Falling crude oil prices to support margins
Analysts at Morgan Stanley say while the market is wary of increased competition and raw material inflation, they are confident that Asian Paints can compete effectively with competition
The Asian Paints stock was up nearly 5 per cent in trade on expectations that the company will be a key beneficiary of a growth rebound and gain from the recent fall in crude oil prices. In addition, incremental growth from new businesses such as designer tiles that the company has recently diversified into adds to its revenue stream.
The stock has been underperforming the benchmarks since the start of the year on the back of increasing competitive pressures in the core decorative paints business and sharp rise in raw material costs especially crude oil and its derivatives. While the Sensex is up 6 per cent since the start of the year, Asian Paints is down 11.5 per cent over the same period.
Analysts at Morgan Stanley say while the market is wary of increased competition and raw material inflation, they are confident that Asian Paints can compete effectively with competition. The company, according to them, is best placed to capture the growth rebound in 2021.
While there could be short-term challenges, especially on the pricing front due to new competition, most experts believe that Asian Paints will be able to hit double digit decorative volume on the back of market share gains from the unorganised segment. Calibrated price hikes, delay in passing on any gains from lower crude oil prices will also help maintain margins.
The Street is also positive on the diversification strategy of the company. After foraying into kitchen, adhesives, home decor among others, Asian Paints entered the designer tile segment. Analysts at ICICI Securities believe that this can open up a potential Rs 30,000 per household revenue opportunity for the company. Given the company’s new product template of lower investments in capex and branding, success can potentially create huge value with negligible downside in case of failure, they add.
At the current prices, the stock is trading at 62 times its FY22 earnings estimates. Given that the Street is positive about its growth prospects and ability to sustain margins, investors could consider the stock on dips.