Can Asian Paints Repeat History of Multibagger Returns? 

Exactly two decades back, in In April 2004, we urged Equitymaster subscribers to consider buying the paint stock Asian Paints.

Back then the company was beginning to see the impact of higher crude prices on its margins. Competition from entities like Goodlass Nerolac, Berger Paints and Sherwin Williams was stiff. To add to that Asian Paints' foreign subsidiaries were incurring losses due to exchange rate fluctuations.

But the company's success in inorganic growth was evident in domestic and international markets. Use of technology for the tinting machines became a gamechanger in decorative paints.

The management's foresight was evident in the company's tie-up with US paint major PPG. Also, the timely diversification into industrial paints and automotive paints saved the day for Asian Paints when decoratives took a backseat.

Asian Paints had been one of the earliest companies to buy a supercomputer.

But the company's capex plans did end up be ill timed during economic meltdowns. For instance, after announcing heavy capex in April 2008, Asian Paints saw its stock price crash by 44% between May 2008 and March 2009.

The reason I am recounting this, is to remind you, dear reader, that companies like Asian Paints do go through temporary rough patches. And these do erode shareholder wealth. At least temporarily.

But the question is whether the rough patch should be considered a permanent damage. Enough to completely write off the stock?

As per reports, Aditya Birla Group led Grasim Industries is set to disrupt the oligopolistic Indian decorative paints industry. The company is expected to leverage its strong distribution strategy and manufacturing prowess in cement and metals.

Under its paints brand, Birla Opus, six plants are set to come on stream by the end of 2025. Collectively, these plants would expand the domestic paint industry's current capacity by about 40%.

Needless to say, the new capacities will keep margins under pressure for most paint stocks. And Asian could also see some of its market share getting cannibalised.

But can a new entrant be a reason to write-off a business that has endured cycles and competition for several decades?

So, what explains the feverish attempt by stock market participants to write off Asian Paints?

And how exactly do they feel confident of the incumbent (Grasim) grabbing market share and be very profitable in doing so.

Well, Warren Buffett, in his latest letter to shareholders, wrote this. He basically once again, explained such situations, with his trademark historical references. I could have not explained the frenzy to dump the stock of Asian Paints any better.

• He wrote...
  
  For whatever reasons, markets now exhibit far more casino-like behaviour than they did when I was young. The casino now resides in many homes and daily tempts the occupants.
  
  One fact of financial life should never be forgotten. Wall Street - to use the term in its figurative sense - would like its customers to make money, but what truly causes its denizens' juices to flow is feverish activity.

Buffett's assessment of the American stock markets and American investors aptly fit the Indian markets too.

There is no doubt that Grasim will do everything possible to make its presence felt in the paint business. That in fact is the 'Idea'. Pun intended.

The Birla group has made attempts to dethrone the largest players in the telecom business in the past. And may try doing so in the paint business too.

There are speculations that Birla Opus brand will have more than 145 products and 1,200 stock keeping units. Also, the brand could offer 10% additional quantity in most water-based paints during the promotional period.

To establish its brand value, the company will also be offering a one-year warranty for enamels, wood finishes, incentives for contractors, and free tinting machines.

There is no doubt that such moves will hurt margins and volumes for most large paint companies in the near term. Especially Asian Paints.

But Asian Paints began diversifying into non paint businesses a decade back.

From modular kitchens to sanitaryware to wall papers, furniture and home decorative, the company is now a complete one-stop home decor solution to customers.

The company is also undertaking capex to produce next generation environmentally friendly paints. It has signed a definitive agreement to acquire a majority stake in a specialty chemical and next-generation nanotechnology player. This tie-up will enhance the company's technological capabilities across all products.

While Asian Paints' market leadership and supply chain prowess is well known, investors have chosen to ignore the stock over the past two years.

Especially, ever since there have been reports of new competition with deep pockets (JSW group, Pidilite and and Birla group) entering the paint business.

Even as the benchmark indices trade close to all-time highs, the P/E and price to book value multiples of Asian Paints are near the stock's 10 year average.

While the multiples themselves may not be cheap, they certainly signal relatively lesser downside risk for the stock.

Also, when the investment returns from the stock of Asian Paints are compared to that from the Sensex, the stock has grossly underperformed over past two years.

It is rather rare to find stocks like Asian Paints trading at such valuations relative to long term averages.

So, they do, as an investor you must ask yourself ...what are the chances that the stock of Asian Paints could repeat history?

Grasim may certainly be a company to watch out for in the paint sector. But write off Asian Paints at your own risk.

Hope you like this video. Thanks for watching.