Asian Paints has long been recognized as a cash-generating powerhouse. Currently, the stock is undergoing a time correction and is available at a 5-year low PE ratio of 63, which stands below its historical median PE ratio of 76.4. Despite the near-term challenges of rising competition, inflationary pressures, and subdued demand, we see promising signs for the future.
Short-Term Challenges
- Rising Competition: Increasing market competition has affected short-term performance.
- Inflationary Pressures: Cost pressures have impacted margins.
- Subdued Demand: Short-term demand has been affected by macroeconomic factors.
Positive Catalysts
- Recovery in Margins: Early signs of margin recovery are visible.
- Improving Consumer Demand Conditions: Consumer demand conditions are showing improvement.
- Government Initiatives
- Affordable Housing and Infrastructure: Government schemes such as PM Awas Yojana, which account for about 70% of the total paint demand in India, are driving demand.
- Increased Government Spending: Continued investment in affordable housing and infrastructure is expected to boost demand.
- Market Dynamics
- Rural Market Recovery: Green shoots are seen in rural markets.
- Real Estate Sector Uptrend: The real estate sector continues to show strong growth.
- Monsoon Progression: A favorable monsoon is expected to support demand uptick.
- Festive Season: The upcoming festive season bodes well for peak season demand.
- Residential Housing
- Sales Growth: Residential housing sales are expected to increase by 10% in the top 15 cities during CY2024.
- Repainting Demand: Repainting, which accounts for 80% of the total decorative paint demand, is expected to pick up due to factors such as a growing population, an increase in rental homes, and rising income levels.
Conclusion
Asian Paints has consistently proven its ability to defend its market position and has historically received premium valuations. Given its robust fundamentals, strategic initiatives, and favorable market conditions, we are confident that Asian Paints will continue to outperform. We recommend a Buy rating on the stock, with an expectation that it will continue to deliver strong long-term returns for investors.
Asian Paints Stock has been consolidating over the past 3 years
Asian Paints has demonstrated remarkable growth, boasting a 25% CAGR since its listing in 1999, with its share price increasing from Rs 11.8 to Rs 3100 as of 06 August 2024.
Despite its historical success, Asian Paints and its counterparts, such as Berger Paints and Kansai Nerolac, have experienced a downturn from its ATH.
Despite its historical success, Asian Paints and its peers have experienced a notable decline from their all-time highs (ATH). The data as of 06 August 2024 highlights this trend:
| Company | ATH Date | ATH Price | Current Price | Fall from ATH |
|---|---|---|---|---|
| Asian Paints | 01-Dec-21 | 3382 | 3100 | -8% |
| Berger Paints | 01-Jul-21 | 702.95 | 540.7 | -23% |
| Kansai Nerolac | 01-Sep-21 | 422.15 | 297 | -30% |
| Indigo Paints | 01-Jul-21 | 2605.1 | 1474 | -43% |
What’s causing this dip?
Increased Raw Material Costs: The Russia-Ukraine war has led to a significant rise in crude oil prices. Crude oil derivatives make up nearly 50% of the raw materials used by paint companies, accounting for 30-35% of the total raw material cost. This surge in costs has adversely affected profit margins.
Weak Consumer Demand: Higher inflation has dampened consumer demand, negatively impacting sales growth across the industry.
| HIGH DEMAND | ||||||
| Asian Paints | Jun-21 | Sep-21 | Dec-21 | Mar-22 | Jun-22 | Sep-22 |
| Sales – | 5,585 | 7,096 | 8,527 | 7,893 | 8,607 | 8,458 |
| Sales Growth % | 91.11% | 32.63% | 25.61% | 18.66% | 54.10% | 19.19% |
| Kansai Nerolac | Jun-21 | Sep-21 | Dec-21 | Mar-22 | Jun-22 | Sep-22 |
| Sales – | 1,403 | 1,620 | 1,810 | 1,537 | 2,051 | 1,931 |
| Sales Growth % | 119.55% | 17.09% | 13.68% | 5.28% | 46.24% | 19.22% |
| Berger Paints | Mar-21 | Jun-21 | Sep-21 | Dec-21 | Mar-22 | Jun-22 |
| Sales – | 2,026 | 1,798 | 2,225 | 2,551 | 2,188 | 2,760 |
| Sales Growth % | 49.54% | 93.23% | 27.69% | 20.42% | 7.97% | 53.45% |
| LOW DEMAND | |||||||
| Asian Paints | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 | Mar-24 | Jun-24 |
| Sales – | 8,637 | 8,787 | 9,182 | 8,479 | 9,103 | 8,731 | 8,970 |
| Sales Growth % | 1.28% | 11.34% | 6.68% | 0.25% | 5.40% | -0.64% | -2.32% |
| Kansai Nerolac | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 | Mar-24 | Jun-24 |
| Sales – | 1,827 | 1,734 | 2,157 | 1,957 | 1,919 | 1,769 | 2,133 |
| Sales Growth % | 0.91% | 12.82% | 5.14% | 1.32% | 5.03% | 2.07% | -1.10% |
| Berger Paints | Sep-22 | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 | Mar-24 |
| Sales – | 2,671 | 2,694 | 2,444 | 3,030 | 2,767 | 2,882 | 2,520 |
| Sales Growth % | 20.04% | 5.60% | 11.71% | 9.78% | 3.61% | 6.99% | 3.14% |
Intensified Competition: The entry of major players into the decorative paints segment, including Aditya Birla Group’s Grasim Industries, JSW Paints, and Pidilite, has heightened competition. These companies have announced substantial capital expenditure plans to penetrate the market.
Big Impact on the Market Leader Asian Paints and other players in the segment
Grasim Industries, with its launch of the Birla Opus range, has announced a capex of Rs 10,000 Cr and targeted sales of Rs 10,000 Cr in the next three years. Leveraging its existing distribution network (e.g., Birla White and UltraTech Cement), efficient supply chain management, brand value, and financial strength, Grasim is poised to disrupt the paint industry.
b. Competitive Pressure: Increased competition is expected to impact volume growth and margins for existing players like Asian Paints, Berger Paints, Kansai Nerolac, and Indigo Paints. These companies may need to ramp up advertising and promotional expenses, along with increased spending on distribution and trade incentives, thereby exerting pressure on profitability.
Will Asian Paints Survive Its Margin And Market Share
| Jun-21 | Sep-21 | Dec-21 | Mar-22 | Jun-22 | Sep-22 | Dec-22 | |
| Sales | 5,585 | 7,096 | 8,527 | 7,893 | 8,607 | 8,458 | 8,637 |
| OPM % | 16% | 13% | 18% | 18% | 18% | 15% | 19% |
| Mar-23 | Jun-23 | Sep-23 | Dec-23 | Mar-24 | Jun-24 | |
| Sales | 8,787 | 9,182 | 8,479 | 9,103 | 8,731 | 8,970 |
| OPM % | 21% | 23% | 20% | 23% | 19% | 19% |
Asian paints is back on track to its historical margins of 20%-24% even after facing huge headwinds from big players Birla opus investing 10,000 crores and dumping paint in volumes never seen in the Indian paint industry. But to hedge against such pressure Asian paints themselves are investing close to 9000 crores over the next 3 years and are increasing manufacturing capacity by almost 50%, foraying in new segments. They are also investing in backward integration which will further aid margin expansion.
STRONG MOATS
- With more than 70000 distributor networks, 27 Manufacturing facilities worldwide 160,000+ Retail touchpoints across India the MOAT of Asian paints lies on the distribution and supply side which is almost impossible for any new entrant to compete with.
- Strong database which company has acquired over decades gives the competitive edge to manage its supply chain efficiently and it will take years for a new entrant to gather such data
- Asian paints revenues also just don’t come from India, they have a serious presence in other continents. Their risk mitigation and diversification is top notch.
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Geographical Revenue FY24 Asia 39.10% Middle East 32.20% Africa 23.60% South pacific 5.10%
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