Asian Paints: Benefits of lower GST in Q2 come at cost; volumes surge 12%

Asian Paints’ September 2018 quarter (Q2) numbers show that benefits of higher volumes have come at a cost. Consolidated net profit reported by the paint major was not only 14.8 lower than the year-ago quarter but also below the street’s expectations. High inflationary pressure, besides expected start-up cost on its new Mysuru plant, hurt the company’s bottom-line. The recent cut in goods and services tax (GST) might have helped the company to push up its volumes, which rose by 12 per cent on expected lines and drove the top-line. However, the strict anti-profiteering clause of the GST restricted the company’s ability to pass on the high input cost burden to customer.

The company’s management, during June-2018 quarter earnings call, had mentioned about high input cost pressures and deferment of price hikes amid anti-profiteering clause after the GST was slashed from 28 per cent to 18 per cent. Thus, Asian Paints had to bear most of the heat from spiralling inflation.

Prices of key raw materials such as crude oil derivatives and titanium dioxide (TiO2), among others, were elevated during Q2, which further exacerbated with a weak rupee against USD. Resultantly, Asian Paints gross margin fell by 148 basis point year-on-year to about 40 per cent. What added to the woes is the company’s inability in terms of cost efficiency. While employee cost as a percentage of net sales remained almost flat year-on-year, other operating expense rose 39 basis points year-on-year. Thus, earnings before interest, taxes, depreciation and amortisation (EBITDA) margin moved down by 188 basis points year-on-year to about 17 per cent. In fact, this was after three consecutive quarters that the company’s operating margin contracted on a year-on-year basis.

Despite the 12 per cent volume growth, net sales rose by just 8.8 per cent. Some analysts believe the company might have given some incentives in Q2 for filling the channel with stocks before the festive season begins. The current festive season and commissioning of new plants thus should spur volumes further. While the company’s analysts call on Tuesday would provide more details, it stance in terms of pricing action and margin protection would be key to watch.

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