Turnover growth modest at weak prices
Brokers largely agree that third-quarter revenue growth is likely to remain modest despite improving volume momentum. Systematix expects volumes to grow approximately 10% year-over-year, but believes flat net prices and an unfavorable mix will hold back revenue growth.
Kotak Equities expects Asian Paints’ organic sales growth to slow to around 4% year-on-year from 5.6% in the September quarter, due to weak demand for decorative paints and increased competitive intensity.Nuvama is more cautious, estimating consolidated sales growth of around 3.5% year-on-year, as pricing pressure continues due to faster growth in cheaper categories such as putties and construction chemicals, coupled with an unfavorable product mix. Motilal Oswal, on the other hand, forecasts relatively stronger growth of around 6.5% year-on-year, supported by a weak base in the same period last year.
Volumes are recovering, but value growth is lagging behind
Volume growth is expected to be the main positive result in the third quarter. Most brokers are seeing domestic decorative paint volumes grow from high single digits to low double digits. Kotak Equities expects volume growth of around 8%, while Systematix estimates it closer to 10%. Motilal Oswal is more optimistic and expects household decorative paint volumes to grow by about 12% year-on-year.
However, the gap between volume and value growth remains a concern. Several brokers point to downtrading by consumers and a shift to cheaper products, keeping prices weak. Nuvama notes that negative prices and unfavorable mix continue to depress value growth even as volumes recover from last year’s lows.
Margins will improve on benign commodities
The biggest positive in the quarter is probably the margin expansion. Lower crude oil and titanium dioxide prices, together with operating leverage, are expected to support both gross and EBITDA margins.
Kotak Equities estimates consolidated gross margin at approximately 44%, up approximately 160 basis points year-on-year, aided by a favorable commodity environment and sourcing efficiency. It expects EBITDA margin to improve to around 20%, up 90 basis points year-on-year, but partially offset by higher advertising and sales promotion spending. Systematix also expects margins to improve thanks to lower raw material costs. Motilal Oswal forecasts gross margin growth of approximately 140 basis points year-on-year to approximately 43.8%, with EBITDA margin improving by approximately 70 basis points to approximately 19.8%.
Nuvama is slightly more optimistic about gross margins, expecting an improvement of more than 200 basis points year-over-year to around 44.5%.
Subsidiaries and B2B provide support
The performance of the subsidiaries is expected to remain stable, but is not a significant growth driver. Kotak Equities models low single-digit annualized growth for subsidiaries, similar to the September quarter. Nuvama emphasizes that while demand for exterior paints slowed due to unusual rainfall in October, this is largely deferred demand that could shift into the fourth quarter.
On the positive side, the B2B segment is expected to grow at double digits, supported by government capital expenditure and infrastructure activities. This could partially offset weakness in certain retail segments.
What to see in Q3
Management commentary on demand revival, competitive intensity, pricing strategy and sustainability of margin gains will be critical.
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of Economic Times)
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