Asian Paints Ltd, a decorative paint manufacturer, announced two acquisitions on Friday to strengthen its foothold in the home improvement and decor segment. The company will acquire a 49% stake in Obgenix Software Pvt. Ltd, known as White Teak, for ₹180 crore. The remaining stake will be acquired in a phased manner over the next three years, consideration for which would depend on achieving certain milestones for the business. It will also buy a 51% stake in furnishing firm Weatherseal Fenestration Pvt. Ltd for ₹19 crore cash. A further stake of 23.9% would be bought in two tranches by FY26.
Asian Paints’ management expects the home improvement segment to contribute 10% of revenues in next three-five years, it said in a conference call. At present, this business forms 2% of revenues. These acquisitions are in line with Asian Paints’ long-term goal of becoming a one-stop home solutions company.
However, Asian Paints’ investors don’t seem too excited with the latest buys. The stock has risen 2% in the past three days. “Asian Paints‘ incremental acquisitions in the home decor segment are small compared with the paint business. So, these acquisitions do not change the outlook on the stock,” said Varun Singh, analyst at IDBI Capital Markets and Securities.
The addition of White Teak and Weatherseal will increase home improvement sales by around 16%, becoming around 2.7% of overall revenues, estimate analysts at Nomura Financial Advisory and Securities (India). As such, revenue accretion from these deals is minuscule. “The company’s home improvement business has recorded about.15% CAGR over FY16-21, with Sleek International (kitchen fittings) and Ess Ess (bath fittings) growing at similar rates. However, its contribution to Asian Paints‘ overall sales has remained the same at around 2% over the period because of the strong growth in the coatings business,” added the Nomura report. CAGR is compound annual growth rate. Asian Paints had acquired stakes in Sleek and Ess Ess some years ago.
In other words, Asian Paints‘ earnings outlook depends on its key decorative paints business in the foreseeable future. In the March quarter of FY22, the company is expected to post double-digit sales volume growth in its paints business. Paint companies have hiked prices by nearly 20% across categories in 9MFY22, to protect margin erosion, following a steep surge in crude-based monomers and important input titanium dioxide. So far in this calendar year, Asian Paints shares have declined by around 7%, underperforming benchmark Nifty50, which has gained 3.5%. Any delay in hiking prices further could be a dampener for the stock. To be sure, inflation-related concerns have played a spoilsport for the stock.
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