Asian Paints gains 5% amid a historic drop in oil prices, nears record high

The stock has rallied 21% in the past month.

Shares of Asian Paints hit an over one-month high of Rs 1,817, up 5 per cent on the BSE on Wednesday on the back of historic drop in crude oil prices. The stock of the decorative paints leader was trading at its highest level since March 13 and rallied 21 per cent in the past one month. In comparison, the S&P BSE Sensex was up 4 per cent during the period. It hit an all-time high of Rs 1,916 on March 9, 2020.

Having a 50 per cent market share in the organised space, Asian Paints enjoys dominance in the decorative paints segment along with a 20 per cent share in the automotive industrial paints segment.

After remaining range-bound for a couple of years, the price of crude oil has fallen sharply since early March 2020 and has fallen to a record low level in the ongoing week. The sudden slump in the prices bodes extremely well for this paint player as crude oil derivatives form 30-35 per cent of its raw material costs.

“The price fall is much steeper than what was witnessed during October-December 2015 as the current situation is not only a result of over-supply it has also been triggered on account of a decline in demand due to COVID-19”, according to CARE Ratings.

Analysts say Asian Paints is well placed to gain market share once discretionary demand recovers. Covid-19 outbreak and subsequent lockdown impacted sales in the last 10 days of the January-March quarter (Q4FY20).

“For Q4FY20, we expect 40/180 bps quarter on quarter (qoq)/year-on-year (yoy) improvement in gross margin (GM) aided by favorable raw material trends. We expect 230 bps yoy increase in reported EBITDA margin; on LFL basis adjusted for Ind-AS 116, EBITDA margin would be up 110 bps yoy led by increase in GM partly offset by negative operating leverage. Net profit would be aided by corporate tax rate cut,” analysts at Kotak Institutional Equities said in results preview.

“The strong balance sheet with minimum leverage and high free cash flows to sales of 4.44 per cent will enable Asian Paints to tide through the pandemic. Additionally, it has the lowest cash conversion cycle in the industry compared to its competitors. Since the last 5 years, it has maintained an interest coverage ratio of over 50 and an asset turnover ratio of around 1.5,” analysts at Samco Securities said in a stock update.