Amid high volatility due to the Ukraine-Russia war and increasing crude oil price, market experts suggest investors accumulate quality blue chip stocks on dips in order to build a long-term portfolio. Asian Paints is one such stock that Sharekhan recommends buying amid volatility given its strong market presence and growth prospects. “With Asian Paints focusing on becoming a complete home décor play, its valuation will remain at a premium in the consumer space. Company’s strong growth prospects makes it a good buy in every dip from a long-term perspective,” said Sharekhan in its note. Asian Paints scrip closed 1.16% down at Rs 3,016 apiece on BSE today.
Asian Paints a good buy in every dip from a long-term perspective
The Indian paints industry was reeling under pressure of high input costs with margins of all paint companies sharply declining. Paint companies hiked prices by 15-16% in Q3FY2022 in order to mitigate cost pressures. However, the Russia-Ukraine crisis led to a sharp spike in crude oil prices which further stressed margins of the paint companies. However, with some easing of the geopolitical situation, crude oil prices have now corrected by 25% until mid of March, thereby aiding a recovery in Asian Paints stock price.
“Historical trends suggest that Asian Paints witnessed a quick recovery in profitability with a strong pricing strategy amid the sharp surge in raw material prices. This along with strong growth prospects makes it a good buy in every dip from a long-term perspective,” said Sharekhan in its report.
Structural growth of the paint industry intact
The Indian paints industry reported an 11% CAGR over FY2011-FY2019 and stood at Rs 545 billion. The decorative paint segment constitutes around 74% of total paint sales, resulting in the paint sector growing at a robust rate even at the time of an industrial slowdown. Previous financial year performance was affected by the pandemic, led by lockdown, resulting in almost no business in Q1FY2021. Volatile input prices and a slowdown in rural India are near-term headwinds for the paint industry, the brokerage stated.
“The decorative paint industry is expected to post a 13% CAGR over FY2019-FY2024, led by reduction in the repainting cycle to 4-5 years acceptance for better paint products in smaller towns, and upgradation of premium brands in cities and large towns. Higher input prices will keep toll margins of the paint companies in the near term,” it said.
APL might further hike prices by 5-6%
Company gross margins and OPM decreased by 825 bps and 764 bps on-year in 9MFY2022 due to a sharp increase in raw material prices (including those of crude derivatives). The paint company has undertaken a price hike of 20-21%. Post the significant spike amid an uncertain geopolitical environment, crude oil prices have corrected from its high of $130 per barrel and are expected to settle at around $95-100 per barrel in the near term. Thus, paint companies including Asian Paints are expected to take additional price increases of 5-6% to mitigate the cost pressure.
Asian Paints stock rating: BUY
Target price: Rs 3,689
According to Sharekhan analysts, Asian Paints’ dominant positioning in the domestic decorative paints business and focus on becoming a complete home décor play in the long run gives them a visibility of better earnings growth in the medium term. “With the company focusing on becoming a complete home décor play, its valuation will remain at a premium in the consumer space. We maintain a Buy rating on the stock with a revised price target of Rs 3,689 apiece,” they said. However, if crude oil prices remain volatile in the long run, the decline in margins will be sharper than anticipated and will act as a risk to the earnings estimates.
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