Asian Paints Q2 preview: Earnings may increase substantially on a sequential basis

Asian Paints will report its September quarter results on October 22. The company could see a decline in profitability but operating earnings may remain strong on a year-on-year basis due to cost measures, with revenue growth at 2-3 percent.

On the sequential basis (i.e. compared to June quarter 2020), earnings may see a substantial increase due to low base in Q1 FY21 that affected by lockdown.

"We expect a recovery in decorative paints volumes in September 2020 quarter (down 35-45 percent YoY in June 2020) and following trends: (1) growth driven by North and East followed by South; West would be a bit soft, dragged down by Maharashtra, (2) tier-2 and tier-3 towns would continue to drive growth, (3) volume growth would continue to be 500-600 bps higher than value growth on account of higher sales of economy products and putty," said Kotak Institutional Equities which sees 3 percent fall in profit but 2 percent increase in revenue and 17 percent rise in EBITDA in Q2FY21 YoY.

For Asian Paints, the brokerage estimates 2.7 percent YoY growth in domestic decorative sales (standalone) led by about 8 percent volume growth, and expect flat sales in overseas business (subsidiaries) led by a recovery in Indonesia and MENA regions.

Gross margin expansion could be 230 bps YoY and 80 bps sequentially due to a fall in crude oil prices, said Motilal Oswal which sees 3 percent revenue growth YoY and 17.5 percent growth in EBITDA. Sharekhan too sees 3 percent growth in Q2 revenue YoY.

The price of titanium dioxide (TiO2), a crude-linked raw material, was down 4.2 percent in Q2FY21 YoY.

"Continued cost-saving initiatives and slightly lower media intensity would translate into robust EBITDA margin expansion," Kotak said.

According to the brokerage house, the sequential increase in profit could be 220 percent, revenue 76 percent and EBITDA 131 percent with 520 bps margin expansion in September quarter 2020.

The stock is up 27 percent so far in FY21 and 18 percent in the July-September quarter.