Stock To Buy: This Industry Leader With A Proven Track Record Of Returns

Sharekhan has recommended buying the stock of Asian Paints for long-term investors. The firm has set a price target of Rs 3689 on the stock.

High input costs

According to Sharekhan, the Indian paints industry was reeling under pressure of high input costs with margins of all paint companies sharply declining in 9MFY2022.

"Players hiked prices by 15-16% in Q3FY2022 (cumulative price increase of 20-21% for APL) to mitigate cost pressures. However, Russia-Ukraine crisis led to sharp spike in the crude oil prices in the upwards of $130 per barrel, which further stressed margins of the paint companies. However, with some easing of the geopolitical situation, crude oil prices have now quickly corrected by 25% until mid of March, 22, thereby aiding a recovery in Asian Paint's stock price," the brokerage has said.

Product price hikes likely

Sharekhan believes that Asian Paints might further hike prices by 5-6%. Asian Paints gross margins and OPM decreased by 825 bps and 764 bps y-o-y in 9MFY2022 due to a sharp increase in raw material prices (including those of crude derivatives).

"Asian Paints has undertaken a price hike of 20-21% (15% in Q3FY022). Post the significant spike amid an uncertain geopolitical environment, crude oil prices have corrected by ~25% from its high of $130 per barrel and are expected to settle at around $95-100 per barrel in the near term. Thus, we expect paint companies (including Asian Paints) to take additional price increase of 5-6% to mitigate the cost pressure," the brokerage has said.

Valuation and view

According to Sharekhan, Asian Paints dominant positioning in the domestic decorative paints business and focus on becoming a complete home décor play in the long run gives us 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. Hence, any further decline in the stock price due to volatility in crude oil prices would act as a good entry point from a long-term perspective. The stock is currently trading at 71.0x and 55.2x its FY2023E and FY2024E EPS. We maintain a Buy rating on the stock with a revised price target of Rs. 3,689," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.