“The overall industry is definitely on a decline from the point of view of consumer demand,” Syngle told analysts late Tuesday on a call after third-quarter earnings. “I would say that at least the decorative industry is definitely ranging anywhere around minus 4-5% kind of a zone…We haven’t seen a challenge like this…(since) possibly when you go to the era of 1997 or something.” Asian Paints saw its consolidated revenue decline for the second consecutive quarter, and profit retreat for the third consecutive quarter. The company, which commands more than half the market share in India, saw its profit drop nearly a fourth to ₹1,110.5 crore, while consolidated sales fell 6.1% to ₹8,521.5 crore. Operating profit shrank more than a fifth to ₹1,636.7 crore. For Asian Paints, the December quarter was unlike what its typical festive season looks like. The operating margin dipped more than three percentage points to 19.2% amid intensifying competition in the industry.
Raw material costs stood at 57.7% of the consolidated revenues-higher than the year-ago level of 56.5%. Other expenses, too, climbed to make up 16.2% of the revenues-much higher than the y-o-y level of 14.8%. These increased expenses, and a less favourable product mix, dented profitability.
Among the silver linings, the 1.6% increase in domestic decorative business volumes proved to be better than what was anticipated by analysts. The top line, bottom line, and profitability, too, posted sequential improvement.
The industrial and B2B businesses posted relatively better traction. Government segment has shown traction post three quarters of slow movement. There has been an overall increase in profitability in the international business driven by recovery in key Asian geographies. For investors, the main question is whether the worst is over. The December quarter performance is markedly better than that of the September quarter. But it is historically also one of the strongest quarters for the company.
Besides, there are several factors like consumer demand behaviour, downtrading, competitive intensity, softening of raw material prices and rupee depreciation that will determine the overall performance. The Asian Paints stock is down 24% over the past six months but is up 3.6% for the past one month.While “cautiously optimistic” that demand will recover, Syngle maintained the guidance of operating margins remaining in the range of 18-20%.The Aditya Birla Group’s ‘Birla Opus’ forayed into the paints industry nearly a year ago, with a plan to add 40% of the industry’s existing capacity.
Syngle, though, said that it is “too early” to comment on the kind of impact the competition would bring in. While acknowledging that competition had spread across the country, and that they have products across price points, Syngle said that given the market size of ₹80,000 crore, a 7-8% market share would be considered as an impact.
