The stock of Asian Paints, one of the largest paint makers in the country, gained 3 per cent today on the back of improved volumes towards the end of the quarter ended June 2020. Revenue for Q1 FY21 fell 43 per cent y-o-y to ₹2,923 crore due to weak business in April and May, following the lockdown. It reported a profit decline of 68 per cent to ₹219 crore in Q1 FY21 compared to the same period last year.

With softer crude oil prices cushioning the blow for paint companies, stocks of paint manufacturers have been resilient amid the market volatility due to Covid-19. Since January this year, Asian Paints has corrected by just 1 per cent.

While the improvement in volumes in the June quarter could be attributed to release of pent-up demand in the market after the initial lockdown, the impact of the pandemic could keep growth subdued for Asian Paints in the near term. Given that many are facing pay-cuts and some job losses, there could be a postponement of painting/re-painting requirements. Prospects for the industrial segment too, will improve only when demand for automobiles improve.

However, though the short-term environment is challenging, the fundamentals of the company remain strong. Asian Paints has negligible debt levels and healthy cash flow.

Volume improves

Asian Paints’ mainstay business segment, decorative paints, witnessed improvement in demand conditions during the June quarter of FY21. According to the management, the business picked up in tier II and III cities, while metro cities and some tier I cities continued to see demand slowdown. The company was able to achieve double-digits volume growth of more than 14 per cent in the month of June, thanks to the easing of lockdown restrictions in many places. This was achieved on the back of pushing upgradation and premium range of products across categories and markets.

Asian Paints derives nearly 70 per cent of its revenue from the decorative paints segment, while about 30 per cent comes from the industrial segment (including automotive and coatings). Given the uncertainties of the Covid-19 pandemic and many states announcing control measures sporadically, demand is expected to remain weak in the near term.

However, the company, being the market leader in paints in the country, should benefit from strong growth drivers when the situation improves. These include the government’s push to the housing sector, improving prospects for the farm sector which should aid rural income, and benign interest rates that should aid housing demand. These factors should translate into good volume growth for Asian Paints, especially in the decorative segments later on. A pick-up in auto sales in the medium term will give a fillip to the industrial segment.

Low crude prices to help

For paint companies such as Asian Paints, raw materials include titanium dioxide, zinc oxide, solvents, and additives (essentially crude oil derivatives). Benign crude prices help in the form of lower raw material costs for paint companies, which in turn, boost margins.

For Asian Paints, in the June quarter, raw material cost (as a percentage of sales) stood at 46 per cent; this was about 5 percentage points lower than in the same quarter last year (51 per cent in June quarter FY19). Despite lower raw material costs, the company’s operating margin fell to 18 per cent in the June quarter, from 24 per cent in the same period last year. This is mainly due to the company’s change in product mix (focus on economy products) in the last two-four quarters. While crude prices have been inching up recently, it is still at $40-45 per barrel (lower than the $66 per barrel in the beginning of FY20). This can cushion the margins to an extent.

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