Asian Paints Q3 Preview: PAT seen up 8% YoY; volume growth to pick up

Asian Paints is likely to deliver a stable performance in the December quarter, with better volumes and margin improvement partially countered by weak pricing and a subdued demand backdrop. On average, five brokerages expect revenue to rise around 5% year-on-year in Q3, while profit after tax (PAT) is estimated to increase by about 8% compared with last year.

Revenue growth modest amid weak pricing

Brokerages largely concur that revenue growth in Q3 is likely to stay modest despite improving volume momentum. Systematix expects volumes to grow around 10% year-on-year, but believes flattish net pricing and an unfavourable mix will cap topline expansion.Kotak Equities projects Asian Paints’ standalone revenue growth to slow to about 4% YoY from 5.6% in the September quarter, citing muted demand in decorative paints and heightened competitive intensity.

Nuvama is more cautious, estimating consolidated revenue growth of roughly 3.5% YoY, as pricing pressures persist due to faster growth in lower-priced categories such as putty and construction chemicals, coupled with an adverse product mix. In contrast, Motilal Oswal forecasts relatively stronger growth of around 6.5% YoY, supported by a weak base in the year-ago period.

Volumes recover, but value growth lags

Volume growth is expected to be the key positive in Q3. Most brokerages see domestic decorative paint volumes growing in the high single digits to low double digits. Kotak Equities expects around 8% volume growth, while Systematix pegs it closer to 10%. Motilal Oswal is more optimistic and expects domestic decorative paint volumes to grow about 12% YoY.

However, the gap between volume and value growth remains a concern. Several brokerages highlight downtrading by consumers and a shift towards lower-priced products, which is keeping pricing weak. Nuvama notes that negative pricing and adverse mix continue to weigh on value growth, even as volumes recover from last year’s lows.

Margins set to improve on benign raw materials

The biggest positive in the quarter is likely to be margin expansion. Lower crude oil and titanium dioxide prices, along with operating leverage, are expected to support both gross and EBITDA margins.Kotak Equities estimates consolidated gross margin at around 44%, up about 160 basis points YoY, aided by a benign raw material environment and sourcing efficiencies. It expects EBITDA margin to improve to about 20%, up 90 basis points YoY, though partly offset by higher advertising and sales promotion spends.Systematix also expects margins to improve on the back of lower raw material costs. Motilal Oswal forecasts gross margin expansion of around 140 basis points YoY to about 43.8%, with EBITDA margin improving by roughly 70 basis points to around 19.8%.

Nuvama is slightly more optimistic on gross margins, expecting an improvement of over 200 basis points YoY to about 44.5%.

Subsidiaries and B2B provide support

Subsidiary performance is expected to remain steady, but not a major growth driver. Kotak Equities models low single-digit YoY growth for subsidiaries, similar to the September quarter. Nuvama highlights that while demand for exterior paints slowed due to unseasonal rains in October, this is largely deferred demand that could shift to Q4.

On the positive side, the B2B segment is expected to grow in double digits, supported by government capital expenditure and infrastructure activity. This could partially offset weakness in certain retail segments.