This paints stock fell 9% in 3 days, but foreign brokerages see massive 19% upside

Asian Paints share price fell 2.7% on Monday morning to trade at Rs 2,525 per share. With this, the stock is down 9% since January 21 or three trading sessions. The fall comes despite a stellar quarterly earnings performance posted by the firm where its net profit soared 62% on-year basis to Rs 1,238 crore, beating street expectations. However, the fall in stock price has not bettered brokerage firms from upgrading the target price for Asian Paints. Global brokerages such as Morgan Stanley and Credit Suisse believe the stock will outperform and hence have increased the target price of the same.

Pent up demand to continue

“We have been arguing that Asian Paints is well-positioned for re-opening,” said analysts at Morgan Stanley in a recent note. They added that the strong results show faster demand recovery in decorative paints segment and reflect a new rental leasing cycle, a strong rural economy, and a pickup in urban demand that should aid in product mix improvement. Asian Paints saw strong growth in tier-2/3/4 markets the firm also recorded a strong recovery in tier-1 and metro cities.

Analysts at Credit Suisse have raised their FY21-23E EPS for Asian Paints by 4-14% and target multiple to 62x. The brokerage firm said there may be more pent up demand that makes its way to Asian Paints as in the first nine months of the current fiscal revenues are still down 3%. Asian Paints could also undertake price hikes in the current quarter to adjust the increase in input costs. “We expect the paint industry to take price increases as there have been price declines in paints over the past 2-3 years, starting with the GST rate cut in 2018. We see no demand elasticity or competitive challenges in taking 5-10% price increases in FY22,” Credit Suisse said.

Positives priced in?

While awaiting a battery entry point for the stock, Nomura has said that the stock is pricing in positives for now. The brokerage firm added that the performance posted by Asian Paints was not all structural but driven by pent-up demand. “While pent-up demand is likely to continue to drive strong revenue growth for a couple of quarters (aided by a weak base), some of the other triggers will be absent in coming quarters, and growth will normalize,” they added.

Target prices

Nomura has downgraded the stock to ‘Neutral’, adding that most positives have been priced in. However, they value Asian Paints at a P/E of 70x, implying a target price of Rs 3,000 per share. Morgan Stanley has an ‘Outperform’ rating on the shares of Asian Paints and a target price fo Rs 3,000. Similarly, Credit Suisse also sees upside potential for the stock with a target price of Rs 3,000.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)