Will Asian Paints sustain growth momentum of Q2?

ET Intelligence Group: The Asian Paints stock hit a record high on the eve of the company announcing its September quarter results. The company didn’t disappoint and posted resilient growth — a double-digit increase in volumes and multi-year high margins. Recovery in consumer demand in tier 2,3 and 4 markets ahead of the festive season helped the company post 6% increase in consolidated net sales, operating margin of 24% and an 11% growth in volumes. The volume growth improved in each of the months of the quarter across all ranges of products — economy, premium and luxury with no large-scale down-trading seen. The international market revenues grew in double-digits. The water-proofing portfolio has also expanded. Uptick in the automotive industry led to gradual recovery in part of the firm’s industrial business. Benign raw material prices and effective control on costs have enabled the company to beef up its profitability. Savings on rentals and travel, lower marketing expenses and frugality in business operations have helped keep costs low. The company is in cost-optimisation mode, taking up only critical expenditure as the environment still remains uncertain.Asian Paints received strong response to its safe and sanitised painting services. During lockdown, it became the first company in its industry to launch a new portfolio of sanitisers and disinfectants, masks and PPE kits. The company is exploring its own network to sell some of the hygiene products in the market and expects the segment to have a slow and steady ramp-up.78816510But the home improvement business (kitchen & bath) is proving to be Achilles heel. It posted a drop in revenues although at the operational level it achieved break-even for the first time in the September quarter aided by cost control and lower spend on marketing. The company nevertheless is going full throttle in transitioning from surface decor to home decor business and launched 1500 SKUs across categories in lightings, furnishings and furniture. This transition may not be easy to begin with and is likely to eat into the growth and profitability of the flagship paints business in the initial years. But Asian Paints’ strong recovery gives rise to the question of whether it is sustainable going ahead. The management forecast is uncertain and dependent on how the Covid situation pans out in the current quarter. The business is still at 70-80% of the pre-Covid level with scope for improvement. Good monsoon coupled with festive demand augur well.

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