Asian Paints remains bright spot in dull scenario

Valuation of 48x its FY21 earnings at 15% discount to Berger

With the Street unclear as to when the market will bottom out in light of the Covid-19 outbreak, stocks, such as Asian Paints, are considered a good bottom-fishing opportunity.

Investor liking for a stock can be gauged from its outperformance vis-a-vis the broader market, and its peers. While the stock of the decorative paints leader has dropped 10.7 per cent in a month, the Sensex has lost 26.2 per cent and other paint stocks (Berger Paints, Kansai Nerolac, and Shalimar Paints) have fallen between 14.2 and 40 per cent.

What has helped is Asian Paint’s strong ability to withstand and recover fast from the shock, its leadership, strong balance sheet with a cash-surplus position, a higher share of variable costs, strong brand recall, and its pricing power.

There is little doubt that Asian Paints will also see the lockdown affecting its operations. It has already shut its manufacturing plants, and there could be an impact of the labour shortage too.

However, according to Vineeta Sharma, head (research) at Narnolia Financial Advisors, “Asian Paints has all the big moat like huge distribution network, strong inventory management, etc, to sail through this tough time... We believe it’s a good option in the discretionary segment.”

The firm has over 65,000 dealers — at least twice that of Berger Paints, the second largest decorative player. Analysts say Asian Paints is well placed to gain market share once discretionary demand recovers.

According to ICICI Securities, paint demand is expected to recover from Diwali, while some experts believe demand will see faster growth from December 2020.

Once the lockdown is over, lower input costs amid the sharp correction in the crude oil price should help paint players focus on their top line growth, without hurting profitability. However, how the supply of raw material pans out would be a key monitorable, given inputs are imported mainly from China and Europe.

Besides, entry into the high-potential waterproofing segment/products should help Asian Paints expand its market. According to a Bloomberg poll, 21 of the 37 analysts have a ‘buy’ rating. After the recent correction, valuation of 48x its FY21 estimated earnings is 5 per cent higher than its long-term historical average, but at a 15 per cent discount to Berger.