The past few quarters have been a slowdown for the paint industry. Worries of high raw material inflation, sluggish demand and rising competition have taken away the shine of paint stocks. Even Asian Paints Ltd, the market leader in the decorative paints segment, has not been spared. Shares hit 52-week low 2,560 on the NSE on June 17 and is now up about 5% from that level. However, the stock is down 20% so far this calendar year.
There are a few bright spots that can calm investor panic. An analysis by Antique Stock Broking reveals that during the inflationary period (FY 11-12 and FY 18-19), Asian Paints has absorbed part of the inflation to protect its volume growth and market share . “However, in subsequent years, the company has recovered its margins from price increases and operational scale,” analysts at Antique said in a report on June 29.
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That said, in the near term, costly input materials could hinder a quick recovery in gross margin. Analysts said prices of crude oil-based monomers and titanium dioxide have begun to ease, but are still higher than in the year-ago period. Varun Singh, Analyst, IDBI Capital Markets & Securities Ltd. said, “With crude oil prices beginning to soften, the chances of a sharp rise in prices in FY13 are slim.” To address the cost pressure, Asian Paints had increased prices by about 22% in FY12. Nevertheless, the year-on-year (YoY) gross margin declined by 717 basis points. One basis point is 0.01%.
“If the moderation in crude oil prices continues, gross margins will start improving from the second half of FY13. Besides, strong volume growth will help the stock see a sharp jump,” Singh said.
After the recent correction, the valuation of Asian Paints stock has softened. According to data from Bloomberg, the shares are now trading at 49 times FY24 estimated earnings. Asian Paints’ FY22 Annual Report said volume and value growth in the decorative segment was 31% and 36%, respectively, last year. According to Edelweiss Securities Limited, this was industry leading growth. Analysts say the company continues to garner market share from listed competitors as well as from smaller and regional paint makers.
Meanwhile, Grasim Industries Ltd’s entry into the paint space is not a major concern for Asian Paints so far. This is because Grasim aims to capture the North Indian market first, rather than compete with Asian Paints in the West, which has less reach. Recently, Grasim has doubled its capital expenditure outlay for the paint business. 10,000 crores.