The analyst community is positive on Asian Paints’ stock, which currently trades at Rs 1,405.60 per share.
The company’s paints business broadly splits into decorative and industrial paints.
The decorative segment, consisting of interior wall finish, exterior wall finish, metal surfaces and wood surfaces, accounts for around 90% of its revenues. Analysts are betting on good volume growth from the decorative segment over the next 3-5 years, riding on a recovery in the housing and construction sectors.
Demand from Tier 2 and 3 cities is expected to be good even as the metros see growth return. Additionally, international operations are expected to boost earnings, backed by revival in the Middle East market.
Demand in the industrial paints segment, however, is expected to be weak in the near term, given the lag effect of economic slowdown on the automobile industry and corporate capex. The segment consists of protective coatings, floor coatings and road markings.
Predictably, a recovery in demand here would be a function of industrial growth. Moreover, crude oil prices have moved up from their lows and this could pose a problem of higher costs. Crude oil prices have a direct correlation with raw materials used in the paint industry.
Meanwhile, for the quarter ended June, Asian Paints has reported numbers exceeding street expectations. Revenues increased 17.5% year on year, helped by a 17% increase in revenues from domestic business, 9-10% increase in sales volumes and 6-7% increase in price realisations. Net profit increased 65% to Rs 176.1 crore, helped by strong operating performance, higher other income and a slower pace of increase in interest and depreciation costs.
At the current market price, the stock trades at 23.4 times its estimated earnings for 2010. The stock is a good bet in the space and investors could consider it on declines.
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