Asian Paints has surprised analysts with steady volume growth despite slowdown
Asian Paints, the undisputed leader in the Indian decorative paints industry, has surpassed analysts’ expectations yet again.
The analyst community was surprised when the company managed to sustain volume growth in the third quarter, reporting a domestic decorative paint volume growth of 12%, y-o-y against the market’s expectation of 7%.
This has happened during a period when discretionary products in the broader economy are facing a slowdown. Though the latest volume growth can be partially attributed to the festive season demand slipping to the third quarter, analysts are hopeful that it will continue in the subsequent quarters as well.
This is because the demand for decorative paints usually picks up during the January-June period. Asian Paints also surprised the market with a margin expansion of 100 basis points in the third quarter, which was led by two main factors. One is the fall in the input prices. This expansion may continue in the coming quarters because of the continued fall in input prices, especially the decrease in the price of titanium dioxide, which reduced by 12% quarter-over-quarter, and 8%, year-on-year in the third quarter.
The margin expansion also found a trigger in the company’s pricing power, which is fuelled by strong brand loyalty. Moreover, Asian Paints managed to maintain its price level despite a muted volume growth in the first and the second quarters. It did not resort to price cuts to increase the volume. This is similar to the pricing power that it demonstrated during the difficult quarters of 2009-10.
With the demand situation improving, the condition is likely to become better for Asian Paints in the coming quarters. Currently, Asian Paints is trading at a PE multiple of around 38.
This high valuation is the only area of concern for the investors. However, analysts feel that the company will be able to sustain this high valuation in subsequent years as well because of its ability to show strong volume growth, high brand loyalty and sufficient pricing power.
The green field expansion at Khandala is expected to begin production in 2013-14.
With this, Asian Paints will be able to generate strong free cash flow from next year onwards.
This also means that the company will be expected to increase its dividend payout ratio in future. Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month.
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