Asian Paints Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Volume engine intact, margins squeezed: Q2 delivered 10% volume growth and ~20% value growth despite an extended monsoon, but gross margin fell sequentially to 35.6% as ~8% cumulative raw material inflation overwhelmed a ~3% price increase.
• Rural demand is the surprise outperformer: T3/T4 centres grew much faster than Metros and T1/T2, contradicting broader market commentary, and management sees rural demand as "very live and very good."
• A capex super-cycle is now committed: The board approved ₹6,750 crores in total outlay over three years, spanning a >30% decorative capacity expansion plus backward integration into VAE/VAM emulsions and white cement.
• Backward integration is the margin thesis: The VAE/VAM plant and white cement JV are together expected to add 4–5% to gross margins at the overall level once operational, with white cement alone seen adding 5–7%.
• What to watch next quarter: Whether the promised 3–4% margin recovery from deflation actually materialises, the pace of downtrading normalisation after steep price hikes, and any demand disruption from geopolitical or currency shocks.

Demand & Volume Performance

• Double-digit volume commitment delivered: Q2 volume grew 10% despite an extended monsoon that hit exterior painting and the projects/construction business, especially in West and South India. H1 volume growth reached 22%, with a three-year CAGR of ~19%.
• Rural demand defied the narrative: T3/T4 centres grew much better than Metros, T1 and T2 centres, a divergence management called out explicitly as contrary to market commentary. The ~8,000 new retailing points added in H1 are a key driver igniting rural demand.
• Projects business outpaced retail: The projects segment grew much faster than retail, with strong sales realisations from the government/factory segment and a well-performing flooring segment supported by new Epoxy and Polyurethane launches, even as monsoons caused some exterior standstills.
• Painting services scaled rapidly: The painting service, present in more than 628 towns and claimed as the biggest in the world, grew at about 100% in the quarter.
• Downtrading emerged across the pyramid: Some downtrading was visible in Luxury and Premium products and in some Economy products, attributed to steep price increases taken over the last six months. Management described it as "incidental," arguing that in a consumption market with limited alternatives, demand normalises and jumps back over time.

Syngle: "unlike possibly what the commentary we have been hearing in the market, we have grown much better in the T3T4 centres which means the rural demand for us has been much better in terms of what we are seeing as compared to possibly the growth which we are seeing in the Metros, T1 and T2 centres."

Margin Dynamics

• Sequential margin drop was an inflation lag story: Q2 gross margin fell from 37.9% to 35.6% sequentially because ~8% cumulative raw material inflation (6% in Q1 plus 2% in Q2) hit with a lag through inventory carry, while only ~3% in price increases was taken, creating a ~5% deficit.
• Management deliberately chose not to pass on all inflation: As market leader, management stated it does not feel justified passing on "sinusoidal trends of inflation immediately to the customer" and takes a considered view, implying the market should assess margins with "a certain level of maturity."
• YoY margin still improved: Despite the sequential drop, Q2 gross margin improved from 35.0% to 35.6% YoY, and consolidated PBDIT margins improved ~1.7% YoY, driven by strong international business bottom-line performance.
• Q2 mix is structurally inferior: Q2 traditionally has a relatively inferior product mix compared to other quarters, partly dependent on Diwali dates and sales phasing; July and August are largely stocking months, while September is strong for wood finishes, emulsions and waterproofing.
• Deflation-driven recovery expected: Management sees a deflation trend already underway and expects 3–4% margin correction going forward, with the best effect coming in Q4. The gross margin band is confidently pegged at 39–40% going forward.
• No immediate price cuts despite raw material softening: Management wants to let things stabilise and then take a concerted call, prioritising consumer demand and market share growth, stating "you can't really play with the prices as if you are playing on a stock exchange."

Management: "we don't feel justified that we should kind of pass on all the sinusoidal trends of the inflation immediately to the customer. We need to have a considered view and therefore I think the market also has to see it with a certain level of maturity in terms of how the margins are behaving"

Backward Integration & Capex

• A ₹6,750 crore capex cycle was committed: The board approved three-year total outlay comprising ~₹3,400 crores for a >30% decorative manufacturing capacity expansion to 22.7 lac KL per annum, plus ~₹2,550 crores for two backward integration projects (VAE/VAM and white cement).
• VAE/VAM plant is a technology moat play: The combined Vinyl Acetate Ethylene Emulsion and Vinyl Acetate Monomer plant, with capacity of 1.5 lac tonnes p.a. for VAE and 1 lac tonnes p.a. for VAM, is the first such technology in India and held by only 3–4 players worldwide. Management described it as "technology of future which will remain for the next 50–100 years" and expects it to provide sustainable competitive advantage.
• VAE/VAM margin and product benefits: The technology enables low-VOC, environment-friendly paints with better scrub resistance, stain resistance and durability, while improving adhesive quality and margins. Management expects 4–5% gross margin improvement from this category at the overall level, with the comment that "margins here could be even higher."
• White cement JV plugs a distribution gap: The 60% majority-owned JV with Riddhi Siddhi group in Fujairah, UAE, for 2.65 lac MT per annum of white cement and white cement clinker, with grinding units to be set up in India near putty-making units for cost synergy. The Indian white cement market is 7–8 lac tonnes growing at 15–20%, and 80% is sold by Asian Paints' existing network of hardware and building material dealers.
• White cement margin boost: Expected to give at least 5–7% gross margin improvement going forward. Combined with VAE/VAM, the two backward integration initiatives are expected to add about 4–5% to gross margins at the overall level.
• Riddhi Siddhi has multi-decade limestone rights: The JV partner holds limestone reserve rights in Fujairah for 50–100 years, derisking the raw material supply. The clinker unit is targeted to come up in about 24 months on an aggressive timeline.

Syngle: "this is not because of any other entry which is happening in to the paint market but more from the point of view of a purist backward integration initiative"

Home Décor & Adjacent Businesses

• Home Décor transition is accelerating: The company is moving from "Share of Surface" to "Share of Space," now manufacturing many categories within Home Décor, giving control over design and costs. Beautiful Homes Stores reached 30 with 7 new stores added this year, and the Beautiful Homes Service for personalised interior design-to-execution is now in 11 cities.
• White Teak and Weatherseal outperformed: Both acquired businesses (lighting and uPVC doors/windows) did extremely well in H1 and Q2 compared to what they achieved in the full last year, on both top line and bottom line.
• Kitchen business grew but stayed loss-making: Q2 growth was 14%, H1 growth 35%, but the bottom line was slightly affected because the components business, a substantial part, did not do too well. Management expressed confidence in addressing the bottom-line loss situation in Q3 and Q4.
• Bath business turned the corner: Q2 growth was 11%, H1 growth 51%, with Q2 delivering break-even and H1 posting a profit of about ₹5 crores.
• Waterproofing is now a significant contributor: The business has been growing substantially over the last 8 years; the SmartCare brand is easily one of the leading players in the retail market, and both retail and projects are doing extremely well. Backward integration into bituminous emulsions, membranes and specialised construction chemicals is underway.

International & Industrial Businesses

• International business delivered a standout quarter: Q2 growth was ~15.5%, with all geographies doing quite well: Africa stood out, the Middle East did quite well, and Asia did well despite Sri Lanka pulling some growth. Profitability was very strong, with Q2 PBT of ₹43.5 cr versus a ₹16.7 cr loss last year, and H1 PBT of ₹81.4 cr versus a ₹28 cr loss last year.
• Industrial JVs delivered spectacular performance: PPG-AP grew ~25% in Q2 and ~40% in H1; AP-PPG grew ~25% in Q2 and ~39% in H1. AP-PPG has been delivering this kind of performance consistently for the last ~8 quarters. Both businesses saw substantial increases in gross margins and overall profitability.

Guidance & Commitments

Key Metrics