Decorative paint maker Asian Paints Ltd on Friday announced two acquisitions to strengthen its presence in the home improvement and décor segment. The company will acquire 49% stake in Obgenix Software Pvt. Ltd., better known as White Teak, for 180 crores. The remaining stake will be acquired in a phased manner over the next three years, subject to achieving certain milestones for the idea business. It will also buy a 51% stake in furnishing firm WeatherSeal Fenestration Pvt. for ltd 19 crore cash. Another 23.9% stake will be bought in two phases by FY26.
Asian Paints’ management expects the home improvement segment to contribute 10% to revenue over the next three-five years, it said in a conference call. Currently, this business makes up 2% of revenue. These acquisitions are in line with Asian Paints’ long-term goal of becoming a one-stop home solutions company.
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However, Asian Paints investors are not too excited about the fresh buy. The stock has gained 2% in the past three days. Asian Paints’ incremental acquisition in the home decor segment is small compared to the paint business. Hence, these acquisitions do not change the outlook on the stock,” said Varun Singh, analyst at IDBI Capital Markets & Securities.
Analysts at Nomura Financial Advisory & Securities (India) estimate that with the addition of White Teak and WeatherSeal, home improvement sales will increase by about 16%, accounting for around 2.7% of total revenue. Thus, the revenue growth from these deals is negligible. “The company’s home improvement business has registered around 15% CAGR in FY 2016-21, with Sleek International (kitchen fittings) and AS S (bath fittings) growing at similar rates. However, its contribution to Asian Paints’ total sales has remained the same at around 2% over the period due to strong growth in the coating business,” said the Nomura report. CAGR is the compound annual growth rate. Asian Paints had acquired a share in this. Sleek and ass a few years back.
In other words, Asian Paints’ earnings outlook in the near future depends on its core decorative paint business. In the March quarter of FY22, the company expects to post double-digit growth in sales volume in its paint business. After a huge jump in crude-based monomers and critical input titanium dioxide, paint companies have hiked prices by around 20% across all categories in 9MFY22 to avoid margin erosion. Shares of Asian Paints are down nearly 7% in this calendar year so far, which is lower than the benchmark Nifty 50, which has gained 3.5%. Further delay in prices may impact the stock. To be sure, inflation concerns have played a bad game for the stock.
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