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Would you buy the world's most expensive paint stock? - Views on News from Equitymaster
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  • Jun 27, 2012

    Would you buy the world's most expensive paint stock?

    Investing in stocks is about getting two things right.

    The first is to identify a company that has proactive management with good governance, sound fundamentals, and a clear and robust business model. In the long term this is the best recipe for maximizing returns.

    The second is to get the valuations right. But, what is the "right" valuation? There is no one answer to this question. As beauty lies in the eyes of the beholder price lies in the eyes of the investor!

    But no matter what your approach to valuation may be, would you really buy the world's most expensive stock in its category?

    The stock we are talking about is Asian Paints.

    In May 2012, a story in a leading business daily said that Asian Paint's stock was one of the most expensive paint stocks, not just in India ... but in the world!

    Asian Paints is currently trading at a price-to-equity PE multiple of 37 times its trailing 12 month (TTM) earnings (EPS).

    Does the company's fundamental performance justify this high valuation?

    Over the past 5 years, the company has seen dynamic growth in both its revenues as well as earnings. On a consolidated basis, revenues grew at a compounded annual growth rate (CAGR) of 21% while net profits grew at a CAGR of 29%.

    At the same time it was able to maintain healthy margins and return ratios as well. FY12 operating and net margins were 14.9% and 9.4% respectively; while Return on Equity and Return on Capital employed were 41.4% and 54.7% respectively. All this represented solid results.

    But how does Asian Paints stack up against the peers?

    Asian Paints versus other Indian Paint Companies - Five Year Analysis
      Akzo Nobel India Ltd Kansai Nerolac Berger Paints Shalimar Paints Asian Paints
    Sales growth (5 yr CAGR) 4% 16% 19% 14% 21%
    Net Profit growth (5 yr CAGR) -15% 15% 15% 25% 29%
    Operating Margin (5 yr avg) 15% 13% 10% 7% 15%
    Net Margin (5 yr avg) 14% 8% 6% 2% 10%
    Return on Equity (5 yr avg) 18% 21% 24% 23% 47%
    Return on Assets (5 yr avg) 17% 19% 15% 8% 38%
    Return on Capital Employed (5 yr avg) 23% 27% 25% 22% 56%
    TTM PE 16.0 22.7 27.3 14.5 37.0
    Source: ACE Equity

    Clearly, Asian Paints has delivered superior returns relative to its competitors. And with its PE of 37, it also commands a premium in terms of valuation.

    So we know that Asian Paints has strong fundamentals and financials, and its achievements have been much better than its competitors. But does the PE of 37 reflect the "right" valuation for Asian Paints?

    Source: Livemint

    Asian Paints' PE of 37 is close to its historic high of August 2005 when the Indian and world economy was stronger. Valuations of other companies in the Paint industry range between 15 and 23, and mirror the average of companies in the economy.

    We believe that Asian Paints has demonstrated good governance, sound fundamentals and a solid business model. And its results reflect these parameters.

    However, we wonder if the "lustre colour" that paints its valuation is too shiny. We suggest a "wait and watch" approach to see if Asian Paints performance is indeed as rich and sustainable as the quality of the paints it promises.

      Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.



    Equitymaster requests your view! Post a comment on "Would you buy the world's most expensive paint stock?". Click here!

    3 Responses to "Would you buy the world's most expensive paint stock?"

    dharmendra khatri

    Jan 31, 2014

    yes, i had it with long term bet, i think that what it looks to be expensive but in f.y. 2010 it has surprisingly doubled it eps to 87 and PE would be half of what it had been 2009 (if buy out), when macro changes it will provide benefit of it topline growth. it has track record of delevering whooping wealth createn since ipo at just rs 13 per share to present day 473 price and 17420 shares bonus per share.



    Jul 2, 2012

    I have invested in Asian Paints about 10 years back at around Rs. 300/-. I may not buy more but will surely hold on the existing investments.

    Like (2)


    Jun 29, 2012

    invested from its IPO in mid 1970s.have been adding now and then.Most of the time it looks like over valued but investors sufficiently got rewarded.At 3000 level people were making noise that it was over valued and sold not long ago;Now it is hovering around 4000;Now also it looks over valued to many.But market is giving such valuation.the management is honest and trust worthy.not like many other indian companies including Tata groups.On this factor coupled with performance market gives such a valuation to this stock.That is the beauty of this scrip.So it is ones call..one can go on grumbling that it is overvalued and sit on sidelines or just go ahead and buy with Long term.

    Like (3)
    Equitymaster requests your view! Post a comment on "Would you buy the world's most expensive paint stock?". Click here!

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