The Covid wave, rising raw material costs can impact near-term sales
Multiple lockdowns across states and the fact that the impact of the second wave has been felt in rural areas, a major growth driver, can impact June quarter sales
The strong March quarter performance, expectations of a bounce-back upon easing of the Covid wave, and management commentary on protecting margins led to an 8.5 per cent jump in the stock price of India’s largest paint company, Asian Paints, on Friday.
Though the 48 per cent jump over the year-ago quarter for Asian Paints was on a soft base, pent-up demand and sequential recovery, especially in Tier 1 cities and metros, led to the gains. Increased construction activity and an uptick in undercoats/waterproofing where it launched new products also helped volumes. The performance in the March quarter helped the company deliver 13 per cent volume growth in FY21 despite the 38 per cent decline in the June quarter last year.
While strong sales in April, new launches, and market share gains from both organised and unorganised segments are positive, the Street is worried about near-term sales growth. Multiple lockdowns across states and the fact that the impact of the second wave has been felt in rural areas, a major growth driver, can impact June quarter sales. The company believes that it is well positioned to benefit once the recovery takes hold.
The other concern is the impact on margins as the raw material basket (largely crude oil derivatives) is witnessing an upward trend. Given the lack of price hikes in Q4, the company’s gross margin fell 266 basis points. However, lower employee costs and other expenses helped it expand the operating profit margin by 127 basis points.
The company took a price hike of 2.8 per cent in this quarter. Analysts at Motilal Oswal Research, however, expect a 60-basis point hit to the margin in FY22 as compared to the record 22.4 per cent margin in FY21. Most brokerages have cut their earnings estimates by 7-9 per cent for the current financial year, given the near-term headwinds. Analysts at Axis Capital have lowered their target price given the high base and Covid impact, and say that an inflationary input environment — coupled with rich valuation (at 55 times its FY23 earnings estimates) — leaves little margin of safety. Investors should await a better entry point.