Mark to Market | Asian Paints struggles with flat revenue; higher input costs

Asian Paints Ltd put up a dismal show on revenues in the September quarter (Q2FY24) due to weak consumer sentiment. Erratic monsoons meant slower pace of growth in rural volumes and product mix was inferior led by the economy range of products. Plus, there was the shift in festive demand by a quarter to Q3 to cope with. Urban markets did relatively better but that could not move the needle enough. In this backdrop, Asian Paints’ volume growth in the domestic decorative business (forming 84% of FY23 revenues) stood at 6% in Q2, down from 10% in Q1FY24, and 16% in Q4FY23. Thus, consolidated total operating revenue rose by a mere 0.2% year-on-year to 8,479 crore.

“Even as we were expecting deceleration in growth (from 7% year-on-year in Q1), owing to the late festive season, we are negatively surprised by flat revenues,” said analysts from Kotak Institutional Equities. It looks like demand has deteriorated even after factoring in seasonality, they added.

All eyes are now on how the ongoing December quarter (Q3FY24) pans out. The management is optimistic that sales growth would be brighter in Q3 helped by strong festive and wedding season demand. It expects to clock double-digit volume growth ahead. For now, analysts have slashed their respective earnings estimates for FY24 and FY25, also to factor in the recent surge in input costs. This could mean that the huge margin expansion seen in the first half of FY24 would not repeat in the second half. Asian Paints saw solid Ebitda margin expansion of about 540 basis points in the first half of FY24 amid softening input costs to 21.7%. This boosted overall earnings growth in the past two quarters even as revenue growth was muted. The management aspires to maintain Ebitda margin within the range of 18-20%. But elevated crude prices pose a risk to margin.

Competition Loom

Meanwhile, a potential rise in competitive intensity is a looming threat. New players, including Grasim Industries, have entered the paints sector. Thus, the impact on pricing needs to be closely tracked. Here, Nomura believes rising competitive intensity will have a delayed impact (if any) on Asian Paints’ sales and margins. Be that as it may, valuations do not offer comfort. Asian Paints’ shares trade at close to 50 times estimated earnings for FY25.

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