Why Asian Paints Share is Falling

Editor's note: When we talk about wealth creators of the past, we list out companies like MRF, HDFC Bank, Pidilite Industries and the likes.

Then there's Asian Paints, one of India's best franchises.

The company has earned an ROE (Return on Equity) of at least 20% in each of the last 10 years. This makes it one of the only 100 companies in a universe of close to 4,000 to have achieved this feat.

Think of 20% ROE as a fixed deposit that consistently pays an interest of 20% or higher, year after year!

Astonishing, isn't it? No wonder it is the top paint company in India by growth.

But lately, shareholders aren't very excited about the company as it is continuously facing margin woes, which has affected the company's share price.

There are more reasons affecting the stock. Continue reading to find out...

Why Asian Paints Share Price is Falling

The performance of paint stocks in 2022 has remained subdued.

For the past 2-3 quarters now, paint companies have been battling cost inflation pressures. They have taken an aggressive approach by going on a price hiking spree to protect margins.

Meanwhile, rising crude oil prices and Grasim's aggressive foray into the space has also added to the pressure.

Among the big companies, Kansai Nerolac Paints, Berger Paints, and Asian Paints have seen a substantial fall in 2022.

Berger Paints, India's second-largest paint manufacturer by market share, has fallen around 24% in 2022.

Meanwhile, the fall in market leader Asian Paints is not to a large extent as is the case with Berger.

Asian Paints share price is down 9% in 2022 so far. After seeing a decent recovery in the months between June-August 2022, the stock has come under pressure in recent sessions.

Let's find out why.

Why Asian Paints Share Price is Falling

The recent decline in share price of Asian Paints could be attributed to its weak Q2 results.

Last month, Asian Paints reported a 31.3% year-on-year (YoY) rise in consolidated net profit at Rs 7.8 bn. This, on the back of 19% growth in revenues which came at Rs 84.6 bn.

Higher raw material cost was the primary reason which affected the paint maker's net profit. During the quarter, raw material costs rose by 8% to Rs 49.3 bn.

The street was expecting much better results from the market leader but both topline and bottomline missed estimates.

Margins continued to remain a concern. Gross margins slipped 200 basis points sequentially amid higher raw material prices.

The company in its concall said it remains confident of gross margins returning to normal levels gradually and will maintain margin at around 18-21%.

Update: On 19 January 2023, the company reported its Q3 results, which once again failed to enthuse investors.

The company's consolidated net profit for the December 2022 quarter rose marginally by 5.6% while revenue increased by a mere 1.3%. Asian Paints informed in the filing that extended monsoon in October affected retailing in the peak festival season.

Revenues and profit, both coming in below estimates dampened the sentiment which resulted in a 3% decline in Asian Paints share price on 20 January 2023.

However, one should keep in mind that street estimates are always estimates...on shouldn't rely on those numbers. For instance, HUL reported its results on the same day and the figures were above estimates. The company attributed this to a rise in consumption. Still, HUL share price saw a 3% decline like Asian Paints the other day.

Other Reasons Driving Asian Paints Lower

Weak quarterly results have had an impact on the company's share price in the short term. But what about a longer duration?

Well, one reason why Asian Paints is falling lately is because of competition in the industry.

A few months ago, Grasim announced an aggressive capex plan. It increased planned capex from Rs 50 bn to Rs 100 bn. The capacity it's aiming for is 1.33 bn liters. This is very close to Asian Paints.

It's not hard to imagine what this might do to existing players. Increased supplies are likely to increase competition and pricing pressure.

No wonder then major incumbents, including behemoths like Asian Paints and Berger Paints, witnessed a sharp sell off.

Grasim has advanced the implementation of a 1.33 bn litre paint capacity. The plant's commissioning will begin in stages in the fourth quarter of 2023-24.

The project cost has been increased to Rs 100 bn by 2024-25 from the previously stated Rs 50 bn by 2023-24.

Now that Asian Paints is down from its highs, should you buy the stock or is there more pain in the offing?

Tune in to the below video where co-head of research at Equitymaster Rahul Shah analyses whether you should buy the dip in Asian Paints.

Interim Dividend

While declaring its Q2 results, Asian Paints announced an interim dividend.

The company's board approved the payment of an interim dividend of Rs 4.4 per equity share for the financial year ending March 2023.

The record date for the same was 1 November 2022. The dividend will be paid to the shareholders on or after Thursday this week, 10 November.

For more details, check out the dividend payout history of Asian Paints.

Management Commentary

While the company's September quarter results were below estimates, the management is expecting things to turn in favour next quarter onwards.

The company's MD and CEO Amit Syngle said raw material prices are cooling off strongly.

He further added that after dipping demand due to a bad monsoon in September, demand trends have started to pick up.

• First, the wedding season seems to be very, very strong this year in quarter three as well.
  
  The construction is picking up, and our B2B business, the project's business has been doing extremely well, outgrowing the retail sales to that extent therefore given the kick in the real estate despite the interest rate going up I think that is a very strong area, which is kind of auguring the demand.

How the stock of Asian Paints has performed recently

Yesterday, Asian Paints slipped 2.4% to close at Rs 3,105 against its previous close of Rs 3,181.

Asian Paints has a 52-week high of Rs 3,590 touched on 28 September 2022 and a 52-week low of Rs 2,560 touched on 17 June 2022.

Take a look at the table below which shows the comparative analysis of Asian Paints with its peers.

Comparative Analysis

Company	Asian Paints	Berger Paints	Kansai	Shalimar	Akzo Nobel
ROE (%)	23.0	22.7	8.4	-21.6	22.8
ROCE (%)	30.7	28.0	11.8	-9.7	30.0
Latest EPS (Rs)	38.2	9.7	7.8	-7.5	66.1
TTM PE (x)	81.3	63.1	57.8	0.0	31.9
TTM Price to book (x)	21.2	14.3	5.6	3.2	7.7
Dividend yield (%)	0.6	0.5	0.5	0.0	3.6
Industry PE (x)	74.1
Industry PB (x)	16.4

Data Source: Ace Equity, Equitymaster

About Asian Paints

Asian Paints is one of India's most well-known and finest paint companies.

Founded in 1942, it's also India's largest paint company. It also produces varnishes, enamels, or lacquers, surface preparation, organic composite solvents, and thinners.

The firm has business in 15 countries and has 26 paint production sites worldwide, serving customers in over 60 nations. It sells its products under numerous names such as Apcolite, SCIB, and Causeway Paints.

The firm is also well-known for its supply chain approach. Its supply chain is critical to its competitiveness by offering flawless product quality and exceptional service while keeping prices down.

We will have to wait and watch how Grasim's paint business works out and how it competes with its peers.

Till then, you can compare Asian Paints with its peers:

Asian Paints vs Berger Paints

Asian Paints vs Shalimar Paints

Asian Paints vs Indigo Paints

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...