Asian Paints shows uptrend post results; analysts upbeat

Asian Paints, India’s largest paint manufacturer, posting an 80.4% rise in net profit and 37% volume growth failed to cheer markets as margin pressures and rising raw material prices continue to be a concern.

After the earnings announcement, the company’s stock prices ended flat at Rs 3,105 on Tuesday. However, it started posting a rising trend and closed up 2.24% at Rs 3,178 on Wednesday. On Tuesday, buoyant on rising customer demand Asian Paints’ consolidated net profit rose 80.4% on a year-on-year basis to Rs 1,036.03 crore for the first quarter ended June 30, while total revenue from operations rose 55% to Rs 8,606.94 crore. However, gross margins fell 70 basis points (bps) y-o-y to 37.7%, while the company saw a further 6% sequential raw material inflation in the first quarter.

“Raw material prices continue to be volatile and there is an increase in inflationary pressures in the first quarter. The depreciation of the rupee also continues to hurt margins. Asian Paints had raised prices by 2% in Q1FY23 and by less than 1% again in the second quarter. It expects the gross margins to remain range bound and does not expect a sharp recovery in margins,” ICICI Securities, which maintained a ‘hold’ on the stock, said in a report.

The report also termed lower-than-expected urban recovery and potential execution challenges in new categories as “key risks”. “Our neutral stance on the paints segment (within consumption) is intact as we ascribe a high probability of market share losses for incumbents in the medium term,” it added.

The competition in the paints segment is set to intensify with Aditya Birla Group’s flagship company Grasim Industries announced plans, while Sajjan Jindal-led JSW Group forayed into the sector. At present, Asian Paints – with a production capacity of 1,700 million litres per annum (MLPA) – is India’s largest and Asia’s third-largest paints company.

“Crude-linked raw materials form about 55-60% of costs and margins of players are susceptible to its sharp variations. The ability of players to keep fixed costs under control while scaling up is a key factor determining their overall profitability, while distribution network and product offerings will be a key factor determining overall pricing power. Lastly, heavy investment in sales and marketing is also required. We see a potential rise in competitive intensity with new players with strong balance sheets entering the market,” Anuj Sethi, senior director at Crisil Ratings said.

“With the entry of new players with deep pockets and massive commitments on investments, the overall industry may see a shift in demand and margin structure due to the heightened competition. We remain cautious as the sector may not enjoy the higher multiples of the past,” Motilal Oswal said in a report.The company is likely to raise prices by 0.5% in the first week of August, while the gross margin is likely to remain in the 38-40.5% band for some time, it added.

According to Edelweiss, which has a “buy” rating, the management expects margin pressure in the second quarter and will take calibrated price hikes.“Paint companies were indulged in price hikes over the past year, leading to an unprecedented 22% hike over the period. Paint companies have shown that they have strong pricing ability, but such sharp hikes will have some adverse impact on near-term volume growth (especially at the lower-end),” it added.

The company’s margin pressure is abating “faster-than-expected” with the softening of key input costs. The company would comfortability maintain a gross processing margin (GPM) band of 38-40.5% in the near term (versus 37.7% now), Nomura, which upgraded its rating to ‘buy’ said.India’s paint segment is estimated to be at Rs 60,000-65,000 crore with organised players cornering 70% of the market. Within the organised segment, decorative paints account for about 78-80% and industrial paint accounts for the rest.

Asian Paints, India’s largest paint manufacturer, posting an 80.4% rise in net profit and 37% volume growth failed to cheer markets as margin pressures and rising raw material prices continue to be a concern.

After the earnings announcement, the company’s stock prices ended flat at Rs 3,105 on Tuesday. However, it started posting a rising trend and closed up 2.24% at Rs 3,178 on Wednesday.On Tuesday, buoyant on rising customer demand Asian Paints’ consolidated net profit rose 80.4% on a year-on-year basis to Rs 1,036.03 crore for the first quarter ended June 30, while total revenue from operations rose 55% to Rs 8,606.94 crore. However, gross margins fell 70 basis points (bps) y-o-y to 37.7%, while the company saw a further 6% sequential raw material inflation in the first quarter.

“Raw material prices continue to be volatile and there is an increase in inflationary pressures in the first quarter. The depreciation of the rupee also continues to hurt margins. Asian Paints had raised prices by 2% in Q1FY23 and by less than 1% again in the second quarter. It expects the gross margins to remain range bound and does not expect a sharp recovery in margins,” ICICI Securities, which maintained a ‘hold’ on the stock, said in a report.

The report also termed lower-than-expected urban recovery and potential execution challenges in new categories as “key risks”. “Our neutral stance on the paints segment (within consumption) is intact as we ascribe a high probability of market share losses for incumbents in the medium term,” it added.
The competition in the paints segment is set to intensify with Aditya Birla Group’s flagship company Grasim Industries announced plans, while Sajjan Jindal-led JSW Group forayed into the sector. At present, Asian Paints – with a production capacity of 1,700 million litres per annum (MLPA) – is India’s largest and Asia’s third-largest paints company.

“Crude-linked raw materials form about 55-60% of costs and margins of players are susceptible to its sharp variations. The ability of players to keep fixed costs under control while scaling up is a key factor determining their overall profitability, while distribution network and product offerings will be a key factor determining overall pricing power. Lastly, heavy investment in sales and marketing is also required. We see a potential rise in competitive intensity with new players with strong balance sheets entering the market,” Anuj Sethi, senior director at Crisil Ratings said.

“With the entry of new players with deep pockets and massive commitments on investments, the overall industry may see a shift in demand and margin structure due to the heightened competition. We remain cautious as the sector may not enjoy the higher multiples of the past,” Motilal Oswal said in a report.The company is likely to raise prices by 0.5% in the first week of August, while the gross margin is likely to remain in the 38-40.5% band for some time, it added.

According to Edelweiss, which has a “buy” rating, the management expects margin pressure in the second quarter and will take calibrated price hikes.“Paint companies were indulged in price hikes over the past year, leading to an unprecedented 22% hike over the period. Paint companies have shown that they have strong pricing ability, but such sharp hikes will have some adverse impact on near-term volume growth (especially at the lower-end),” it added.

The company’s margin pressure is abating “faster-than-expected” with the softening of key input costs. The company would comfortability maintain a gross processing margin (GPM) band of 38-40.5% in the near term (versus 37.7% now), Nomura, which upgraded its rating to ‘buy’ said. India’s paint segment is estimated to be at Rs 60,000-65,000 crore with organised players cornering 70% of the market. Within the organised segment, decorative paints account for about 78-80% and industrial paint accounts for the rest.

As a manufacturer, Panzhihua Haifengxin has developed a range of tio2 pigment which is client-oriented and aims to address customer needs in the fields of coating, ink, plastic, paper, and so on.

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