Street unconvinced by Asian Paints’ June recovery

Revenue down by 43% and PBT 70%; scepticism is around sustenance of volume recovery

The June quarter (Q1) was expected to be a complete washout for companies operating in sectors like paints because of the Covid19 disruptions. For Asian Paints, too, analysts had estimated volumes to plunge by 50 -55 per cent year-on-year (YOY).

However, the decorative paints leader surprised the Street not only with betterthan-expected numbers, but also with good volume recovery — 14 per cent growth — in June, and volume decline was also lower than expected.

On a consolidated basis, Asian Paints reported a 42.8 per cent YOY decline in revenue to ~2,923 crore, while profit before tax was down 70.2 per cent YOY to ~306 crore. According to a Bloomberg poll, the Street was expecting these two numbers at ~2,324 crore and ~194 crore, respectively.

The sharper beat in bottom line was mainly because of tight control on operating costs — administrative, and sales and distribution — besides benign raw material prices.

With a 110 basis point YOY expansion i n gross profit margin and around 37 per cent YOY decline in other operating expenses, Asian Paints’ Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin contraction of 611 bp to 16.6 per cent was better than analysts’ estimates of 13.5 per cent.

The company ’s Q1 volume decline of 35-40 per cent (analysts’ estimates, as company does not share volume data) was mainly due to the lockdown, and was better than expectations. The management’s commentary about sustaining June volume recovery, if there are no major l ockdowns, offers comfort.

However, there is an element of scepticism on the outlook.

Vishal Gutka, vice-president at Phillipcapital, says: “Sharp volume recovery in June was mainly due to pent up demand. We believe the volume recovery pace is unlikely to remain strong going ahead due to lower special occasions such as weddings.”

There are also worries about how volume growth pans out in rural and semiurban areas, given the increasing spread of Covid19 there. Some economists also believe that gains from government schemes and higher farm incomes might be offset by factors such as lower remittances as workers have migrated back to villages.

The volume recovery in June was also driven by semi-urban and rural areas, which account for around 50 per cent of Asian Paints’ revenues.

While the management expects the demand momentum in these areas to continue, the jury is out on this.

Overall, the stock, which is already enjoying rich valuations of 63 times FY21 estimated earnings, is unlikely to see significant upside unless there are clear signs of sustainable volume recovery, caution analysts.