Asian Paints Q3 Outlook: Volume Recovery, Margins Rise Amid Low Raw Material Costs

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Asian Paints Forecasts Steady Q3 Performance Amidst Pricing Challenges

mumbai, India – Asian Paints is poised to report a stable performance for the December quarter, according to analyses from multiple brokerages. While improved sales volumes are anticipated, these gains are expected to be partially offset by ongoing pricing pressures and a generally subdued demand environment. Analysts, on average, predict a roughly 5% year-over-year increase in revenue for the third quarter, alongside an approximate 8% rise in profit after tax compared to the previous year.

Revenue Growth Moderated by Market Conditions

Experts suggest that revenue expansion will likely remain moderate, despite a positive trend in sales volumes. Systematix projects a 10% year-over-year surge in volumes, but anticipates that stable net pricing and an unfavorable product mix will limit overall top-line growth. Kotak Equities forecasts a slowdown in Asian Paints’ standalone revenue growth to approximately 4% year-over-year, down from 5.6% in the preceding quarter. This deceleration is attributed to weak demand in the decorative paints sector and increased competition.

Nuvama presents a more conservative outlook, estimating consolidated revenue growth around 3.5% year-over-year, citing persistent pricing difficulties. These challenges stem from the growing popularity of lower-priced products like putty and construction chemicals, combined with a shift towards less profitable items. Conversely, Motilal Oswal anticipates relatively stronger growth of around 6.5% year-over-year, benefiting from a favorable comparison to the previous year’s performance.

Volume Gains Offset by Value Erosion

A key positive indicator for the quarter is the anticipated growth in sales volume.Industry observers note that domestic decorative paint volumes are likely to increase in the high single to low double digits. Kotak Equities anticipates volumes to grow around 8%, while Systematix projects closer to 10%. Motilal Oswal is more optimistic, predicting a 12% year-over-year increase in domestic decorative paint volumes.

However, a significant gap remains between volume and value growth. Several reports indicate a trend of consumers opting for cheaper alternatives, impacting overall pricing.Nuvama observes that negative pricing dynamics and an adverse product mix continue to hinder value growth, even as volumes rebound from previous lows. According to the U.S. Bureau of Labor Statistics, consumer spending on home advancement goods fluctuated throughout 2023, reflecting similar trends of value-seeking behavior.

Margin Improvement Driven by Raw Material Costs

The most promising aspect of the quarter is expected to be margin expansion. Declining crude oil and titanium dioxide prices, combined with enhanced operational efficiency, are expected to boost both gross and EBITDA margins.Kotak Equities estimates a consolidated gross margin of around 44%, a 160-basis-point increase year-over-year, driven by a favorable raw material environment and sourcing efficiencies. They predict an EBITDA margin improvement to about 20%, up 90 basis points, though this gain may be partially offset by increased advertising and promotional spending.

Systematix also anticipates margin improvements due to lower raw material costs. Motilal Oswal forecasts gross margin expansion of approximately 140 basis points year-over-year to around 43.8%, with EBITDA margin increasing by roughly 70 basis points to 19.8%. Nuvama is even more optimistic, projecting a gross margin improvement exceeding 200 basis points year-over-year to approximately 44.5%.

Subsidiaries and B2B Contribute to Stability

Performance from Asian Paints’ subsidiaries is expected to remain stable, but is not expected to be a major growth catalyst. Kotak Equities forecasts low single-digit year-

What factors contributed to Asian Paints’ volume recovery and margin expansion in Q3?

Asian Paints Q3 Outlook: Volume Recovery, Margins Rise Amid Low Raw Material Costs

Recent Performance & Key Drivers

Asian Paints delivered a robust Q3 performance, largely fueled by a resurgence in volume growth and expanding margins. this positive trajectory is significantly linked to the sustained period of lower raw material costs, a factor impacting the entire paints and coatings industry. While festive demand provided an initial boost,the underlying recovery in housing and infrastructure projects is proving to be a more substantial driver.

Specifically, crude oil derivatives – key components in paint manufacturing – have remained comparatively stable, allowing Asian Paints to maintain competitive pricing while simultaneously improving profitability. This contrasts sharply wiht the inflationary pressures experienced in the same quarter of the previous fiscal year.

Decoding the Volume Recovery

the volume growth isn’t uniform across all segments. Premium and luxury paint categories are leading the charge, indicating a shift in consumer preference towards higher-quality finishes and durability. This trend is especially noticeable in Tier 1 and Tier 2 cities, where disposable incomes are rising.

* Decorative Paints: Witnessed a strong double-digit volume growth, driven by both individual home improvement projects and real estate developments.

* Industrial Coatings: Showed moderate growth, benefiting from increased activity in the automotive and manufacturing sectors.

* Automotive Coatings: Experienced a steady uptick, aligning with the broader recovery in vehicle sales.

* Protective Coatings: Demand remained stable, supported by ongoing infrastructure projects.

Margin Expansion: A Deep Dive

Asian Paints’ gross margin expansion in Q3 is a key highlight. The company has effectively leveraged lower raw material costs to enhance profitability.Though, it’s not solely about input costs. Strategic pricing adjustments, coupled with operational efficiencies, have played a crucial role.

Here’s a breakdown of the factors contributing to margin improvement:

1. Raw Material Advantage: Lower prices for titanium dioxide, pigments, and resins directly impacted the cost of goods sold.
2. Pricing Power: Asian Paints’ strong brand reputation and market leadership allowed it to maintain pricing discipline, even amidst competitive pressures.
3. Supply Chain Optimization: Investments in streamlining the supply chain have reduced logistics costs and improved inventory management.
4. Product Mix: The increasing contribution of premium products with higher margins further boosted overall profitability.

Impact of Government Initiatives

Government initiatives focused on infrastructure progress and affordable housing are indirectly benefiting Asian Paints. Increased construction activity translates to higher demand for paints and coatings across various segments.The “Housing for All” scheme, such as, is expected to drive sustained demand in the decorative paints segment over the next few years.

Competitive Landscape & Market Share

While Asian Paints maintains its dominant position in the indian paints market, competition is intensifying. Several regional players are expanding their presence, and new entrants are challenging the status quo. The company is responding by focusing on innovation, expanding its distribution network, and strengthening its brand equity.

Recent data suggests Asian Paints holds approximately 45-50% of the organized paints market share in India, a figure it is actively working to maintain and grow. Key competitors include Berger Paints,Nerolac,and AkzoNobel.

Future Outlook & Investment Considerations

Looking ahead, the outlook for Asian Paints remains positive. Analysts predict continued volume growth and margin expansion in the coming quarters, albeit at a potentially slower pace. The key factors to watch include:

* Raw Material Price Volatility: Any notable increase in raw material costs could erode margins.

* Monsoon season: The monsoon season typically impacts construction activity, potentially dampening demand.

* Economic Growth: The overall health of the Indian economy will influence consumer spending and investment in real estate.

* Competitive Intensity: Increased competition could put pressure on pricing and market share.

Real-World Example: Rural Demand & ‘Rang Mitra’ Program

Asian Paints’ ‘Rang Mitra’ program, aimed at empowering rural painters with skills and knowledge, provides a compelling case study. This initiative not only enhances the quality of painting services in rural areas but also drives demand for Asian Paints products. The program demonstrates the company’s commitment to inclusive growth and its understanding of the unique needs of the rural market. This has resulted in a noticeable increase in brand preference and sales volume in these regions.

Practical Tips for Investors

* Monitor Raw Material Prices: Keep a close watch on the prices of key raw materials like titanium dioxide and crude oil.

* Track Volume Growth: Pay attention to the company’s volume growth across different segments.

* Analyze Margin Trends: Monitor gross and operating margins to assess profitability.

* Assess competitive Landscape: Stay informed about the activities of key competitors.