Asian Paints' Near Nil Returns — Is There A Silver Lining?

Asian Paints Ltd.'s shares are hovering at the same level as three year ago. In other words, they have given almost no return over this period. However, a deeper inspection shows that they rose as much as 40% before been trimmed by consumption stock cyclicality.

Shares of Asian Paints have spiked and dipped during these past three years, creating a series of troughs and crests. Thus, an investor who bought shares in April 2021 dip and sold them around the peak in September 2021 and repeated a similar strategy might have more than doubled their investment, a study by NDTV Profit showed.

Lets look at how the company's market capitalisation performed in comparison to its net profit.

Source: TradingView

Net Profit, Market Cap Convergence?

When comparing the company's average growth in market capitalisation and earnings over FY14–21, it can be seen that the stock price outpaced earnings.

However, between FY21-24 the market cap growth and and profit growth are converging i.e. the share price is growing in tandem with earnings growth.

Valuations Cool Off?

Asian Paints currently trades near its 10-year average valuations, its lowest level since September 2020 at a PE of 68.13x. This is compared to the trailing twelve-month peak PE of 113-time in September '22.

This, combined with a convergence of its market cap with new profit growth could suggest a cooling-off amid a space with heated valuations.

The stock is also included in NSE's Nifty Quality indices, a passive strategy which groups stocks with the highest "quality" score in their universe.

NSE's calculates the quality score based a high return on equity, earnings-per-share growth variability, and a low debt-to-equity ratio.

Is The Way Only Up?

A Bloomberg consensus estimate from nine analysts forecasts Asian Paints to report a net income growth of 9.07% in the fourth quarter ended March 2024.

However, historically, the company has given a positive surprise three out of four times during its earnings in the final quarter over the past three years. The only downside surprise was in 2020, a year where consumption was severely dampened due to Covid-19.

Being ancillary to the infrastructure theme at play in the Indian markets, Asian Paints also stands to benefit in the long run.

Emerging Competition

Grasim Industries' foray into the paints business under the brand name 'Birla Opus' has led brokerages to revise their estimates for incumbents in the paints sector.

The company's aggressive attempt to capture the second spot is likely to propel other industry players to ramp up their efforts, according to Jefferies.

Street View

The stock's underperformance while markets are at new highs might suggest some continued weakness, according to Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services.

While a weak sentiment might continue to lead the stock on a downtrend in the near term, a correction towards Rs 2,800 apiece could provide a buying opportunity for long-term returns, he said.

Shares of the company were trading 0.20% at Rs 2,889.15 apiece, compared with a 0.45% gains in the benchmark Nifty as of 10:10 a.m.

Of the 38 analysts tracking the company, 10 maintain a 'buy' rating, 12 maintain a 'hold', and 16 suggest a 'sell', according to Bloomberg data. The average 12-month consensus price target implies a potential upside of 10.7%.