Latest price hike surprising, but may not dent Asian Paints market share

Smaller players have already taken hikes and are more impacted from supply disruption

In a weak market, the stock of the country’s largest paint maker gained 2.4 per cent in trade on Wednesday. The gains were driven by reports that the market leader will take yet another hike ranging from 4-6 per cent from December 5 to offset the sharp rise in input costs.

After raising prices by over 7 per cent in the first half of the financial year (FY22) and 9 per cent effective November 12, the latest round of hikes planned next month would take the cumulative hikes this year to over 20 per cent.

Analysts led by Abneesh Roy of Edelweiss Research say that the latest round of hikes is a surprising move for the Street. Other paint companies, according to them, have indicated that current price hikes are enough to pass on commodity inflation.

Brokerages believe that the gap between the company’s pricing and raw material costs will be bridged now as the cost increase in the first half of FY22 was about 21 per cent. Severe commodity prices had led to a steep 966 basis points hit on the gross margins and almost 1,100 basis points dip in operating profit margins (OPM) in Q2. OPM levels are expected to trend back to the 18-20 per cent range from 12.7 per cent reported in the previous quarter.

While the company had reported a volume growth of 34 per cent y-o-y in Q2, the key hereon would be the impact on volumes/demand given the unprecedented price hikes. Mihir P Shah and Abhishek Mathur of Nomura Research expect low probability of any consumer downtrading to unorganised brands and that the market leader will maintain its competitive lead and share gain ability vis-a-vis smaller players. This is because smaller players (less pricing power) have already taken double digit price increases earlier. Further, supply chain disruptions have impacted these players more severely impacting their ability to procure supplies and service the market.

The other factor is impact on the budget of the customer. While the price hikes are steep (over 20 per cent), the impact on the consumer will be limited to 8-10 per cent as paint cost is about 45 per cent of overall cost, the rest of the painting cost is manpower.

Edelweiss Research, however, doesn’t rule out some impact on volume growth at the lower end if rebates are not high.