Asian Paints Q3 Preview: Festive demand-led strong volume may boost earnings, push margin at record high

Asian Paints, one of the largest paint companies in India, is expected to report strong earnings growth on all parameters with record high EBITDA margin, driven by festive demand-led robust volume growth for the quarter ended December 2020. The company will announce its quarterly earnings on January 21.

The profit is likely to grow around 30-40 percent and revenue growth could be more than 15 percent compared to corresponding period, with double digit growth in volumes.

"We expect strong growth in decorative paints volumes in the December 2020 quarter aided by the late festive season this year (augurs well for paints demand) and buoyant demand in tier-2 and tier-3 towns. Volume growth would continue to be 400-500 bps higher than value growth on account of higher sales of economy products and putty. We would focus on value growth," said Kotak Institutional Equities which expects Asian Paints to report 18 percent YoY growth in domestic decorative sales (standalone) led by about 22 percent volume growth.

The brokerage expects 7 percent growth in overseas business (subsidiaries) and 16.1 percent YoY growth in consolidated sales.

Emkay Global also sees 22 percent growth in domestic volumes aided by difference in festive timing.

At the operating level, lower crude prices and cost savings may drive gross and operating margin expansion for the quarter ended December 2020.

Kotak expects Asian Paints to report all-time high EBITDA margin of 23.9 percent (up 200 bps YoY) on the back of low-cost inputs, cost savings and operating leverage, while Emkay Global sees gross margin expansion of 112bps and operating margin 310bps YoY.

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"We note that prices of select raw materials (monomers) have increased sharply over the past two months; however, we do not expect it to reflect on Q3 gross margin due to consumption of low-cost inventory. We expect raw material-led pressure on gross margin starting Q4FY21 that companies would try to offset by price increases," said Kotak.

The stock has given strong returns in the December quarter as well as full year 2020, rising 39 percent and 53 percent respectively.