Amid improved demand and implementation of the goods and services tax (GST), stocks of Asian Paints soared by 26 per cent in the past three months, outpacing the BSE FMCG index growth of six per cent.
In fact, a double-digit volume growth of domestic-decorative paints (estimated at 13-14 per cent year-on-year) in June 2018 quarter, on a lower base price, led to 30.4 per cent year-on-year rise in consolidated net profit to Rs 5.71 billion, beating the Street estimates of Rs 5.13 billion.
With a strong volume growth, the company’s top line grew 15.1 per cent year-on-year. Importantly, the company's gross margin in the first quarter expanded by 40 basis points to 43.2 per cent. This was owing to a price increase of 3.3 per cent (in March and May-2018) and softer titanium di-oxide (key raw material) prices, year-on-year, in Q1. This also boosted operating profit margins (excluding other incomes) by 248 basis points, year-on-year, to about 20 per cent.
Though the company is experiencing input cost pressures (expects 10 per cent inflation during July-September 2018), and it is unlikely to hike prices further given that it needs to pass on benefits of the recent GST cut — to 18 per cent from 28 per cent earlier (anti-profiteering rules).
Thus, how the company protects its margins going ahead would be interesting to watch.
The management, however, says after passing on benefits of the GST rate cut, the pricing gap between organised players such as Asian Paints and unorganised ones will be reduced, shifting demand and market share away from unorganised players. Besides, this would also help them increase the sales of premium products, supporting profitability. The Street will watch out for the extent of price cuts Asian Paints carries out going ahead.
"Demand recovery from rural pockets (50 per cent of the company's business) and a recent GST rate cute is likely to propel Asian Paints' volume growth and overall performance," says Sachin Bobde, analyst at Dolat Capital, who also sees further upside in the stock despite valuation being at the upper end (about 49 times expected FY20 earnings).