India’s largest paint player Asian Paints is set to report its earnings for the second quarter of the current fiscal year on November 9. However, heavy monsoons and an inauspicious pre-festive period could dampen the company's performance.
According to a Moneycontrol poll of seven brokerages, Asian Paints is likely to report a flat revenue growth at Rs 8,528 crore for the quarter. However, net profit is likely to fall 11.4 percent on-year to Rs 1,067 crore, down from Rs 1,205 crore from the corresponding quarter last year.
Earnings estimates of analysts polled by Moneycontrol are in a narrow range, so any positive or negative surprises may elicit a sharp reaction in the stock. The most optimistic estimate sees Asian Paints’s net profit falling 8.8 percent year-on-year, while the most pessimistic outlook sees it slipping around 15 percent on-year.
What factors are driving the earnings?
The consumer demand during the second quarter was impacted by heavy monsoons, which will result in Asian Paints's reporting a subdued earnings show.
Demand: The demand for paints remained low as a result of heavy rains and flooding in some areas. Exterior paints, a high margin business, will be especially impacted. Further, the demand scenario is challenging as consumers look to down-trade products.
Volume/value growth: According to brokerages, the volume growth is likely to come in between six to eight percent, while value growth will be flat, seeing an impact due to weak mix and price deflation, noted Axis Securities.
Margins: The gross margins are likely to see a hit of 100 basis points, hit by raw material inflation but partly offset by recent price hikes. However, EBITDA margins are likely to moderate even more sharply as a result of an inferior product mix, negative operating leverage, and heightened operating costs (in light of increased competition).
What to look out for in the quarterly show?
Analysts will be keeping a close eye on the demand outlook in metros and tier-3 towns, especially during the festive and wedding season. The raw material prices and their impact on margins will also be watched, along with increasing competitive intensity. Further, there will be a close watch on any commentary on price hikes and the narrowing gap between volume and value growth.
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