Asian Paints’ strokes of price hikes to fight inflation yet to brighten margins
Asian Paints’ consolidated gross margin felt the heat of high-cost inventory absorption in the September quarter (Q2FY27), sliding to a 15-quarter low of 39.7%, down around 350 basis points (bps) year-on-year. The cost of goods sold rose 24% year-on-year last quarter. Since this pressure was already anticipated, Asian Paints took a 5% price hike in Q2, following the 7% increase in Q1.
The raw material inflation scenario remains uncertain, so a further price increase of 3.5% has been announced for November. This also factors in the anti-dumping duty on key input titanium dioxide (TiO2). Asian Paints estimates a cost impact of 2-3% from the duty, which it is mitigating by rationalizing TiO2 use through alternative chemistries.
Pricing pressure
Dealer channel checks by Systematix Shares and Stocks (India) indicate that Asian Paints will take another price hike of 3-4%, effective 21 November, likely across product categories. This would take the cumulative hikes since April to 19-20%. Asian Paints has said price hikes will remain calibrated as it wants to avoid disrupting consumer demand amid elevated competition. Aggressive cost pass-through could lead to downtrading, given the discretionary nature of paints, eventually hurting market share.
Besides price actions, Asian Paints is also banking on sourcing efficiencies and cost optimization to protect profitability. It has guided for a gross margin band of 41-43% and expects to maintain an Ebitda margin of 18-20% for FY27, aided by premiumization. In Q2FY27, Ebitda margin fell 200 bps year-on-year to 15.6%.
The first phase of its vinyl acetate emulsion (VAE) manufacturing facility commenced operations in September, and management expects the facility to yield an overall gross margin benefit of 300-500 bps across product segments. While the timeline for achieving this accretion was not stated, management indicated that full utilization of the phase-one capacity would be achieved in FY28.
VAE advantage
PL Capital expects competitive intensity to remain elevated as players like Birla Opus, JSW Akzo and JK Cement continue to expand distribution and product range, so it feels that margin accretion from VAE facility holds the key to upgrade Asian Paints' earnings and restore competitive edge in the long-term.
Asian Paints’ consolidated revenue grew 16.9% year-on-year, largely backed by price hikes and decorative volume growth of 6% in Q2FY27. The company foresees 8-9% volume growth in Q3, with strong demand traction during the festive season, weddings and new product launches. New products contributed 18% to Q2 revenue.
Despite price hikes, decorative paints volumes grew 7.7% in H1FY27. Still, some broking firms have trimmed earnings estimates amid volatile input cost inflation and increased competition. These factors could curtail earnings growth for incumbent players despite their distribution and network strength.
From its 52-week high of ₹2,985.70, seen in December, the Asian Paints stock is down 24%. At FY28 price-to-earnings, it is trading at a multiple of 38, showed Bloomberg data.
“While fresh price hikes coming in November lift the outlook for realizations, raw material (largely crude-linked) costs remain elevated, and we expect H2FY27 gross margins to also contract about 120 bps year-on-year (limited by sourcing/ formulation efficiencies) while H2/FY27 operating margin would be flattish year-on-year,” added the Systematix report.