Premium products to be one of the catalysts for Asian Paints margins going ahead: Suvarna Joshi

“It will take some time for Asian Paints to reach the pre Covid margin profile of about 23-24-25%. But on a sequential basis, these numbers are much better because in Q2 of FY22, the margin was the lowest the company had recorded at about 13% odd. The current margin is 18.1% odd versus our expectation of 17.4%, says Suvarna Joshi, Senior Research Analyst, Axis Securities.

What are you making of the Asian Paints numbers?
On the Asian Paints numbers, the first cut is that the volume growth is pretty much in line with what we had expected. We were building in 17-18% volume growth and the revenue number has come in a shade better than our expectation of Rs 8,420 odd crores. So, on that front, certainly it is a beat. But looking at the gross margins for this company, we were building in a gross margin of about 37.4% because we had understood that the company had taken price hikes to offset the raw material cost pressures. Against the, actual reported number is about 36.8 so around 60 odd basis points decline from what we were expecting.

But overall, if I have to put these numbers into perspective, the top line seems good. We will need more clarity on how the margin pressures are building up and what we will look forward to for the company. The commentary is on the demand outlook going forward with price hikes coming into play.

In terms of gross margins you mentioned but EBITDA margins also are slightly under pressure as well, How do you see these EBITDA margins panning out for the company going forward?
We think that margins should be in this band and it will take some time for Asian Paints to reach the pre Covid margin profile of about 23-24-25%. But on a sequential basis, these numbers are much better because in Q2 of FY22, the margin was the lowest the company had recorded at about 13% odd. The current margin is 18.1% odd versus our expectation of 17.4%.

So clearly, there is an improvement but my take will be that they will remain in a subdued band and we will wait for management commentary. Our understanding is that with the festive season behind us, with most of the consumption discretionary spends having already taken place and inflation coming into play, there could be a possibility that volumes will also be a little subdued. So we will have to see how the sale of premium products contributes going forward because that will clearly be one of the catalysts for the margins to be driving going ahead.

We are seeing a lot more realty sales coming in and Asian Paints is a proxy play which will work out. How do you expect the home improvement segment to do going forward as in Q3 they have had a very solid performance?
Home improvement certainly has been one of their growth drivers but in terms of the overall scheme of things, home improvement is still a very small pie of the overall revenues for the company and they are in 10-11% range. So we have to see how things pan out.