Asian Paints to expand paint manufacturing capacity at Ankleshwar unit

Asian Paints to expand paint manufacturing capacity at Ankleshwar unit

Asian Paints will expand the manufacturing capacity of paint at its Ankleshwar unit to 2.5 lakh kL from 1.3 lakh kL.
It will also expainds its resins and emulsions capacity to 85,000 from 32,000 tonnes.
The capacity expansion plan will result in an investment of Rs 960 crore over the next 2-3 years.
Through this expansion drive, the paint maker aims to thwart growing competition in the segment.
Recent two year standalone performance of Asian Paint remains satisfactory. It’s standalone sales growth rates(up 44%) was better than its nearest rival Berger (up 35.5%). On two-year basis, Berger’s consolidated sales growth was at 39.2% versus Asian Paints at 40.5%.

Also, Berger is estimated to have clocked volume growth of around 20% y-o-y, trailing Asian Paints’ 34% y-o-y volumes growth in the decorative segment.
However, Berger’s operating performance has been better than Asian Paints’ amid the challenges of cost inflation. On a consolidated basis, Berger’s Q2FY22 Ebitda margin fell 333 basis points (bps).
Asian Paints saw its operating margin decline by 1090bps, followed by Kansai Nerolac’s 937bps fall and Indigo Paints’ 690bps margin compression.

As for Berger’s gross margin, it fell 449bps y-o-y impacted by input cost inflation. Asian Paints’ gross margins shrunk by 970bps in Q2FY22. Of course, paint companies are taking calibrated price hikes to protect their margins but they are unlikely to compromise on market share gains by focusing on price hikes. In simple terms, cost inflation concern is unlikely to ease in a hurry.
While input price index is up almost 60% y-o-y, the paint industry and Berger are behind the curve in passing on entire input inflation as they are gaining market shares and would like to continue that instead of just focusing on margins. There will be some signal to the new competitors. The paint industry’s profit pool is likely to be under pressure in H2FY22 and FY23.
It seems Asian Paints is trying to achieve economies of the scale through capacity expansion plan.

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