“We’re in the business of delivering joy,” said Amit Syngle, the managing director of Asian Paints in the Q4 earnings call. While the company has not given its investors much to cheer about in FY21, FY22 looks more promising. This is on the back of resilient demand in urban and rural areas despite the lockdown, increasing volume growth, and a revival in an important segment for the paints market leader.

In Q4FY21, the strong growth momentum of the previous quarters continued. Asian Paints volume grew by 48% YoY due to demand from housing and automobile companies. Even with rising input costs, margins improved YoY. With demand and volume growth continuing into FY22, the company’s price hike (taken in April 2021) will aid revenues in Q1FY22.

Asian Paints’ home improvement segment (kitchenware, bathware, home decor, etc.) increased its contribution to total revenue in FY21. While it hasn’t recorded an operating profit since its launch in FY14, the management is expecting to break even in FY22. This will further the premium of Asian Paints stock compared to other paint companies as it looks to diversify beyond paints and building materials. 

With these factors in play, will Asian Paints bring some colour to investors? Or will the second Covid-19 wave dampen the enthusiasm?

Rising input costs shrink margins

In Q4FY21, Asian Paints’ revenues were Rs 6,727 crore, an increase of 43.4% YoY. This was because of a low base in March 2020 when the company halted operations due to the first wave. 

Operating expenses rose by 41% YoY in Q4 due to rising input costs. The cost of inputs like pigments (titanium dioxide) and polymers (crude monomers) are up by 20% in the past year.  The surge in raw material costs dented net profits, which were lower by 24% in Q4 against the previous quarter at Rs 852 crore.

Asian Paints’ earnings before interest and tax (EBIT) margins were 20.7% in Q4, a decline of 6.7 percentage points on a QoQ basis. Net margins were 12.7%, lower by 5.3 percentage points.

Price hikes, volume growth to aid switch to rural

Even with high input costs, Asian Paints did not take a price hike in Q4. In April 2021, the company announced a 2.8% price hike. In Q4, volumes grew by 48% YoY. This is despite Q4 being a traditionally weaker quarter than Q3 because of lower disposable income due to the festive season in Q3. The volume recovery and the price hikes will aid revenues in Q1FY22.

The growth in volumes of the paints market leader is because of customer preferences shifting from the unorganised paints sector (33% of total paints market) to the organised paints market. Brokerages expect changing customer preferences to sustain even after the second wave subsides. 

Asian Paints is an urban-centric company with 60% of demand coming from metro, tier 1, and tier 2 cities. Since urban demand was worse hit than rural due to Covid-19 in FY21, the company is shifting its focus to rural areas. The management expects higher agricultural income in rural areas to boost disposable income for paints. Because of Asian Paints’ pricing power, this is expected to increase its market share, eating into the market share of rural-focused paint companies - Indigo Paints and Nippon Paint.

In order to capture the rural market, brokerages expect Asian Paints to increase advertising expenses. In FY20, Asian Paints’ spent Rs 283 crore in advertising, which is more than the other top-5 paint companies’ (Berger Paints, Kansai Nerolac Paints, Akzo Nobel, Indigo Paints and, Nippon Paints) advertising spend combined (Rs 263 crore). 

Asian Paints’ rural expansion will not be limited to decorative paints. The management said that in FY22, the company’s focus will be its home improvement segment. These will “keep the volume game alive” said Syngle. 

Home improvement expected to breakeven after seven years

Over 75% of Asian Paints’ annual revenue comes from decorative paints. But over the years, it is expanding its portfolio moving beyond paints into building materials and home furnishings. Since FY14, the company has maintained a policy to enter into one new adjoining business segment every year. Asian Paints has entered into waterproofing, putty, adhesives, primers, kitchen interiors, bath-ware, and home decor.

In FY21, the home improvement segment (which includes kitchen interiors, bath-ware, and home decor) performed exceedingly well. In Q3, the segment’s revenues surpassed pre-Covid levels and in Q4, while the decorative paints segment’s revenues dropped by 2% QoQ, home improvement revenues grew by 22%. This was led by an 11% and 13% YoY revenue growth in kitchenware and bathware. The home improvement segment’s share of total revenue was 2.8% in Q4, the highest its been since its launch. 

In Q4, the home improvement segment made an operating loss of Rs 1.1 crore, this is down from a loss of Rs 21 crore in the year-ago period. The management expects the segment to break even in FY22. The segment has not recorded an operating profit in seven years. With the strong performance of the home improvement segment in FY21, the management is positive it can break even in FY22 led by the home interiors segment which includes furniture and lighting. 

Asian Paints will put its weight behind home interiors for two reasons. 

First, no other paint company has diversified into home interiors as heavily as the market leader. Second, the company has no cement subsidiary to strengthen its building materials segment. Companies like the newly launched JSW Paints (launched in FY20) has JSW Cement and the forthcoming Grasim Industries’ paints business has UltraTech Cement and its white cement subsidiary Birla White for distribution. Brokers expect Asian Paints to invest heavily in this segment in FY22.

Asian Paints’ capital expenditure (capex) in FY21 was Rs 282 crore, a 30% decline YoY due to lower paints demand in the first half of the year. In FY22, capex in paints and building materials will be low because of outsourced production. Putties, waterproofing, primers, adhesives, bathware, and home decor are either entirely or partially outsourced. Only kitchen decor and tiles are manufactured in-house. This will allow the company to invest in the home improvement segment for which it has sufficient free cash flows.

Asian Paints’ moat grows beyond paints

Investors have attached a premium to Asian Paints’ stock because of its 42% market share in the paints market. This market share is higher in urban areas. But in January 2021, its investors were spooked by the announcement of Grasim Industries’ entry into the paints market. However, Grasim Industries said it will be a “number two-player” and its entry will only be in FY24. 

With competition in the paints market set to increase, Asian Paints is acting fast. In FY22, it will increase its rural penetration and focus on the home improvement segment. This expansion and diversification will widen Asian Paints’ moat. Smaller paint companies have a weaker distribution channel and pricing power compared to the market leader. With the expected growth in home interiors thrown in the mix, smaller paint companies will find it difficult to compete.

This home improvement moat will be backed by strong growth in its decorative paints segment. With the demand momentum set to continue once the second wave subsides, volume growth steady, and price hikes, Asian Paints’ expects a bright FY22.