Although a favourite of long-term investors for compounding wealth consistently over the last few decades, the stock of has hit a rough patch. The Nifty stock slipped another 3 per cent on Tuesday morning to hit a 52-week low of Rs 2,585.05.
The stock is now down over 22 per cent year-to-date (YTD) and 11 per cent in the last one-year period.
For investors of Asian Paints, there are two major headaches – rising crude oil prices and
‘s plan to disrupt the paint industry in Jio-style.
Crude Reality
Crude derivatives roughly form 30-40 per cent of raw material costs for Asian Paints and therefore any rise in crude oil prices may directly impact its margins as the company may not have enough pricing power to pass on the inflationary pressure on to consumers.
Last week the international oil prices hit near a 13-week high, underpinned by robust demand from key buyers like the US. Crude oil prices have risen sharply in the last few months, on the back of a fall in Russian exports and demand cuts in China. Brent crude futures are now trading near $122 a barrel.
Grasim Factor
Grasim Industries, part of the Aditya Birla Group, had last month announced to double the capital expenditure for its entry into the paints business to Rs 10,000 crore. It intends to start production from the March quarter of FY24.
Global brokerage Jefferies has compared it with Jio’s foray into the telecom industry, with significant capacity additions, which ultimately resulted in lower industry tariffs.
“While success is not guaranteed as there is no clarity on its plan on branding and distribution, given significant capex, Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure which may have a greater impact on smaller players but Asian Paints may also be at risk,” said Jefferies’ analyst Vivek Maheshwari.
Street View
Brokerages, however, are not as bearish on the stock. The average target price of Rs 3,359 signals a 27 per cent upside in Asian Paints shares. The consensus recommendation is to hold the stock. Out of 34 analysts covering the stock, 15 have buy recommendations while 10 have a bearish outlook.
On the other hand, long-time fans of Asian Paints are busy lapping up the stock with both hands to take advantage of the dip.
“We have seen these cycles before. In the last 20 years, there have been three occasions where in a span of 80 months the price of crude has doubled. On each of these occasions, Asian Paints and
have held onto their gross margins and their operating margins because of the sheer strength of the franchises. With the lag of a few quarters these companies pass on the raw material cost hike on to the customer base and protect their margins,” PMS fund manager Saurabh Mukherjea said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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