Asian Paints’ Q4 is a pleasant surprise

Price hikes and control over costs lead to highest gross margins in four quarters

Asian Paints’ performance for the quarter ending March (Q4) suggests demand is reviving, and offers some pleasant surprise. Volume growth was ahead of 7-8 per cent estimated by analysts, and was led by revival in the rural economy. The firm gets about half its revenue from rural markets. “The decorative paints business in India registered double-digit volume growth in the March quarter with improved demand conditions,” said K B S Anand, MD & CEO, Asian Paints, in a release.

Better demand also enabled the company to take price hikes, which in turn helped cushion cost pressures and improve margins. Asian Rawmaterials % of sales Gross profit margin (%) 56.30 43.70 Paints reported a 43.2 per cent consolidated gross profit margin, the highest in the past four quarters. This was also the second consecutive quarter of gross margin improvement. Gross margin is the difference between net sales and cost of goods sold, as a percentage of net sales. But, high input cost pressure (raw material costs increased by 15.7 per cent year-on-year or y-o-y) meant that the gross margin was still 47 basis points (bps) lower than in the year-ago 57.20 42.80 58.70 41.30 57.80 42.20 56.80 43.20

quarter. More price hikes in the offing should help sustain/improve gross margins, and offset the pressure on account of rising crude oil prices, to which some of its key inputs are linked.

Apart from price hikes, cost control led to a 62-bp y-oy expansion in earnings before interest, tax, depreciation and amortisation (Ebitda) margin to 18.7 per cent. “Asian Paints’ ability to pass on input cost pressure due to its position enabled it on the margin front,” said Sachin Bobade, analyst at Dolat Capital.

Price hikes along with higher volumes led to a 14.7 per cent y-o-y growth in top line in Q4 to ~44.84 billion.

Net profit (from continuing operations) grew by just 4.2 per cent y-o-y, below estimates of 11-13 per cent growth, because of a 30 per cent jump in tax outgo to ~2.88 billion. Pre-tax profit was up 12.4 per cent.

Analysts expect a strong recovery in rural demand led by a good monsoon and increase in farm incomes to benefit the company in FY19 in terms of volume growth. Although small, its home improvement business also saw healthy growth and a sharp reduction in losses.