The 260x appreciation in Asian Paints shares since listing is a multi-bagger story for ages. The stock, however, has not done much in the past two years. It did hit an all-time high in September 2022 but it has been trading in the range of Rs 2,800-Rs 3,500 over the past two years.
In Moneycontrol’s Analyst Call Tracker, the stock has consistently featured in the Maximum Pessimism list. It has 15 "buy" calls, 11 "hold: and 12 "sell" calls. Back in March 2019, in the pre-COVID era, it had 25 "buy" calls, eight "hold" and only one "sell" call.
The prevailing sentiment is that Asian Paints’ moat and market share are now in danger. According to analysts, here are some of the reasons:
Competition
Ever since Grasim announced its entry into the paints segment with Rs 10,000 crore capex and 1,332 MLPA (million litres per annum) total capacity, D-Street has been playing it safe on Asian Paints. Asian Paints’ current capacity stands at 1,700 MLPA.
A number of other smaller players like JSW Paints and JK Paints are also ramping up their capacity. JSW Paints’ All Color, One Price strategy has also caught the eye.
With this, the fight for shelf space will intensify and eventually eat into Asian Paints 50-plus percent market share in the organised decorative segment.
Heavy capex, ROE worries
For Saurabh Mukherjea, whose Marcellus Investments fund is heavily invested in the company, competition is not a worry. “Making it big in the paint industry is not easy. Shalimar Paints and Sherwin-Williams Paints have failed to make a mark,” he said in an earlier interview to Moneycontrol.
But Asian Paints’ management is surely on the offensive. In two back-to-back capex announcements amounting to about Rs 8,700 crore, the paints manufacturer is now aiming for 2,670 MLPA capacity in the next few years. This includes backward integration of vinyl acetate plants, acquisitions and a new water-based paint manufacturing facility.
According to analysts at HDFC Securities, this investment phase will be a drain on free cash flows and returns profile in the short to medium term. Analysts at ICICI Securities agree. They have pegged ROE (return on equity) at 27.5 percent for FY23, 27.7 percent for FY24 and 25.3 percent for FY25.
Volume and valuations
In Q3FY23, the company reported no growth in volumes. In the September quarter, volume growth was 11 percent, preceded by 38 percent in Q1FY23 and 8 percent in Q4FY22. Three-year volume compound annual growth rate (CAGR) is 16.2 percent, taking into account the pent-up demand after COVID-lockdowns.
As per foreign brokerage JPMorgan, “A severe consumption slowdown could pose downside risks to volumes and, hence, earnings growth assumptions. Aggressive price/promotion-based competition is also a key risk for the company.”
The firm expects the medium-term margin to stay capped at 19-20 percent amid product mix changes, elevated crude price and higher investments in new adjacencies.
Due to these factors, analysts believe there is little scope for re-rating of the stock, which is trading at 73x price-to-earnings ratio. The consensus 12-month target price on the stock is Rs 3,052.74, which is only 6.5 percent higher than the current market price.
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