A leader in the decorative paints segment, Asian Paints Ltd surprised the Street with a strong rebound in sales. Its volumes grew 33% on a year-on-year basis (y-o-y) in the December quarter, much higher than 18-20% growth expected by analysts. The company’s management outlined a combination of factors that contributed to this stellar recovery in volumes. These include pent-up demand from smaller cities and towns and strong festive demand and rebound in Tier-1 demand.
But analysts believe such kind of growth is unsustainable given the rising competition in the paints sector. “While the outlook on demand remains healthy, the extraordinary confluence of positives mentioned above, especially festive season and pent-up demand, may not sustain going forward,” analysts at Motilal Oswal Securities Ltd said in a report on 21 January.
So, investors should not get carried away by the Q3 FY21 robust performance. Analysts at Dolat Capital Market Pvt. Ltd see the company posting mid-teens volumes growth going ahead.
Not only volumes have been strong, but margins also posted impressive growth. Again, they were aided by lower raw material prices and cost rationalization measures, both of which are seen reversing. So, high growth is unlikely to sustain.
In a post-earnings conference call, the company’s management said that since December raw material prices have been seeing an inflationary trend, which would impact costs from Q4 FY21. The management foresees 6–9% basket inflation for now. Further, the company would decide on price increases at a later time based on material cost and rupee movement. Investors should note that paint manufacturers use crude-based raw materials, which are mostly imported.
In the December quarter, gross margins improved by 210 basis points (bps) to 45%. One basis point is one-hundredth of a percentage point. Operating margins rose by 440bps to a record of 26.3%.
Meanwhile, shares of the company rose a little over a percent in opening trade on Friday and currently trade at Rs2733 on the NSE. It should be noted that the stock recently hit its fresh 52-week high of Rs2873.