Asian Paints was resilient in its financial performance in Q4FY22 in the face of a geopolitical storm that hit the world. While analysts estimated sales volume growth of only 3-5% in Q4FY22, Asian Paints surpassed expectations by posting 8% volume growth in its decorative paints business. The company’s sales gained strong traction particularly in February and March after a washout in January. Now the top question is whether Asian Paints can sustain this growth trajectory in the quarters ahead.

Paints market leader witnesses a healthy demand environment in Q4FY22

Asian Paints’ revenues rose by over 18% YoY to Rs 7,892.7 crore in Q4FY22 driven primarily by higher sales realizations. The company hiked prices by nearly 15% back in Q3FY22, which ultimately reflected in higher sales value growth in Q4FY22. Given the magnitude of these price hikes, volume growth of 8% for Q4FY22 is certainly an encouraging number. 

The decorative (India) business, the flagship segment for Asian Paints, saw higher demand coming in from metros, tier 1 and tier 2 cities. The luxury and premium range of paints particularly saw robust traction as demand for these is relatively less price elastic. This means consumers in these segments are not materially sensitive to drastic price changes. 

Additionally, the waterproofing and wood finishes segment continued to see stellar growth in Q4FY22, according to the management. Notably, Q4FY22 also marks the peak construction season in India owing to which Asian Paints saw strong demand coming in from the builder segment. 

Coming to the international business of the company, Asian Paints’ African and Middle-eastern slowed down . The company posted losses in these regions in both Q4FY22 and full year FY22. Notably, the Asian region grew at a faster clip versus other key regions like Africa and the Middle-east. Overall, the net profits of the international segment fell over 80% YoY to Rs 30 crore in FY22. This was mainly on account of higher inflation and currency devaluation in Sri Lanka, Ethiopia and Egypt.

Asian Paints saw healthy growth in its industrial coatings division as well, despite the challenges faced by the automobile sector. The protective coatings segment, which aids in safeguarding assets of industries like Oil and Gas, Infrastructure and Power, saw its revenues rise 17% YoY to Rs 247 crore in Q4FY22. 

Notably, both the kitchen and bath businesses of Asian Paints consistently clocked revenues of over Rs 100 crore in the past two quarters.  However, the kitchen business continued to make losses even in FY22. 

The management has a strong intention to scale-up its home décor business in the next 5 years. Although this segment makes up a miniscule 4% of the decorative business currently, the company plans to expand its share to 8-10% by FY26. To drive this, the company acquired two companies in April 2022 operating in the lighting and UPVC windows segment namely White Teak and Weatherseal. 

Input cost inflation and exceptional losses dent Asian Paints’ earnings growth in Q4FY22

At this juncture, one should note that for the full year FY22, the company took price hikes to the tune of 23%-24% even though it witnessed an input cost inflation of 32-34% on YoY basis. Understandably, the company did not pass the entire inflationary burden on to its consumers and took a certain hit on its gross margins. Although gross margins improved by 280 bps to 39.6% sequentially, they were still down four percentage points on a YoY basis. 

Crude oil derivatives and titanium dioxide are key inputs for a paints company. Global prices for both these commodities were up around 60% YoY in May 2022 fueled by the geopolitical uncertainties. Despite these trends, Asian Paints did a commendable job in protecting its EBITDA margins which fell only 150 bps YoY to 18.3% in Q4FY22. Lower advertising spends and cost rationalization measures came to the rescue of the company in Q4.

While a spike in input costs certainly hit the company’s earnings growth, net profit was flat at Rs 850.4 crore owing to certain exceptional losses. These exceptional losses include loss due to non-receipt of certain subsidies from a state government and foreign exchange losses on account of material devaluation of the Sri Lankan rupee. If we were to ignore these one-time losses, the net profit of the company essentially grew close to 13% YoY in Q4FY22. 

However, Asian Paints’ FY22 net profit fell 3% YoY to Rs 3,030.6 crore, while revenue rose over 30% YoY to Rs 29,101.3 crore. The higher input costs exceeded the topline growth in FY22, ultimately leading to a fall in  profit. 

Monetary policy tightening and hot inflation create an uncertain near-term outlook

In a surprise move, RBI raised the repo rates by 40 bps to 4.4% and cash reserve ratio by 50 bps to 4.5% on May 4, 2022. RBI might consider more such rate hikes to tame retail inflation which rose to 7.79% levels in April 2022, according to reports. 

The gradual end of the low interest rate regime in India is going to impact the real estate sector as well. The interest on home loans is set to get dearer which could moderate  housing demand going forward. The paints sector, which derives its demand from the real estate sector, will eventually also take a hit on demand. 

According to Asian Paints’ management , there was some deferment of demand in the tier 3 and tier 4 cities in Q4FY22 due to high paint prices. On the other hand, some consumers switched to economy brands in tier 1 and tier 2 cities. And the current pricing levels are not going to soften anytime soon. The company saw an additional input cost inflation of 5-7% in April 2022 for which it already announced a price hike of 2% w.e.f. May/June. 

Also, since the Russia-Ukraine conflict is far from over, the management sees input cost inflation heading north in the near future i.e., H1FY23. With rupee dollar exchange rate falling below psychological levels of Rs 77, oil imports will get dearer for India. Hence, it’s quite likely for Asian Paints to raise product prices beyond June 2022 since it seeks to maintain gross margins of 41-42% in FY23. 

In light of above trends, a price-sensitive Indian consumer might defer repainting his/her house since this is essentially a discretionary expense. While Asian Paints’ management does seem confident of maintaining its double-digit sales growth trajectory in FY23, it remains wary of unabated rise in inflation and any new Covid variants.