The impact of the countrywide lockdown for decorative paints company Asian Paints Ltd was lower-than expected in the March quarter. The company reported low single-digit volumes growth of around 3%, analysts estimate. This is better than many consumer goods companies, where volumes declined in Q4. Asian Paints shares surged more than 4% on the NSE on Wednesday, ending the day’s session at ₹1,748.
The company’s consolidated net profit and revenues declined by 2% and 7% year-on-year, respectively, in the March quarter.
The company’s decoratives business witnessed double-digit volume growth in the months of January and February, while the lockdown resulted in lower sales, its management said. In a conference call with the analysts, the company management added that its international business growth was led by Africa, Middle East, and Egypt, while Nepal, Bangladesh and Sri Lanka saw a decline in business.
Speaking of the current scenario, the management said that business has resumed in most markets, with a good pickup in smaller towns. However, metros and Tier-1 cities still remain under severe pressure owing to increasing coronavirus infections. Its management further added that demand has started to normalise in June and Asian Paints is operating at about 70% capacity. But given that consumers have cut down on discretionary spending, and given the hesitancy in allowing people inside homes, near-term paint demand is expected to be relatively weak.
Coming back to Q4 results, the Street was also impressed with the company’s gross margin growth seen in the March quarter. The company continues to reap benefits from benign raw material costs. According to analysts, the company’s gross margin expansion of 430 bps year-on-year to 45.8% is a key highlight. One basis point is one hundredth of a percentage point. Q4 gross margins were close to all-time peak levels.
It should be noted that margin growth came about despite higher sale of low-value products. But as per the management, the gross margin of several low-value products is broadly similar to premium products and strong margin expansion despite product mix deterioration should allay the Street’s concerns on this front.
Further, improvement in margins is also driven by the company’s actions on the sourcing and formulation front. While the company did not change pricing in the first half of the calendar year, it intends to pass on some raw material benefit to consumers going ahead.
Analysts expect margin expansion to continue in fiscal year 2021. However, gains could be capped due to weak sales and likely price cuts.
Meanwhile, Bloomberg’s estimates show that shares of the company trade at a one-year forward price-to-earnings multiple of around 60 times. This valuation multiple is expensive considering that corona-led downside risks to demand growth are not completely out of the way.
