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Wednesday, Aug 18, 2004

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Asian Paints: A rosy picture

Deeptha Rajkumar

Mumbai , Aug. 17

DESPITE the fact that the stock of Asian Paints Ltd has been quoting at a premium to the market or that it registered a weak performance in financial year 2004, the stock continues to remain on the market radar.

Asian Paints reportedly trades at a premium of 19 per cent to the FMCG industry and at an over 50 per cent premium to domestic peers.

An ICICI Securities report on the company states that the premium valuations are justified given its dominant position in a growth industry, and an earnings CAGR of 19.5 per cent between FY04-06E, which is among the highest among the large-cap consumer non-durable companies.

Analysts maintain that APL's leadership position is not as vulnerable as, say Hindustan Lever, to competition from regional and global players due to its aggressive pricing policy. These factors act as entry barriers and offer little scope for new entrants to get entrenched in Indian domestic paint market.

"Despite a weaker FY04 performance we do not expect any adverse impact on the longer-term growth potential of the company. While Asian Paints' current focus is the paints business, it is likely to enter new segments such as construction chemicals, which would further accelerate growth. Additionally, the improvement of the company's global business is likely to aid consolidated earnings growth for FY05E-06E. Consequently, Asian Paints' valuations cannot be compared with its peers in the domestic market. Currently, Goodlass and Berger Paints trade at a discount of 29 per cent and 44 per cent respectively to Asian Paints despite having registered stronger earnings growth in the past two years," the ISEC note said.

According to Mr Atul Rastogi of Motilal Oswal Securities, the stock is a good long-term bet. "It is a sound company, just not a fast growing one," he said.

However, concerns over the fact that there is no homogeneity in the company's global operations in areas such as market dynamics, positioning of brands, employee work culture and operating systems etc continue to dog perspective on the stock.

"Additionally, if crude sustains its upward trend, it is likely to impact the company's profitability," Mr Rastogi added.

Analysts, however, maintain that due to the difference in industry structure and the difference in strategy adopted, Asian Paints is unlikely to go the HLL way.

The stock of Asian Paints ended the day at Rs 320 (on the BSE) and Rs 320.40 (NSE). The stock has appreciated by 31 per cent from a low of Rs 245 (BSE) on May 17.

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