Saurabh Mukherjea explains how one paint maker is crushing competition

Paint makers are bearing the brunt of higher input costs due to rising raw material prices. This is reflected in Asian Paints' Q2 numbers, where the profit fell short of Street estimates by a wide margin even though revenue exceeded expectations. But market guru Saurabh Mukherjea remains bullish on Asian Paints yet again.

In an interview with CNBC-TV18, Mukherjea said the latest quarterly numbers make it relatively clear that Asian Paints is hammering the competition.

Asian Paints' net profit fell 29 percent though revenue jumped 32.6 percent. The company's Q2 performance also disappointed analysts on the EBITDA front. The company's cost of material consumed jumped 72.7 percent in the three months to September 2021. That is when Asian Paints has taken a series of hikes and is looking at further raises to counter inflation.

: Asian Paints Q2 profit falls 29% to Rs 605 crore, misses Street estimates

Asian Paints' management said the prices of raw materials have increased since the beginning of 2021, impacting its margins across units in Q2. CEO and Managing Director Amit Syngle said the company is confident of being able to turn this around strongly in the coming quarter.

"All the businesses continue to engage in some ground-breaking work to enhance customer engagement and advance the value proposition of its various product and service offerings, further increasing the organisation’s value creation potential," he said.

Market veteran Mukherjea said Asian Paints has shown "plenty of strategic aggression" in the past three quarters. That is "gladdening our hearts, leading us to buy even more of the stock". Barring Berger Paints, the competition may not be able to keep up with Asian Paints, believes Mukherjea of Marcellus Investment Managers.

Here's how paint makers have fared on Dalal Street in the recent past:

According to Mukherjea, Asian Paints has not yet taken meaningful price hikes. "What we look for in companies is the ability to suffocate the competition when the going gets tough. As the global recovery picks up, one would expect input cost inflation, what we are trying to see is which franchises makes the most of it, and build their competitive advantages further," he said.

Asian Paints is way more profitable than the competition, and three times as large as its nearest competitor, according to Mukherjea.

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"By preventing price hikes from coming through so far, Asian Paints is hammering the financial strength of its competitors. Barring Berger Paints, one really worries about the rest of the companies and their ability to deal with this sort of pricing pressure from Asian Paints. This is a historical trait you will see this across sectors," he said.

Mukherjea asserted that in India, market-leading franchises suffocate competition, holding prices deliberately when input costs rise, which leads to rivals' margins getting torched.

Growing your dealership network by 50 percent through the pandemic is mind-boggling, he said. "Before COVID, Asian Paints had twice the dealership network than its closest rival and as said in their earnings, they have grown the dealership network by more than half. So at the peak, they had around 80,000 dealerships, and now they have through COVID added 40,000 more," he said.

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Mukherjea is also bullish on the paint maker's non-paint initiatives, which are all profitable. "They are growing and are doubling year on year like their waterproofing and home decor businesses... Asian Paints is getting stronger, suffocating the competition and we are in the business of investing in great franchises.

"We bought the stock yesterday and we are buying more as we speak. And this is exactly the sort of reason why living in India and investing in the Indian market is such a privilege," said Mukherjea, the author of Unusual Billionaires and Coffee Can Investing.