Despite being in the consumption space, paints major may not be the best bet yet.
In troubled times like these, it’s best to stick to established large-cap stocks most experts would advise. Given the headwinds facing most sectors, except consumption, a stock like Asian Paints should ideally be a no-brainer. But it’s not so, believe some analysts, as sustainable growth in the FMCG sector and increased risk perception to earnings of the broader market has pushed up absolute valuations of some stocks and relative valuations even higher.
This is true for Asian Paints say analysts. While the company’s inclusion in the MSCI India Index only reiterates the positives of this company, analysts are playing a wait-and-watch game with this company after its fourth quarter results.
The company’s performance came in below expectation in the last quarter, led by higher than expected decline in Ebidta margins (which fell 180 basis points to 14.7 per cent). Adjusted profit after tax fell by three per cent year on year to Rs 190 crore. Clearly, cost pressures are building-up for the company. Though, calibrated price rises are implemented by the company, cost push is well ahead of price increases, which has impacted quarterly performance.
Considering the sharp increase in the input costs, Emkay Global believes that margins would continue to trail cost increase in ensuing quarters. Hence, price increase is unlikely to flow into Ebidta on immediate effect, there would be time lag until input cost pressure subsides. Citing this, the brokerage has downgraded earnings estimate for FY12 and FY13 by five per cent.
Even if domestic demand remains robust in FY12, don’t expect fireworks in the current financial year. The company’s communication clearly states market conditions across the Caribbean, Egypt, Bahrain and UAE region remain challenging. While demand in India is expected to remain robust, it difficult to say the automotive business would be able to sustain same growth witnessed during last two years. It’s perhaps best to stick to the sidelines for now.
