Earlier this year, on 15th July, we wrote in a post titled ‘The Coming Paint Wars’ Asian Paints is likely to underperform for a considerable period. Since then, it has declared two quarterly results, for Q1 and Q2 FY25. After the Q2 results, which came out this Friday, the stock was battered 2.5%.
From the time we wrote our earlier note in July, to now, the stock is a clear underperformer (see table below), losing over 6% to around 2% for Nifty.
In between, the stock had risen, peaking at around Rs 3383 on 12th Sep. If we compare to Nifty from that day, the underperformance is even more pronounced.
An obvious reason is underwhelming results (see table below). The topline is not growing, and there is margin pressure. Both got more pronounced in the Q2 results.
How low can the stock price go? We are reminded of what Hindustan Unilever went through from the end of 2000 to 2004. The stock fell from Rs 300 levels in Feb’2000 to Rs 100 levels by Aug’04, or about around 65% (see chart below).
At Rs 300 levels, one of us had written a note saying HUL should correct by around one-third, or to Rs 200 levels. This was right after the last analyst meet that Keki Dadiseth took as the outgoing chairperson of HUL. In that analyst meet – for the 1999 annual results – he made an innocuous statement that got us thinking that things weren’t going well for HUL The entire analyst community present in the meeting (analyst meets used to be offline in those days) missed the significance of that statement, no one changed their reco for a long time. To be totally truthful, our note never got published, because the boss got cold feet, and the stock did much worse than we thought.
As a hilarious aside, when HUL’s share price was just over Rs 100, a top tier brokerage published a Sell note, with a target price of around Rs 60. The firm had maintained a positive / neutral stance till that time. The day this note came out was pretty much the bottom of HUL, it rose spectacularly after that.
We are not saying Asian Paints will eventually fall over 60%. The detour to HUL was just a reminder that blue chips can also endure phases of horrible underperformance. HUL eventually got its act right and came roaring back as an outperformer. Asian Paints has fought tough battles before, like when one of the promoter families sold out to British paint major ICI. The other three families dug their heels in, and the company came out a winner. Let’s see how Asian Paints comes out of this fight.