Why Asian Paints corrected 15% in just three days

The stock of Asian Paints has seen some sharp correction. It has been consistently losing 3-4% on a daily basis last few days. It has lost close to 20% in less than a fortnight. From its recent peak, the stock of Asian Paints has fallen about 25-30% in a very short span of time. Most of the damage happened after the company reported pressure on operating margins due to a sharp spike in the cost of inputs. Crude has been a huge overhang for the stock.

What has gone wrong with Asian Paints? The Asian Paints saw selling pressure following a very steep rise in crude oil prices. In fact, crude has rallied from $69/bbl in early December, to above $115/bbl in early February. That has substantially contributed to cost pressures and it is likely to show up in operating profit numbers in the next few quarters also. Higher crude oil increases input costs for paint companies, since they use crude derivatives.

The ongoing war between Russia and Ukraine is making the oil market tighter. Oil markets are scared because Russia exports nearly 7.8 million barrels of oil per day. That means; nearly 8% of the daily supply of crude oil comes from Russia alone. This has led to a sharp rise in the price of crude. If Russian supply vanishes from the market, then it is likely to make matters worse for the paint companies as crude would spike further in that case.

Asian Paints is India’s largest paint company with a dominant market share and also a substantial mindshare. Asian Paints, along with its subsidiaries, has operations in 15 countries across the world and holds about 26 paint manufacturing facilities. Asian Paints services consumers in over 60 countries and in this business the operating margins tend to be tight as this is a highly competitive industry. That is why crude is such a big hit for APIL.

For the third quarter ended December 2021, Asian Paints, reported consolidated net profit lower by 18.49% at Rs.1,031 crore. This was on the back of a 25.61% surge in revenues from operations at Rs.8,527 crore in the third quarter. The fact that Asian Paints has maintained sales means it has managed to pass on some of the cost in the form of higher prices. Also, its brand leadership has helped it hold sales. However, net margins suffered deeply.

There is some good news for Asian Paints on the technical front. If you look at the charts of Asian Paints, the stock's RSI (relative strength index) stood at 29.180. The RSI typically oscillates between zero and 100. In terms of guiding levels, RSI is considered to be overbought when it is above 70 and is considered to be oversold when below 30. By that definition, Asian Paints is oversold and upside potential could be meaningful from here.

Also, the stock of Asian Paints is trading just below its 50 and 100 days simple moving average placed at 3278.72 and 3223.54 respectively. These levels are likely to act as a support for the stock.