The Hindu Business Line : Asian Paints: Buy

Though a valuation of about 21 times expected per-share earnings for the current fiscal is not a bargain, we believe that growth prospects are attractive enough for the stock to deliver meaningful returns over the medium term. We would, however, recommend that investors moderate their return expectations and buy into the stock in small lots.

We note that the stock has shed about eight per cent since our earlier `buy' call; this has, in comparison, been lower than what has been shed by the relevant broad market index.

In current market conditions, Asian Paints is a good defensive and, in our view, one of the better plays in the consumer space.

Asian Paints' performance in the latest quarter reaffirms our view that demand trends continue to be robust. That impressive sales growth has come on the back of a high base in the year-ago period (on account of a spill over due to VAT-related issues) bears testimony to the premise of an uptick in demand. Such an environment is also conducive for Asian Paints to push through price hikes to offset hardening input costs.

We note that apart from having effected a price increase in June, another one in September is also on the anvil. Such measures should aid in preserving margins, which are exhibiting improving trends.

An area of concern could be the longer-than-expected turnaround of Asian Paints' international ventures. Even as pockets of these operations are profitable, parts of it - especially in the South-East Asian region - continue to pull down earnings. However, we do not rule out the possibility of a divestiture of such loss-making businesses to improve the earnings contribution of overseas ventures.

Key risks to our call include a slowdown of the overall economy, an escalating interest rate milieu that stifles domestic demand for housing and a protracted delay in turning around operations abroad.

Nath Balakrishnan

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