Asian Paints Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Flat volumes on a tough base: Decorative volumes were flat YoY as a heavy prior-year base (price-hike pre-buying) and an extended monsoon compressed October, though December rebounded with double-digit volume growth.
• Gross margins inflecting sharply: Standalone gross margin jumped ~310 bps QoQ to 38.7% as material deflation of ~7% began flowing through, with only half realized due to higher-cost inventory; management expects further improvement in Q4.
• Home décor acquisitions scaling fast: White Teak (lighting) and Weatherseal (uPVC) each delivered 9M revenue exceeding their prior full-year figures, validating the ‘Share of Surface to Share of Space’ pivot.
• Kitchen and Bath hit a soft patch: Both businesses saw revenue decline (~7% and ~11% YoY) and slipped into small losses in Q3 on slower retailing and price increases; management calls the Bath loss a “blip” and expects a Kitchen turnaround.
• What to watch next quarter: Whether the December volume momentum sustains into Q4, the pace of further gross margin expansion as deflation fully realizes, and any demand recovery in T3/T4 towns.

Decorative Demand: A Quarter of Two Halves

• October was the problem: Volumes were hit by a double impact: the monsoon extending into mid-October depressed seasonal markets (North, Central, West), and a shorter Diwali compressed the peak selling window.
• The base effect was unusually large: In the prior year, two heavy price increases (10% on 10 Nov, 5% on 1 Dec) pulled Q4 demand forward into Q3, inflating October and November volumes and loading the dealer network with inventory. That inventory bulge was absent this year.
• December snapped back: Secondary sales moved into double-digit growth across T1, T2, T3 and T4 centres, reflecting genuine offtake rather than restocking. Management called it a return to normal market conditions.
• Three-year trends remain strong: The decorative business delivered a three-year volume CAGR of ~16% and value CAGR of ~17.6%, with 9M FY23 volume growth of 13% and value growth of 23%.
• Projects outpaced Retail: The projects business grew faster than retail, driven by government, factories, cooperative housing, and builder segments. Returns are slightly lower than retail because the segment is more competitive.
• Downtrading weighed on mix: Cumulative price increases prompted some shift from premium and luxury products to economy segments, hurting the value mix relative to the prior year when premium products saw higher price hikes and better stocking.

Syngle: “Obviously, this quarter has been a little bit of a rough quarter, in terms of what we have seen. The overall volumes are a little muted in terms of what we see with almost being at base and a value growth of about 1%.”

Margins: Deflation Arrives, More to Come

• The gross margin bridge: Standalone gross margin rose from 35.6% in Q2 to 38.7% in Q3, a ~310 bps sequential jump. YoY, it improved ~180 bps from 36.9%. The driver was ~7% material deflation, of which only about half was realized in the quarter because of higher-cost inventory carried in.
• Q4 set to improve further: Management expects margins to “go even higher” in Q4 as the full impact of Q3 deflation flows through and additional softening in material prices materializes. The ideal gross margin band is 38–40%.
• Consolidated profitability also moved up: PBDIT margins improved sequentially from 14.6% to 18.7%, a ~410 bps jump.
• Overheads contained, not cut: Overheads as a percentage of revenue may appear higher because of lower volumes, but there is no plan for larger curbs on advertising, marketing, or employee spends.
• Price cuts are not imminent: Any price correction will come only when management is certain that cost reductions are durable; war-driven volatility still warrants caution.

Management: “Material deflation of almost about 7% which we have seen the quarter which is also half realized because of the higher inventory which is there in this quarter. So obviously margins are expected to possibly go even higher as we see the next quarter coming in.”

Home Décor: Acquisitions Scaling, Kitchen & Bath Stumble

• White Teak (decorative lighting): Q3 revenue of ₹29 Crores took 9M to ₹73 Crores, already exceeding the prior full-year figure of ₹58 Crores. The business is profitable and growing strongly as distribution expands.
• Weatherseal (uPVC doors & windows): Q3 revenue of ₹7 Crores; June–December revenue of ₹15 Crores exceeded the prior full-year ₹14 Crores.
• Beautiful Homes Stores: Now 38 functional stores across T1, T2 and select metros, offering ~15–16 home décor categories under one roof. The Beautiful Homes Service (personalized interior design to execution) is live in 11 cities.
• Kitchen business: Q3 revenue fell ~7% YoY as retailing slowed and price increases were taken; components and sanware segments performed poorly. The business slipped to an accumulated loss (~₹6 Crores in 9M) after achieving breakeven in prior quarters. Management is confident of a turnaround.
• Bath business: Q3 revenue declined ~11% YoY on slower retailing and price increases. A slight loss in Q3 was characterized as a “blip” after five to six quarters of profits.

Management: “We are confident of turning this around as you kind of go forward because, in the previous quarters we have been able to do a breakeven in terms of this business to that extent.”

Industrial & International: Steady Contributors

• Auto JV (PPG-AP): Q3 growth of ~24%, 9M growth of ~34%, driven by a strong auto recovery over the last two quarters. Q3 profit of ~₹91 Crores represented ~194% profit growth, supported by price increases.
• General Industrial (AP-PPG): Q3 and 9M top-line growth of 24% and ~33% respectively, extending a run of ~10 consecutive quarters of double-digit growth. Margins and gross margins both improved.
• International (AP Global): Overall revenue growth was only 2%, dragged down by Sri Lanka. Ex-Sri Lanka, growth was 13%. Africa and the Middle East performed well; Asia was weak (Sri Lanka, Bangladesh forex issues, Nepal slowdown).
• International profitability: PBT of ~₹37 Crores in Q3 was a sharp improvement YoY, as the prior year suffered from a “debacle” of price increases and inflation. Both PBDIT margins and gross margins improved.

Competitive Landscape & Capacity

• New entrants are not new: Management noted that competition has been entering for two decades (Sherwin-Williams, Nippon, Jotun) and estimated that even in three years, newer players might reach ₹1,000–1,500 Crores in sales, a minuscule share of the ~₹70,000 Crore market.
• Capacity expansion is aggressive: A new greenfield plant (₹2,000 Crores, 4 lakh KL) was announced, adding to the ongoing expansion from 17 lakh KL to 22.7 lakh KL across water-based, solvent-based, wood finishes, and waterproofing categories. The 5 lakh KL jump is expected in two to two-and-a-half years.
• Backward integration underway: Initiatives in white cement and VAM/VAE are expected to be ready in about two years.
• Outsourced capacity stable: Outsourced manufacturing capacity of ~15–16 lakh KL is not expected to rise at the same pace as in-house investments.

Syngle: “Today, what I see very clearly is that the market is about Rs. 70,000 Crores to that extent. So we have all the newer players who are coming and they want to kind of do business, maximum I see in another three years’ time, they can do a maximum sale of about Rs. 1000 Crores to Rs. 1500 Crores which actually would be miniscule percentage of the total capacity they are talking of in terms of putting.”

Volume Growth Trajectory: Good, Not Explosive

• Growth rates to moderate: Management was explicit that the “explosive” volume growth of the last two years will come down as the market matures and bases rise, but “good” volume growth (double-digit) should continue. December’s double-digit secondary sales were cited as a positive signal.
• Mix to improve: The volume-value gap is expected to settle at 4–6% going forward, with a larger focus on high-end and premium luxury products. Mix should improve in Q4 relative to Q3.
• T3/T4 recovery expected: Rains have been good, and rural indicators suggest Q4 will deliver better results, with Q1 of next year better still.
• Caution on macros: Management flagged recessionary fears and forex pressures in some African and Asian markets as reasons for caution in Q4 and Q1.

Syngle: “I think the volume growth would continue possibly, the level of volume growth which we have seen in the past would definitely come down to that extent because today the markets are kind of now coming to a certain maturity. They have seen two years of good growth overall to that extent the bases which we all are sitting are at a certain level. So we might not see very explosive volume growths to that extent, but definitely I think we would see good volume growths going forward...”

Guidance & Commitments

Key Metrics