Shares of Asian Paints, the country’s leading paint and décor company, have extended their decline for the third straight session on Monday, March 23, falling another 3.40% to the day’s low of ₹2,120 apiece.
The stock was last seen around these levels in October 2020, underscoring sustained pressure as investor concerns mount that elevated oil prices could impact the company’s margins and demand in the near term.
With today’s drop, the shares have lost 10.22% so far in March and a sharp 23% in less than three months, which has also brought the company’s market capitalisation down to around ₹2 lakh crore. To be precise, the stock has remained under pressure since December, losing a cumulative 26.2% to date, based on today’s low.
The sustained decline has pushed the stock down over 41% from its record high of ₹3,568 and 30% from its one-year high of ₹2,985 apiece.
Rising crude oil prices are negative for paint companies, as crude derivatives form a key raw material in their manufacturing processes. Crude oil prices have surged over 50% since the start of the US-Iran conflict on February 28, bringing cost pressures back for paint companies after several years.
Price hikes likely if crude sustains at higher levels
In its recent report, domestic brokerage firm Systematix Institutional Research said that paint prices in India could rise by 2–5% in April if crude oil prices remain elevated. It added that dealers have not indicated any price hikes so far, and companies may wait for crude prices to stabilise.
However, the brokerage said the initial price hikes would take place only if crude persists at current high levels for a prolonged period. It expects these hikes to be limited to low single digits and staggered over 1QFY27 and to be followed by further increases in case there is a sharper up-move in crude, which would again need to be sustained for a longer duration.
Citing historical trends, Systematix said that in the past (over 4QFY21–2QFY22 and 4QFY22–1QFY23), when crude climbed by around 15–25% QoQ, Asian Paints implemented staggered price hikes of 2–4%. However, its gross profit margins (GPMs) were impacted by around 350–450 bps QoQ in 1Q and 2QFY22, after which the company took further hikes of around 15% in 3QFY22.
The brokerage further pointed out that GPMs were also impacted by 100–200 bps QoQ in 1Q and 2QFY23, after which crude prices corrected. Subsequently, the company’s GPM rebounded by 200 bps QoQ in 3Q and 4QFY22 and by 300–400 bps QoQ in 3Q and 4QFY23.
Despite margin pressures, it noted that volume growth remained sturdy at 13–14% over 2HFY22 and FY23. It has a ‘Buy’ rating on the stock with a target price of ₹3,160 apiece.
Global brokerage firm Macquarie has also maintained its ‘Outperform’ rating on Asian Paints, with a target price of ₹3,100, CNBC TV-18 reported on March 17.
Disclaimer: We advise investors to check with certified experts before making any investment decisions.
