Asian Paints reported lower than expected net profit for the fourth quarter ended March 31, 2022 on the back of civil crisis currently ongoing in Sri Lanka.
The company reported a net profit of ₹850 crore and said, exceptional loss of ₹115.70 crore towards its Sri Lanka business and a delay in receivable subsidy from the government led to lower profit.
The revenue in the given quarter, however, rose 20.60%, at ₹7889.94 crore.
But, the story lies in its margin play.
The paint-maker's consolidated EBITDA margin compressed 153 basis points. Richard Liu and Sumanyu Saraf of JM Financial, in a report dated May 10, 2022 said, “Asian Paints’ consolidated EBITDA margin compressed 153bps yoy with quite a significant portion of the 448bps compression in gross margin being offset by operating leverage. The latter was led in part by the strong revenue growth seen during the quarter, and also by a mere 1% year-on-year growth in ‘Other Expenses’, which is a totally different trend vs that exhibited in the preceding two quarters when ‘Other Expenses’ grew significantly faster vs revenue growth.”
The duo, however, differed on the company's projection.
Management seems to be suggesting 40-42% gross margin to be a steady-state target (for the domestic decorative business) and 18-20% as the preferred band for EBITDA margin. “These seem quite likely for FY24E (assuming that the hyper-inflation in the relevant commodities would reverse by then), but the picture for FY23E seems more grim at this stage, as per our calculations,” they wrote.
Liu and Saraf further said, “Operating profits were 2-3% below our expectations, due to the revenue miss that arose on account of severe dilution in sales-mix, since a lot more of the incremental revenue arose from categories outside the traditional paints business – these include waterproofing products, lower-end painting-related products like putty, etc.”
JM Financial's note said, risk-reward on the stock does not look all that favourable. “It is possibly ignoring the risk(s). Maintain HOLD,” they said.
JM Financial's ‘hold’ rating means the stock price is expected to move in the range of 10% downside to 10% upside from the current market price for large-cap stocks and REITs and in the range of 10% downside to 15% upside from the current market price for all other stocks, over the next twelve months.
The note also said, “Management continues to guide bullish on volume growth, and its depiction of the margin-picture was also far more sanguine this time round, despite the kind of commodity costs headwinds that seem to be persisting.”
Asian Paints' was trading down 1.5% at 9.29 am on May 12, 2022, at ₹3004 per share.