Is the Asian Paints stock a safe bet in these volatile times?

When turbulence hits the markets, quality stocks are the best refuge for investors. So, as US President Donald Trump’s tariff tantrums turned global markets red, many Indian investors chose Asian Paints. So much so that the shares of India’s largest paint company, and a darling of quality investors, rose 2.5% in five days while the broader markets corrected 1%.For two years, the Asian Paints stock has been trading at a price-to-earnings (P/E) ratio that is lower than pandemic levels. And if one looks at the trends over the past year, the stock is down 15% while the Nifty 50 fell just 0.5%. So, the temptation for investors seeking safe bets in uncertain markets is obvious.Asian Paints at current levels seems like quality available at a discount. With its paints business built on ‘kitchen relationships’ with dealers and retailers, and a low debt-high ROCE (return on capital employed) business model, Asian Paints might seem like a screaming ‘buy’. But what if the moats that made it a quality stock are under threat?Business moats and growing competitionIn the 1950s, Champaklal Choksey’s Asian Paints was a new paint company struggling to grow in a sector that was dominated by foreign paint brands. Back then, the supply chain for decorative paints was dominated by a few large distributors who were pampered by foreign paint companies.Choksey played along for some time but realised that for his small paint business to grow big, he would need to break the dominance of the big dealers. And so, he built a network of smaller dealers and retailers. Under his ‘open market policy’, Choksey established large chains of company-operated stock points or depots where retail dealers could get their requirements.This disruption affected large dealers, wrote Anupam Gupta in his book The Rise of Asian Paints. Some of these large dealers from Pune, Mumbai and Aurangabad landed at the Asian Paints office to complain: “We built your brand, your product, your business over time and now you are taking it away from us,” they said.Thanks to this reengineering of the supply chain, a decade later Asian Paints became India’s largest paint company. And it still is with about 55% market share today. It currently has the largest paint manufacturing capacity in India of over 1,850 million litres per annum (MLPA) and plans to raise it further to over 2,600 MLPA eventually. Two of its closest competitors are still far behind with a capacity of 1,300 MLPA. Its premium decorative paint products sell for ₹700-800 per litre, and distributors and retailers hold it in high regard.“In the premium category, Asian Paints is still a leader and despite the stiff competition from deep-pocketed new entrants, dealers prefer to retain their Asian Paints outlet and open a separate counter to sell products of other players,” says Soham Samanta, equity research analyst at Centrum India.Due to its dominance in urban areas, the economic slowdown here has affected Asian Paints more than its competition, he says but cautions that the new entrants are offering paints at a 8-10% lower price and Asian Paints could lose market share in the economy segment (paints that sell at around ₹300 per litre).Keeping the dealers, painters or contractors happy is a key to the paint market as end-users have little or no understanding of what differentiates a good paint product from a bad one. When it comes to buying paint, these workmen are the final decision-makers and not their clients. So, any brand that can offer better margins to dealers and painters, with decent quality, can become big.Since 1967, barring a few hiccups, Asian Paints’ dominance in the industry has been uncontested. Most of its competitors were owned by foreign multinational companies and many still are, making it difficult for them to replicate Choksey’s grounded dealer connect strategy.But as of last year, Asian Paints has been challenged by two Indian business houses — Aditya Birla Group and JSW Group, to name a few. One of its competitors, Akzo Nobel India, is bowing out of the competition and has invited bids for sale. Among the potential buyers for the Dulux brand are Asian Paints’ domestic peers Fevicol maker Pidilite Industries, JSW Paints, Berger Paints and Indigo Paints. medium120301223On the other hand, Aditya Birla Group, which already has a strong dealer network for its dominant cement business Ultratech, launched its paints brand Birla Opus Paints in February last year. It wants to become India’s second-largest paint company and has a capacity of 1,332 MLPA. After investing nearly ₹10,000 crore towards the first phase of capex, Birla also plans to undertake incremental capex for adding 500 MLPA in the next phase.According to details shared by Grasim Industries, the parent company of Birla Opus Paints, the company already has about 50,000 dealers in its network and has registered over 3 lakh painters and contractors.“From a dealer point of view, we have excellent response from most of the dealer classes. The medium-sized dealers are giving us excellent response. Many small dealers are also betting with us. And we see in the last quarter, many large dealers are also giving us a large part of the business. So as expected, the momentum across all dealer classes is great. In terms of the number of dealers that we are covering, I think we had talked about 50,000 dealers by the end of the first year. I think we are very close to that journey in terms of where we will end the first year,” Birla Opus CEO Rakshit Hargave told investors in a call earlier this year.The headwindsThe paints industry grows 1.2 times India’s GDP growth every year, say analysts. Assuming that India grows at 6-6.5%, the demand for paints should grow at 7-8% annually. So, for Asian Paints to maintain leadership, its top line needs to grow at this rate. The new entrants, on the other hand, need to grow more than this to capture market share from incumbents.While Hargave did not give specific details of volume growth on the call, the company did tell analysts that its paints business is gaining market share in the Indian decorative paints market quarter after quarter.“Further, buoyed by the success of its economy product range (fetching repeat orders from dealers), Grasim is all set to make its mark in the premium decorative paints segment, fortified by recent commissioning of its plant in Mahad,” ICICI Securities said in a report in March.In the first nine months of FY25, sales volume of Asian Paints grew just 3%. In value terms, sales were down 4.8%. Berger Paints, the second-largest paint company that the Birlas want to displace, reported year-to-date volume growth of 7.7% and value growth of 0.9%. medium120301242One of the reasons why Asian Paints was more affected in terms of volume and value growth compared to others could be that most of its demand comes from urban India and these areas are seeing an economic slowdown. On the other hand, in the non-premium segment, the competition is finding success and gaining market share from this category.“If you see Asian Paints for the next two years, the top line growth is expected to be muted and there is no clear visibility of PAT (profit after tax) improvement either, due to the rising competition. Despite Asian Paints being a quality stock, investors are spooked today because Berger is showing better volume growth than Asian Paints and Grasim is gaining market share,” says a fund manager at a portfolio management service (PMS). His PMS likes to hunt for stocks that offer growth at a reasonable price.He adds that in the face of stiff competition, Asian Paints needs to show enough volume growth to protect its market share even if it comes at lower margins. Eventually, the competitive intensity will come down in a couple of years, but till then the company needs to hold on to its market share, this person says.Still a value buy?Seeing the rising competition, Asian Paints has mounted its response and started to invest heavily. This can be seen in the cash flow statement. In FY24, the company invested ₹2,548 crore into its business and still had a free cash flow of ₹6,000 crore. The market is happy that the company has started to react to the competition, but the fact that Asian Paints keeps retaining cash at this level is something that the market wants to question. That is one of the reasons why the stock has not performed. In any case, in a typical capital cycle phenomenon, markets give a lower valuation to stocks when they are in an investing mode.According to an earnings preview by Centrum, Asian Paints is expected to grow at a CAGR (compound annual growth rate) of 2.5% between FY24 and FY27 and is valued at 48.1x its FY26 earnings. Almost every other stock in Centrum’s FMCG basket is valued cheaper and offers better earnings growth prospects for the same period. Hindustan Unilever, whose revenue is expected to grow at a CAGR of 4.8%, is available at nearly the same multiple as Asian Paints. So, investors betting on Asian Paints at current levels may end up paying a hefty opportunity cost.In what could be deemed as a sign of the times to come, in February, an analyst asked the Asian Paints management to recount the last time when the paints industry had seen such a challenge in terms of demand and consumption. “We haven’t seen possibly a challenge like this in terms of what we see in terms of demand. Possibly when you go to the era of 1997 or something, that is a time when we would have seen some kind of streaks of this kind of market,” answered Amit Syngle, CEO of Asian Paints.Incidentally, 1997 was also the year when one of the key architects of Asian Paints’ success, Champaklal Choksey, died. Post this, the business took a couple of years to regroup under professional management, only to rise and take market share from competitors Kansai Nerolac and Akzo Nobel over the next decade and a half.Can Asian Paints repeat history?