Asian Paints Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Demand anomaly, not a structural break: Management called Q2 an anomaly driven by erratic monsoon and a Diwali timing shift; September exit rates were strong and the product mix improved, supporting a confident Q3 outlook.
• Volume growth commitment held: Despite the weak quarter, management reiterated its double-digit volume growth guidance for Q3 and on a four-year CAGR basis, betting on festive and wedding season tailwinds.
• Material deflation boosted margins: Gross margins hit 43.9%, one of the highest in ten quarters, helped by ~4% material deflation; this tailwind is now over and some input inflation is expected in H2.
• Home Décor weakness persisted: Kitchen and Bath businesses remained soft for the third straight quarter, though White Teak and Weatherseal doubled in value and are now flagged as the future flagships of the Home Décor journey.
• What to watch next quarter: Whether the promised festive demand materialises into double-digit volume growth, the pace of input cost inflation and any price action, and whether Kitchen and Bath show signs of the promised recovery.

Demand Environment

• Q2 was an anomaly, not a trend: July was extremely weak due to very heavy rains, August improved, and September saw a healthy exit with strong product mix recovery. Management explicitly called the quarter an anomaly and pointed to a clear time-period shift from Diwali moving from mid-October to mid-November.
• Erratic rainfall hurt both exterior and interior: Sporadic rainfall killed sentiment and strongly affected the exterior segment, but management stressed that interior painting also suffered because customers avoid interiors during uncertain rain periods and retail stocking gets disrupted.
• Rural-urban divergence flipped: Urban centres did better than rural in Q2, a reversal from Q1, causing some demand dip. Government spending has given a fillip to rural demand, and a good harvest should favour rural growth towards the end of Q3 and Q4.
• Festive and wedding tailwinds ahead: A longer Diwali season provides a clear ~40 days of higher retail after monsoons end, and a very strong wedding season in November and December augurs well since painting happens around weddings.
• Unorganised sector shift is structural: The unorganised sector is not growing at par with organised; there is a clear shift towards brands with decreased price elasticity. Asian Paints is gaining share from the unorganised sector, with traction towards economy emulsions from fringe customers looking to buy into organised brands.

Syngle: "So, as we see it, I think this quarter has definitely been an anomaly in terms of what we see."

Margins & Input Costs

• Deflation delivered a gross margin peak: Material deflation of ~2% in Q1 and ~4% in Q2 helped push gross margins to 43.9%, one of the highest in the last ten quarters.
• That tailwind is now over: Crude is increasing and currency direction is uncertain; management expects some inflation in material prices in Q3 and Q4, with the deflation seen in H1 definitively behind them.
• PBDIT margin band maintained: Management committed to keeping PBDIT margins in the 18–20% band, achieved by calibrating prices, discounts and overall spends. No price increase is being discussed now, but management may have to look at prices depending on how crude derivatives and solvents inflation plays out.
• International margins improved: AP Global PBDIT margins improved, helped by some deflation, even as large currency depreciation in Egypt disrupted both growth and the bottom line.

Product & Segment Performance

• Economy range led the mix, Premium recovering: The current product mix was led by the larger Economy range, though the Luxury range also got reasonable traction. September saw larger traction on Premium and Luxury products as sentiment improved.
• Waterproofing was a bright spark: Strong growth in both Retail and Projects segments, standing out in an otherwise soft quarter.
• Painting services scaled dramatically: Safe Painting Service and Trusted Contractor Service grew exponentially and doubled in size with strong NPS. Management claims this is now globally the largest painting service run by any painting company.
• New product innovation contributed 11% of revenue: Launches included the completed Nilaya Naturals range (90% organic, ocean recycled plastic packaging), Royale Glitz, the Shvet Whites and Ivories collection, and new wallpapers at the Smart Economy end plus a high-end Luxury mural range.
• Industrial business stayed strong: Auto refinishes grew ~6% with strong PBT growth over a healthy base, supported by good growth in the auto sector especially passenger vehicles. APPPG protective paints and powder coatings grew in very healthy double-digits with fairly good profitability, continuing a consistent 3.5-year growth journey.

Syngle: "We can easily say that now globally, this is the largest painting service which is run by any painting company and therefore that's a clear edge in terms of the growth which we are achieving here."

Home Décor: Mixed Signals

• Home Décor weakness is recent, not chronic: FY21 and FY22 had ~30% growth; last year was double-digits. Weakness started only from Q4 of last year and has persisted for about three quarters. Management still sees very high potential in both Kitchen and Bath, with modular kitchen called a very strong bet.
• Real estate participation calibrated: The company is looking at mid-end and high-end builder space, not the lower end, and is calibrating margins and products there. Umbrella branding of Asian Paints is already helping.

Syngle: "Only this year and starting from Q4 of possibly last year, we are seeing weakness which is come in, in terms of the overall demand."

International & Subsidiaries

• AP Global delivered double-digit growth overall: The Middle East did very well with double-digit growth; parts of Africa including Ethiopia were decent; Sri Lanka is improving. Asia, particularly Nepal and Bangladesh, was more affected.
• Egypt is the key uncertainty: Large currency depreciation in Egypt is disrupting both growth and the bottom line. Management expressed uncertainty on how things will shape up there, with Asia also a concern.
• Margins improved despite headwinds: PBDIT margins at AP Global improved, helped by some deflation, even with the Egypt drag.

Syngle: "There is a little bit of uncertainty there. We are not very sure in terms of how things will shape up going forward. Let's see and hope for the best that how businesses recover in these places."

Strategic Initiatives & Capex

• Backward integration projects on track: The white cement project in Fujairah, Dubai has permissions, land acquisition and agreements in place with equipment being ordered; expected completion by December 2025, possibly preponed. The VAM VAE project has basic layout work and some permission applications submitted; target completion is Q4 FY26.
• Brownfield expansions progressing: Kasna (north) plant completed; Khandala (Maharashtra) expansion completed; Ankleshwar plant expansion expected by December of this year. About 50–60% of committed capex has been spent on these projects.
• Distribution expansion remains aggressive: Network expansion continues with a target of 8,000–10,000 points this year.
• Sustainability milestones: The company is water positive with strong reductions in scope one and two emissions; renewable energy at ~67% achieved directly, not through purchased certificates; strong work in recycled material, skilling and healthcare.

Guidance & Commitments

Key Metrics