What exactly has gone wrong with the stock of Asian Paints and why is the stock down so sharply in recent weeks?

You are absolutely correct; it is hard to recollect the last time that Asian Paints corrected so sharply in a short span of time. But there are some obvious reasons for this performance. Let us look at the stock price first. The stock lost close to 20% in less than a fortnight. In fact, the stock is down nearly 30% from its recent peaks. The damage started after Asian Paints reported pressure on operating margins while reporting results for the third quarter.

In the last few days, the big reason for the fall in Asian Paints is the sharp spike in the price of crude. Just look at the last 3 months. Crude has rallied from $69/bbl in early December, to above $118/bbl in early February. Since crude and crude derivatives are important inputs for the manufacture of paints, the spike in crude prices has really hurt Asian Paints. Markets are now apprehensive that the pressure on OPM in Q4 could be deeper than Q3.

The war between Russia and Ukraine and the sanctions imposed on Russia are only making matters worse for Asian Paints. Currently, Russia exports about 7.8 million barrels of oil per day or roughly 8% of the total supply of oil in the market. Now, that is huge impact and if that supply vanishes, prices of crude will shoot up further. This has been putting a lot of pressure on crude prices and depressing the price of Asian Paints.

The pressure was visible in Q3 numbers. In the Dec-21 quarter, Asian Paints reported 18.5% fall in net profits at Rs.1,031 crore. This was despite a healthy 25.6% surge in revenues from operations to Rs.8,527 crore. The only reason, Asian Paints could maintain buoyant sales was that it could pass on some of the cost spikes in the form of higher prices due to its brand and strong market positioning. However, that could not really save the OPMs.

Some of the optimists are suggesting value buying at these levels, but as long as crude is rising rapidly, Asian Paints is going to be under pressure.