Luxury and Premium products propelled growth in 4QFY21 – Asian Paints

Update on the Indian Equity Market:

Market started the week on strong note, bulls took center stage today as the vaccination drive is expected to pick up momentum. Nifty was up ~245 points (1.7%) at 14923. Among the sectoral indices, BANK (+4.0%), PSU BANK (+3.8%), and PVT BANK (+3.0%) were top gainers while MEDIA (-0.5%) and PHARMA (-0.2%) were among the top losers. Among the stocks, INDUSINDBK (+7.5%), SBIN (+6.7%), and ICICIBANK (+4.5%) were the top gainers. CIPLA (-2.3%), BHARTIARTL (-2.3%), and LT (-1.9%) were the losers.

Luxury and Premium products propelled growth in 4QFY21 – Asian Paints

Edited excerpts of an interview with Mr. Amit Syngle, Managing Director and Chief Executive Officer, Asian Paints with Economic Times dated 14th May, 2021:
• Performance in Q3FY21 was good with 20% volume growth. Q4FY21 further accelerated on that in terms of demand — not only from the retail business, but also from the projects business which had been a bit down in previous 2 quarters. Big corporate institutions, builders, cooperative societies — everyone went for painting and maintenance in Q4. Another big thing seen was with respect to market structures, with T1 and T2 cities contributing in a very big way in Q4 as compared to Q3. In Q2-Q3 these cities were depressed because of a larger number of cases and the paranoia in the market. A third area was the luxury and premium products which kind of took off, propelling overall growth. There was a little bit of a pent-up demand, but largely a lot of new demand came in. So, that is basically how Q4 differed from Q3.
• Home décor business did quite well. Asian Paints now has ~18 stores across the country that offer all home décor solutions under one roof. It has got amazing response from the market in terms of offers for the consumer and company is quite pleased with it.
• When asked about the impact so far of the second wave of the pandemic and how does he see things playing out Q1 of FY22 he commented that things have been good thus far. There have been disruptions with localised lockdowns affecting some of their backend processes. But he thinks April-21 has still been largely good in terms of business. May is looking a little tough as most of the country is in a lockdown-like situation. They are finding very few markets to offer service at the moment. Picture will be clearer once vaccinations catch up and some bit of normalcy returns.
• When asked about the kind of rise in costs in Q4 because of crude and other prices and his outlook on operating margins going ahead he said that Gross margins in Q4 were lower a little bit both QoQ as well as YoY. This was largely due to the high inflationary pressures that built up starting the last week of December 2020. Material inflation has been to the tune of 7% to 8% in terms of crude derivatives as well as critical raw materials like Titanium dioxide and monomers that go into the paste. Management puts to use all sourcing efficiencies and formulation efficiencies, and sought to control overheads in a very strong manner which limited the damage to some extent in Q4. Asian Paints didn’t affect any increase in prices because they felt demand might not be very good given the widespread paranoia. Company took a 2.8% increase in prices on May 1 as the management is pretty confident that some of the inflationary pressures would come down going ahead, after which the company can look at more price increases to kind of do justice to the overall margins.
• There is definitely customer sensitivity to price hikes. It is observed that 2% to 4% hikes don’t really impact the purchasing of the customer very strongly, because it’s an addition of just Rs 400-500 in a work worth Rs 15,000. From a point of view of projects though, the price sensitivity is higher because the additional cost becomes higher. The company is confident that if prices are raised in a measured manner, it won’t hurt margins much.
• When asked about the expenditure on distribution, brand building, marketing earmarked for the financial year he informed that overall, they are integrating the whole area with paint. A typical home store would have large amounts of paint as well as home décor stuff. Any promotion done for a home store also accelerates the paint category as well. Asian Paints is looking at offering very strong value to the consumer, so it would bring down the stress on margins. It will depend on which way the market possibly goes, but the plan is to move into a strategic area that has been set and move strongly from the share of surface to the share of space within homes in a big way.

Asset Multiplier Comments
• The growth for most of the FMCG companies in 4QFY21 has been good. Even after commodity cost going up, they seem to have retained their pricing power. But we think, due to stricter lockdowns, the outlook for 1QFY21 seems to be bleak. In 1QFY21, we believe most of these FMCG stocks will moderate.
• Asian Paints’ underlying volume growth was quite robust. Seeing a similar kind of volume growth trajectory going forward seems difficult due to recent lockdowns. We might have to see price hikes, cost push and margin pressures in short term which will lead to correction in the subsequent quarter. But being the market leader, the long-term story remains intact.

Consensus Estimate (Source: investing. com and market screener websites)
• The closing price of Asian Paints was ₹ 2,782/- as of 17-May-20. It traded at 72.4x/60.7x the consensus EPS estimate of ₹ 38.3/45.7 for FY22E/ FY23E respectively.
• The consensus target price of ₹ 2,678/- implies a PE multiple of 58.5x on FY23E EPS of ₹ 45.7/-.

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