The latest quarterly results announced by the market leader – Asian Paints, conveys more than that meets the eye. On the positive side, there was a huge volume growth of 34% during the second quarter of current financial year is also not expected as the economy had just come out of lockdown 2.0 and it was a lean season as the business slows down during the Monsoon period. However, defying all these logics, India’s premier decorative paints maker posted volume growth that’s difficult to expect even under normal circumstances. With three-year volume CAGR of 20% on YoY basis (even one had to adjust for favourable base and pent-up demand), Asian Paints has once again proved its superiority over others in the business.
Margin under pressure
However, the other side of the story is also equally surprising, for that matter, shocking! Asian Paints could achieve its rarest volume growth by sacrificing 1000 bps margins which is also one of the rarest things to expect from the company like Asian Paints which has highest brand recall value. Does it mean that price elasticity of decorative paints has gone up post lockdown? Or is it because of the change in strategy by the market leader?
Affected by cost inflation
Yes, everyone has been affected by cost inflation and decorative paints business was affected more than any other industry because it’s a raw material intensive industry with more than 300 materials needed to manufacturer paints most of which are petroleum based. As the crude oil price is moving northwards, cost of production too is galloping. However, in paints business effect of price rise (of raw material) is felt with a time lag – usually after 2-3 months. According to the company’s management, inflation environment currently seen is one that has not been seen in the ‘last forty years.’ Over and above, freight costs have also moved up and plus there was a need to spend on marketing to support business growth.
Price hikes didn’t cover full cost inflation
Indeed, paint manufacturers have resorted to frequent price hikes to absorb cost increase but that was not enough to cover the complete cost inflation as is evident from the margin compression. Even during the current quarter Asian Paints is likely to take price hikes but it will be moderate one. It may not be in double digits as indicated by the company management. Considering the recent price spurt in raw materials, the company may have to take at least 15% price hike but actual hike may be in the region of 6-8%.
Change in the strategy?
Now the big question is – why the company is making such sacrifice? Is it a change of strategy? Considering the various sequence of events that have happened in the recent past one may be forced to believe that the company is reworking on its strategy.
Two business houses – JSW and Birlas – both with deep pockets have announced their intention to enter the paint business. While JSW is already in the business since last two years, Birlas through Grasim will be setting up their first paint unit in Haryana for which they recently bought land. Also, the existing players like Indigo Paints through their innovative strategy are slowly but surely gaining market share (though not at the expense of Asian Paints). These events might have forced the market leader to rework its market strategy and perhaps go back to its old strategy (practiced during 2008-2011) of keeping volume and market share above rest may come back into play.
The company may be aiming at its long term benefits though in the short term it may have huge impact on its profitability. Further, the company has also added 40,000 retail touch points in last 18 months. This may further put the newcomers on the backfoot. The company is already reaping the benefits of expanded distribution network as indicated by market share gains. The company has gained market share not only from unorganised sector but also from organised players. When the benefits evident within a very short span of time, Asian Paints has all the reasons to continue with this strategy in the foreseeable future to gain market share and weaken the rival brands.