Asian Paints: Investors should look at the stock for long term on dips

In addition to paints, construction chemicals and home decor could add to incremental growth

The Asian Paints stock gained 1.4 per cent on expectations of a faster recovery in paints and growth opportunities in the home decor and construction chemicals business. Chirag Shah and Nitin Gupta of CLSA believe the paints segment is witnessing a relatively quick recovery within the consumer discretionary space. 

According to their channel checks, strong rural demand has helped boost recovery for paints, in general, and Asian Paints, in particular. They have revised their volume growth estimates for FY21 from a fall of 15 per cent earlier to decline of 6 per cent now. Asian Paints had recorded a volume dip of 38 per cent in the June quarter this year. In addition to volume, the research firm has upgraded the FY21-23 revenues and earnings estimates by 6-9 per cent and 5-15 per cent, respectively. 

With downtrading to the lower end of the paints market, the company’s focus on volumes, according to HDFC Securities, can further strengthen its competitive advantage and pay future dividends as newly recruited low-end consumers eventually move up the ladder in the paints value chain. Though near-term value growth is likely to lag volume growth, new launches across categories shall help the company gain market share.

In addition to the paints segment, the company has recently launched furniture, furnishing and decorative lighting products under three brands, as well as an omnichannel brand identity, Beautiful Homes. Analysts at Kotak Institutional Equities believe the new growth engines augur well for the long-term growth and valuations, though the pace of growth will depend on capital investments. 

While most brokerages like the volume-led strategy, stable margins, and incremental growth potential of the home decor and waterproofing segments,  valuations are capturing some of the upsides. After the earnings revisions, the stock, which has gained 15 per cent over the last month, is trading at 54x its FY22 estimates; investors can look at this for the long term on the dip.