Asian Paints is feeling blue
Asian Paints is feeling blue
Asian Paints is feeling blue
given the impact of the Covid-19 pandemic on businesses in 2020, it is very rare that a company declares a decline in its profits compared to last year. however, Asian Paints Ltd. had to suffer that ignominy, and as a result, saw its share price plunge to a two-month low. this also meant that its stock has currently delivered just over 5% returns since the turn of the year.
why is it underperforming and will it bounce back?
paint it black
the simple answer here is the same problem that’s plaguing FMCG giants such as HUL — inflation. rising input costs have eaten into APL’s margins, taking the gloss off its rather impressive rise in revenues.
consolidated revenue for Q2 FY22 grew 32.6% over the year-ago period to ₹7,096 crore. however, its net profit was only ₹605 crore as against ₹830 crore in Q2 FY21. thus its EBITDA also declined 28.5% year-on-year to ₹904.4 crore, and EBITDA margin contracted by 1.08% to 12.75% for the reported quarter.
the degree of impact that the increase in raw material prices had is shown in the fact that APL’s total expenses of ₹6,418.2 crore for the quarter represent a whopping 49% jump over the year-ago period.
shade of hope
the reopening of businesses and other activities post the second wave of Covid-19 in India has led to a strong bounce in Asian Paints’ sales. its domestic decorative business consolidated its high-growth trajectory with an unprecedented 34% volume growth in the quarter. its industrial coatings business also registered strong double-digit revenue growth corresponding to an uptick in demand in the automotive sector.
combine this with the festive season, where people typically get their homes painted. this could see an increase in revenue and the profit margins revert back to what they used to be. but all price conversations come up with caveats. what if your rivals don’t follow suit. Asian Paints may end up ceding ground to them.
Asian Paints has already hiked its prices to maintain a reasonable margin but in small increments. its prices have gone up by only ~7% against a ~21% rise in the price of its raw materials, resulting in a drop in its margins. but dropping margins is not sustainable for a long period of time. sooner or later, listed companies with eagle-eyed shareholders have to show healthy margins lest they be punished in the markets. this is why Asian Paints plans to aggressively increase prices in the second half of FY22. this coincides with the festive season when people typically get their homes painted and hence demand increases.
but Asian Paints is in a price-sensitive business where increasing prices could send its customers to a rival. other players may be willing to sell for cheaper (at a lesser profit) in favour of gaining ground on the market leader.
there’s also a looming global shortage already reflected in drying up reserves of the colour blue. If this shortage spreads, prices will go up across the board and consumers will have no choice but to grin and bear it. this is good news for APL.
Asian Paints MD & CEO Amit Syngle has promised that the company will clock a “double-digit growth” in the second half of the year. the current dip in its stock price may represent a buying opportunity.