Sunday, 2 September 2012

Case Study Asian Paints Pt-2

Lets take a deeper look into Asian Paints company to see if it is a good stock to invest in.

The Asian Paints share is presently trading at a P/E ratio of 35 (approx.). So, this stock is undoubtedly pricey. Going by the logic laid out in one of our previous posts, at the first glance it may seem that we should avoid this stock because it is currently trading at a premium and not at all undervalued.
But, let us try to understand the reason for such a high price for this stock.

The networth of Asian Paints has been consistently increasing over the past 5yrs, which means that the company has been increasing its assets and reducing its liabilities. In short it has been in expansion mode to cope with the increase in consumer demands. The  Return on Equity of Asian Paints is 34.75%.

Looking at the data of the past 5yrs, we come to know that Asian Paints has a Sales/Topline CAGR of 23.07%. The EPS/BottomLine has seen a CAGR of 28.83%. Clearly, such a growth over the years has given rise to investor confidence in Asian Paints and this has reflected in the present high price of the stock.

Now coming to the next question. Is it wise to invest in Asian Paints now? The company has a market capitalisation of Rs. 35,042Cr. Which means it is indeed a big player in the industry and here to stay.

The Debt/Equity ratio of Asian Paints stands at a low 0.08. Click here for details. This means that the company has a virtual free-hand to use its funds for any activities that it may deem fit to grow its business. How actually the company uses its funds, however, depends on the management outlook but the parameter does indicate the possibility that being a good company and not having much debt to worry about, the company may indeed try to increase its market share in which case it will again reflect in its share price.

Asian Paints has an Operating Profit Margin of 17.23%. So, it can be said that on the profit/loss front also Asian Paints is a good bet.

When posted the CMP of Asian Paints was Rs.3653.20.
On 30-Jul-2013 Asian Paints split its shares in the ratio of 1:10. So, the CMP on the date posted should be now read as Rs.365.3.

Couple all the above mentioned parameters with the indisputable fact that consumer demand for all types of Paints and Varnishing products is going to increase in the future. We can safely come to the conclusion that though Asian Paints Stock is definitely pricey at the first glance and it looks as going against the grain by investing in Asian Paints, since the sector itself has potential for a lot of growth when taken in relation to the large scale of Indian economy, it is definitely a value pick and a buy-on-dips stock.

With this we conclude our analysis on Asian Paints saying that it can be a good stock investment option.