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Asian Paints Short Analysis

Asian Paints Short Analysis

Published on 28 February 2021 Views 151 Comments 1

Introduction
Paints Sector which normally trade at premium valuation are now facing a downfall trend and the market leader of this sector i.e., Asian Paints has fallen by almost 20% from its All-Time High levels in this journey and the same has bothered its keen investors. So, in this blog, we will look after what are some possible reasons behind this fall in stock price of Asian Paints.

Reasons behind the fall in stock prices

i) Sluggishness in Broader Market

  • Stock Markets have witnessed fall of 7%-8% from its peak level in Index and same can be witnessed in stock of Asian Paint in more aggravated manner.

ii) Increasing Crude Oil Prices

  • As we already know, Prices of Crude oil have a huge impact on Paint Sector, the same has been affecting the prices of Asian Paints as well.
  • 50%-60% of the raw material cost of a Paint Industry accounts to Crude & Crude Derivate Products.
  • And since, Crude Oil prices have increased by nearly 28% over last 2 months, it has also affected the profitability of the paint sector.
  • Further, it may affect Operating Profit Margin of the company, then profitability and ultimately the valuations of the firm.

iii) Entrance of Aditya Birla Group in Paint Sector

  • Aditya Birla Group is planning to invest around Rs. 5,000 crores in Paint Sector.
  • Entry of Birla Group in Paint Sector is majorly on Decorative Paints which can be a possible competitor for  Asian Paints.

Competitive Analysis of Asian Paints

From Return Point of View of last 1-year, Asian Paints have outperformed all other players in the market by generating appreciable return of 26.7% despite downfall in the economy. Whereas, other players like Berger Paints, Akzo Nobel & Kansai Nerolac have yielded return of 20%, -8.2% & 11% respectively.

Technically, with the higher return potential in the stock, it also carries extra Beta along with it and there by fall in particular stock is also high in comparison to other players.

Downfall of Paint Stocks

  • Following the upward journey in the NIFTY & Sensex, Paint Sector Stocks had also managed to enjoy the rally and nudged their All-Time Highs.
  • But again, with the ongoing weakness of the market, Paint stocks have also crashed from their ATH levels.
  • Like, Asian Paints is down by 20.7%, whereas, Berger Paints is down by 17.6%, Akzo Nobel have also fallen by 14.70% and fall of 17.79% is witnessed in Kansai Nerolac.

Valuation

  • Asian Paints is currently trading at PE ratio of 79.5. Whereas the Average PE of Asian Paints for last 1-Year, 3-Year & 5-Year are 82.3, 62.4 and 59.1 respectively. This data represents that Stock is Undervalued on current base.
  • If we look out over this in technical terms, the stock has crossed the Support level as per 1-Year Median PE of 82.3.
  • Asian Paints has witnessed good Q3FY21 but the rising Crude Oil prices may spoil their profitability level in upcoming times.

Future Prospects

  • With the increasing demand and expected growth in Renewable Energy Resources, there will be certainly a downfall in price of crude oil which might prove advantageous situation for the paint industry.
  • Further, with proper handling of raw material operations, business can efficiently improve their profitability.
  • Also, with the eminent Demographic Dividend and expected increase in Disposable Income of the society there is clear visibility of the growth as well as earnings in this sector.

Conclusion

If any stock is facing a notable amount of fall (for instance 20%) that we are witnessing in Asian Paints, then it might be a good time to accumulate such stock. Also considering the other important issue i.e., rising crude oil prices which is not permanent & increasing disposable income clearly presents the high growth and earning visibility in this sector. Hence, with proper research and study, one should keep this stock in radar or allocate some of the funds in this stock.



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