Asian Paints Ltd has benefited immensely from the growing demand for its paints to decorate new and existing homes, and also from users in the automobile and industrial sectors. But the current fiscal year has seen this demand being accompanied by a trying set of circumstances.
Blame it on the growing affluence in developing markets that can have unintended consequences. Rising demand for quality paints has increased consumption of a key pigment—titanium dioxide. Limited supplies have allowed global producers to effect a series of price hikes. Chemical maker Huntsman Corp. said the selling price of pigments rose by 38% year-on-year and by 15% sequentially in the September quarter. Prices are set to increase again from 1 January.
Now, cost increases were visible in 2010-11 as well. But the rupee’s depreciation is magnifying the extent of the impact. That is, if prices of titanium dioxide were to increase by $100, what would have been an increase of say Rs 4,500 is now translating to an increase of Rs 5,200. Under normal circumstances, Asian Paints could have passed on the cost hikes in full. But the company has already hiked prices earlier, and economic conditions are not conducive for sustained price increases.
Slower growth rates are visible in key sectors such as automobiles, construction and infrastructure. Even if the company’s leadership position in decorative paints gives it pricing power, exercising too much of it may end up hurting demand in the medium to long term.
In the September quarter, Asian Paints’ consolidated sales rose by 24.3%. It did not hike prices during the quarter, but had raised prices by 8.33% in the previous quarter. The September quarter experienced slower demand due to an extended monsoon, according to the company. But the cumulative effect of price hikes helped sales growth. Now, investors would watch if demand spills over to the December quarter, leading to healthier growth.
On the cost front, the rupee has depreciated further in the current quarter, which, along with an increase in pigment prices, sets the stage for continued pressure on margins.
Asian Paints’ experience in handling such situations in the past will be tested to the hilt. Its share continues to outperform the broader market, though its current level is unchanged from the start of 2011.
A rebound in the rupee back to its normal levels will be a near-term positive trigger. In the medium to longer term, an easing of input costs and brighter economic growth prospects will be welcome signs.
Till then, the company’s stock may continue to be dogged by a cost overhang.