Asian Paints is likely to post double-digit growth in volume as well as revenue, but weak operating margin may limit profitability despite price hikes and lower cost of raw material YoY.
Overall, brokerages expect the revenue to grow in the range of 12-17 percent year-on-year, driven by expected volume growth of around 12-13 percent for the quarter ended December 2018.
For the quarter, Edelweiss Securities said it expects Asian Paints to report around 12 percent YoY volume growth on a base of 6 percent (Q2FY19 saw 11 percent volume growth on a base of 8 percent) and sales to grow 13 percent YoY.
"The demand shift due to postponement in festive season should aid volumes coupled with a soft base. The total effective price hike of around 3.25 percent YoY should be seen for the quarter. Price hike taken in December will benefit from Q4FY19 onwards," it added.
The paint maker is likely to record sales growth of around 16 percent YoY to around Rs 4,931 crore in Q3FY19E led by volume growth (includes industrial paint) of around 12 percent YoY, according to ICICI Securities.
Crude prices are up 10.3 percent YoY but down 10.1 percent QoQ in Q3FY19. "The magnitude of price movement in crude derivatives is lower vis-à-vis crude prices. But deflation has not yet begun in Q3FY19 either," said Motilal Oswal which expects revenue to grow 13 percent.
The price hike and fall in raw material prices could support operational growth QoQ but is likely to remain lower compared to year-ago due to use of high-cost inventory.
"As per analysis, after accounting for price hikes, domestic gross margin should improve 155bps QoQ during Q3FY19, however, it should contract 115bps YoY ," Antique Stock Broking said.
Asian Paints hiked product prices 2.35 percent in October and 1.5 percent in December 2018.
Edelweiss Securities also said prices of TiO2 and other monomers that are used as raw materials have declined from the peak. This coupled with price hikes and stabilising rupee should aid sequential gross margin recovery. "Cost rationalisation will further boost margins on the EBITDA level when seen sequentially."
According to ICICI Securities, EBITDA margin is likely to decline 180 bps YoY to around 19 percent while Motilal Oswal expects gross margin to contract 150bp YoY and operating margin to contract 290bp, with EBITDA declining 2.7 percent YoY in Q3FY19.
Hence, the year-on-year profitability is likely to be limited, though sequential growth is expected in Q3.
ICICI Securities said profit would grow marginally by around 5 percent YoY and 18 percent QoQ while Edelweiss Securities expects PAT to rise 6.9 percent YoY and 19.8 percent sequentially.
Key issues to watch out for
> Volume growth trends and demand scenario in urban and rural geographies
> Market share trends
> Outlook for raw materials/pricing actions
> Commentary on price increases
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