Future Prospects of Asian Paints and Management Commentary- BDV

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Asian Paints has 50+ years of market leadership in India. They have a dealer network of 65,000+ and is a leader across all geographies except the Kashmir region in India. Asian Paints have deeply penetrated the Indian market down to the rural economy where they sell distemper paints, to the automobile sector where they currently have 20% of the total market. The major competitors are Kansai Nerolac and Berger paints in India. These companies, however, have not been able to establish a solid market presence and compete with Asian paints in the organised sector. The company is also focused on R&D and introduces 25 colour additions every year. They also have installed paint dispensing (NNG) machines with almost all retailers which save them warehousing and encourage retailers to sell Asian Paint products. Let’s go ahead and take a look at the future prospects of Asian Paints.

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Future Prospects of Asian Paints : Growth Outlook

  1. Asian Paints reported its highest till date Sales/EBITDA and Sales/PAT ratio in the third quarter of FY 2021.
  2. The outlook on demand remains positive because of the festive season and pent-up demand. However, this may not sustain over the long term as the economy may struggle to get back on track.
  3. The major factors driving growth still remains the recovery in the urban and metro regions. Boost in the real estate market across the country is also a positive factor.
  4. Asian Paints has delivered a strong performance in the home improvement business. The industrial coatings segment delivered a robust performance. This was particularly in Protective coatings and Auto OE businesses which was due to the resurgence in the industrial activity
  5. Recovery in new construction projects is also contributing to volume growth. Metro cities, in particular, are doing well in terms of residential real estate sales.
  6. Material cost inflation has also been sharp since last year. This means that recent all-time high-profit margins are unlikely to sustain beyond this financial year.
  7. The company’s successful entry into new businesses such as ‘Putty’ has also driving revenue growth from rural regions.
  8. The shares of the entire paint industry are expected to trade at higher valuations going forward.
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Future Prospects of Asian Paints : Management Commentary

  1. The company is expecting a rapid recovery in international business. The growth has recovered across all major foreign markets except Indonesia. The Management also reported a growth of 21% in revenues for the International business segment.
  2. Asian Paints has also planned to give a boost to waterproofing products in export business.
  3. The current capacity utilization is around 63% following the completion of massive CAPEX before the Covid-19 Pandemic. The capacity is expected to gear up with demand gradually as the company wants to lean out its inventory.
  4. The raw material prices are on rising and can expect a 4-6% inflation in the coming year. The management has not taken any decision yet on increasing the prices as the market remains highly price competitive.
  5. The metro region growth has recovered and there is also strong traction observed in the Tier-2, Tier-3, and Tier-4 markets. The Rural segments are also doing good and breaking even at current price levels.
  6. The company’s home decor business has 15+ stores now. The Beautiful homes business which was launched recently has also seen good traction in the market.

Future Prospects of Asian Paints : Valuation and Pricing

  1. The stock is expected to trade at higher PE even though the industry remains highly competitive. The FII inflows in the Indian market may also drive an increase in valuation in the near future.
  2. Asian Paints has shown rapid recovery as compared to its peers after the pandemic. This is good from an investment perspective considering the highly discretionary nature of the business. It will also help the company to attract higher multiples.
  3. The EPS growth estimates are expected to be in the range of 8-12% for the coming years. The valuations forecasts stand at 65 times Earnings Per Share for FY 2022 and around 57 times Earnings Per Share for FY 2022.
  4. Overall the share price performance is expected to dampen in the coming years as the cost increases and the industry becomes more competitive. The outlook remains neutral on the future prospects of Asian Paints.
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)

References:

Economic Times
Bloomberg
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