Analysts and investors have soured on asian paints. Can it proves Wrong?

Broad-based pessimism

The pessimism Around Asian Paints is not limited to a select few analysts. Of the 38 brokers covering the stock, barely a handful – HSBC, HDFC, and Nuvama – are still positive on it. Only 16% are holding out a ‘Buy’ signal, down from 26% at the start of the year and 41% a couple of years ago.

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The stock has also been tested the patience of institutional investors. While Domestic Instituteal Investors (DIIS) have increased their stake in the company from 3.5% to 5.7% SIPTEMBER 2023, Foreign Institutional Investors (FIS) has been sold. Fiis’ Sharehlding in asian paints has dropped sharply from 17.7% to 12.2% over this period.

Stiff Competition AMID Soft Demand

Asian paints have long been synonymous with the Indian paints industry, commanding a 50% share of the market. But the industry has been under stress for several year now with demand slowing down and competition intensifying.

The company positions itself as a premium/luxury player for the most part. So, The Recent Urban Demand Slowdown Has Hit It Where It Hurts. Management has called out the current demand environment as the worst in two decades. Meanwhile, International Business Has Been Affected by Currency Depreciation in Africa, While The Industrials Segment was Mellow, Too.

Despite Gross Margins Holding Steady Around 43-44% Over the Years, operating Margins have suffred due to negative operating leverage and higher spends on marketing and distrition. Even as management help back on cutting costs significantly to Defend Against Competition, The Profit Before Depreciation, Interest, and Tax (PBDIT) Margin Has Fallen from 21% to 17% to 17% to 17% Over the Past Count Years.

Ceding Ground in Decorative Paints

Decorative Paints Comprise Around 70% of India’s Paints Industry. Repainting, which comprise 75% of the segment, has been affected by sluggish urban demand and downtrading by customers. Plateauing launches and Residential Projects Have Affected Fresh Painting as Well.

According to annalysis by anand rathi, asian paints have ceded the most ground (350 BPS) to new entrant birla opus. JSW Paints also presents a growing threat, particularly in tamil nadu, where asian paints is a market leader. But some loss in market share is par for the course for a dominant player when new players enter the area. Moreover, Asian Paints’ Dominance in Tier-1 and Tier-2 CITES HAS Left It More Vulnerable to the Recent Slowdown in Urban Demand.

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The new entrants are capturing market share by tapping new dealers and offering significant Higher Painter Incentrites and Dealer Margins-10-12% Against 4-5% for Asian Points. Despite MainTaining Prisis at the Higher End of the Industry Range, Negative Operating Leverage and Higher Spends on Marketing and Distribution Have LED to a Margin Compression for Asian Points.

That said, the company has iterated that its value proposation remains unafected by the new entrants, who do not offer any differentized propostions. Long-Term Durability of the new players’ products remain untested as well.

Industrial Segment has Hurt Profitability

In the Industrial Paints Segment, Asian Paints Operates Through Two Joint Ventures with PPG Inc., A Global Automotive Coatings Manufacturer. PPG -P Caters to a Broad-Based Portfolio LED by Automotive Clients, and Comprises two-thirds of the industry segment. AP-PPG Constitutes The Remining Third, and Operates in the Powder and Protective Coatings Markets.

The latter accounts for more than 4% of the company’s revneues but less than 2% of its rights, and is thus margin-dilvent for the overal business. In fy25 the industry segment was Decent 5% Growth in Revenues, Thanks to Factors and Builder segments as well as a pickup in government spending in the second half of25. But, LED by a 25% Decline in Profits for AP-PPG, The Segment’s PBT Saw 3% Year-On-Year Degrowth.

International Business Flat

The International Business Has Remained Flat Year-On-Oyar as Robust Growth in the Middle East and A Recovery in Asian Markets Has Been Negated by a Sharp Currency Deepracies in the African Markets of Egypt and Egyptan Markets of Egypt Ethiopia.

As for Profits, The Company Had to Divest Its Indonesia Operations and Recognise a Loss of More Than 80 Crore. It also Had to undertake a goodwill consolidation loss of more than 20 Crore on a Sri Lankan Acquisition. Overall, profits for the segment declined by 1.7% in FY25. The International Business Constitutes only about 10% of the company’s reviews and less than 3% of its rights.

Premium Home Décor offerings face headwinds

Asian paints have partnered with sleep for modular kitchens, Acquired White Teak for Decorative Lighting and WeATHERSEAL For Doors and Windows, Windows, Dominates the Bath Market with Esses Esses Esses Esses Esses Esses. It also houses brands such as nilaya, royale and ador, catering to furniture, furnishings, and lighting. It is also into interior designing through beautiful homes service.

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The home décor segment contributes less than 5% to the overal business. It faces steady competition from unorganized players. Its kitchen segment reported flats and accelerating losses owing to transition pains in the Sleek acquisition. White Teak, which procures a bulk of its inputs from China, Saw a sharp 20% drop in revealed to new bureau of Indian Standards (BIS) Specifications. The company had to undertake an impairment provision of almost 80 Crore decision of this.

But the segments hold long-term potential, giving the growing class of aspirational consumers. Supported by new launches of beautiful homes studios and stores, as well as successful collaborations with Sabyasachi, Jaipur Rugs and European Designers, Asian Paints have Grown ASNTEEGTED Décor player.

Silver linings

Asian Paints Continues to Command Strong Brand Recall, and Benefits from Its Efficient Supply Chains and Expansive Distribution Network of 169,000 Retail Touchpoints. The company’s new economy-segment launches such as ace and tractor emulsions, and ‘Neo Bharat’ Latex Paints Should the Supoport Growth Amid The Slowdowne in URBAN Demand. But with a long-term view, 60% of its new products are likely to be in the premium to luxury space, thereby supporting margins. New products Contributed 14% of Revenues in Q4.

Asian paints have also been investment in backward integration with white cement and Vam-Vae (Vinyl Acetate Monomer and Vinyl Acetate-Peetate Copolymer), Which Are Key KEY CONSTURENTUNALY Friendly and High-Performance Paints. They are currently important, and local manufacturing would help improw cost efficiencies. This is expected to support margins while competition-LED Spending Increases. The company has also been investing in digital solutions, innovation-licked extended-warranty formulations, and sustainable products. These initiatives should reinvigorate its brand image, particularly among new-generation boyers.

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Q4FY25 SAW Some Recovery in Demand. Over the Near Term, Moderation in Crude Oil Pries and a Stabilising Rupee Should Support Margins, Especially as the Company does not intend to pass on the benefits to consumors or dealsums amid geopol Uncertainty.

A Recovery in Urban Demand and Sustained Rural Demand Cold Support Growth Going Forward. Despite Competitive Pressures, which will eventually plateau, mangement has reiterated its guidance for 18-20% consolidated ebitda margin. But the timeline is uncertain, and it is too early to call an end to the pressures of the past few years. The stock’s target price has been peged at 2,282, at par with current levels.

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Ananya Roy is the Founder ofcredibull Capital, A SEBI-Registered Investment Adviser. X: @ananyaroycfa

Disclosure: The Author does not hold shares of the company discusing. The views expressed are for informational purposes only and should be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.