery

Asian Paints derives nearly 80 per cent of its revenue from the decorative paints business. With improving demand in real estate, especially in affordable and mid-income housing categories, the demand for paints also improved. According to the management, the demand recovery was visible across its decorative product segments — premium, luxury and low-end products (putty and distemper). The company reported 33 per cent volume growth for the quarter (26 per cent value growth).

A similar trend was witnessed in industrial paints segment, which accounts for about 20 per cent of the company’s revenue. This is mostly thanks to the recovery in automobiles sales. The growth in the industrial paints segment was mostly led by protective coatings and Auto OEM businesses.

On the input cost front, with the crude prices remaining stable, the cost of raw material too remained stable in this quarter, following the trend from the previous two quarters. The raw material cost (as a percentage of sales) is at 42.6 per cent in Q3FY21 (42.5 per cent in Q3FY20).

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 2020 has translated into lower raw-material costs for paint companies and boosted their margins. The EBITDA margins, for the December quarter of FY’21 was 28 per cent, up from 22.3 per cent same period last year. With crude oil prices range bound throughout second half of last year, the company was able to improve its margins in the last 2 quarters as well.

Asian Paints posts flat net profit at Rs 852 cr in Sept quarter

Outlook

If the pace of demand improvement in real estate continues, it 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.

Though the raw materials cost had been stable in 2020, any spike in the input costs could have a negative impact on its margins. According to the management, the raw material costs had a sharp inflation in the month of December. But the company has not taken any price hike to pass on the increase so far and intends to see if the inflation sustains before deciding on price change.

Published on January 22, 2021

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