Chart of the day: Asian paints' gloss may not last for long

The robust show of Asian Paints, the first of the large consumer goods companies to report its earnings for the quarter to September, may not be the right indicator of a good performance down the line. For good reasons: The company, a leader in the Indian decorative paints segment, was hit by stunted volume growth in the preceding two quarters. With no change in the macro economic scenario in the September quarter, the company was expected to post single-digit revenue growth owing to continued weakness in consumer demand. However, a revenue growth of 18%, coupled with double-digit volume growth, took the Street by surprise, taking the stock to new high of Rs 529.35. A healthy volume growth, thanks to better growth in tier-2 and -3 cities, lower base year impact and stocking ahead of an early Diwali, led to strong revenue growth. Raw material costs — the company’s largest cost head constituting over 57% of its revenues — grew at a much lower rate of 12% compared with revenue growth.
The prices of a key raw material, titanium dioxide, remained lower over the past year. Consequently, the operating margin expanded 195 bps to 16.5%, despite higher employee cost and other expenses. The company raised prices cumulatively by over 4% in the first half of the fiscal, given the input cost inflation. The second quarter show of Asian Paints does not indicate the positive momentum may continue in the next few quarters. The company expects margins to be lower in the second half compared with the first half with a weak rupee impacting raw material cost. This will put pressure on margins. A high base year effect may also play spoilsport in the December quarter. Its industrial paints segment remains impacted by the slowdown, and with global business growth lower than the local because of under erformance in certain markets.

The Asian Paints stock is trading at 45 times its trailing four-quarter earnings and is valued at a market cap of Rs 50,000 crore, which is four times its revenues. These are high valuations with limited room for further rise.