This paint business, which was once a stock market favourite, hasn't had a fantastic year. While the Sensex has increased by more than 50%, Asian Paints has only increased by 30%.
The Synopsis
Asian Paints, the world's largest paint manufacturer, has raised prices by just 3% a year for the past 20 years. That's correct, despite the fact that we've had to cope with out-of-control inflation everywhere, paint costs have never been an issue.
The corporation, on the other hand, has finally rolled up its sleeves and is getting down to work. Asian Paints, the industry leader, is raising prices by 7–10 percent starting November 12th. Yes, it's advising everyone to spruce up their homes before Diwali.
But, you may wonder, why the abrupt change of heart. Of sure, earnings are important.
Sales increased by 32% year over year, from Rs 5,350 crores to almost Rs 7,000 crores, according to the company's latest figures (July-September). However, its net income dropped by 28%, from Rs 830 crores to Rs 595 crores. That isn't good news for the corporation.
It's also not a spur-of-the-moment decision. If you've been considering painting your home, you should be aware that costs have risen by as much as 7.5 percent in the last six months. And, although this may not seem unusual in the context of Asian Paints' history, this year has been genuinely "unprecedented."
That was a direct quote from the horse's mouth. Here's what CEO Amit Syngle had to say about it:
"In the previous 40 years, we have never witnessed such high inflationary pressure." In addition, the difficulties in obtaining raw materials and the rising freight prices have been unprecedented."
So, to see what he's talking about, let's break it down:
1. Input expenses are rising.
What goes into the creation of paint? Titanium Dioxide, for example, is a chemical pigment (TiO2). It is responsible for the hardness and opacity of paint. TiO2 alone accounts for around 20% of the raw ingredient. However, TiO2 costs have increased by 25% in the last year, which hasn't been nice.
There's also crude oil. Products generated from crude oil, such as solvents and additives, might account for 30–35 percent of the raw material cost. Crude oil prices have risen by 70% this year, to over $80 per barrel. It is predicted that it will climb by another 30% in the next months.
And, given that raw materials account for half of all income, this type of pressure may be fatal.
2. Problems in obtaining raw materials
Can the paint industry blame a scarcity of transistors and chips, as automotive and electrical industries have done? It turns out that it can!
How? Paint firms, on the other hand, utilise something called a tinting machine. Customers may pick from an unusually extensive catalogue of paints at a firm like Asian Paints. Maybe ten hues of white. How do you think you're going to get all of that paint? This is when tinting machines come in handy. By combining colours, paint sellers may create a variety of tints on the moment. As a result, when a consumer goes into a paint shop and requests a certain shade of white, dealers may utilise these amazing equipment to quickly produce the shade and dazzle their customers.
These devices, too, need chips! So, if Asian Paints wants to grow, add new dealers, or simply replace old machinery, it's now an issue.
3. Costs of logistics
The cost of freight and delivery is skyrocketing. Both on a national and worldwide scale. Obviously, as oil prices have risen, freight expenses have risen as well. The Institute of Logistics of the Confederation of Indian Industry (CII) predicts a 25–30 percent increase in freight charges.
Furthermore, since 30% of raw materials are imported, these expenses may quickly pile up.
4. Depreciation is the fourth step.
If the raw material is imported, it is usually paid for in US dollars. The Indian rupee has lost approximately 3.5 percent versus the dollar since the beginning of current fiscal year. And it raises the price even more.
In the end, all of this is starting to squeeze margins.
Asian Paints' profitability has suffered as a result of its refusal to pass on a large portion of these expenses to customers. In order to make up the shortfall, they may have to raise prices by another 5%.
This isn't simply a problem with Asian Paints. Berger Paints, Kansai Nerolac, and Akzo Nobel have all performed much worse over the last year. Asian Paints may have had a role in this as well, given their aversion to raising pricing in order to maintain market dominance.
So, it's possible that this is only a hiccup, and Asian Paints will emerge victorious in the end.
(Source: Finshots)
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