Tuesday, October 22, 2013


I love how people can be in denial despite their call going horribly wrong. One of the leading brokerages downgraded Asian Paints on October 14, cutting the target from Rs 505 to Rs 405, and since the brokerage is a real blue blooded one, the stock fell from Rs 485 to Rs 470 – the analyst must have felt a million dollars, but wait, within 3 days, the stock is back to 485 and on 5th day, the stock hits a lifetime high of 530 Rupees after spectacular number.

The brokerage also had a research tactical idea of the stock underperforming which was closed today. All they say in closing the note is this – “This Research Tactical Idea is closed because the stock price has moved contrary to our expectations. Effective immediately, the Tactical Idea published on Asian Paints (ASPN.NS) on October 14, 2013 has been discontinued and should no longer be relied upon”

Now my problem is not that an analyst call has gone wrong. My problem is the resistance the analyst community has to eat their words and admitting that they got it wrong. I have seen 5 brokerage reports this morning and none of them has a buy on the stock, It’s a consensus Sell/Underperform/Underweight.

To all these analysts – I have just a one line response– the stock is up 8% this week, 13% this month and 20% this year. Oh, and the stock is up over 100% since the start of 2012.

Now of course, the key is what to do with this stock going forward. At 30-35x on eyear forward earnings, this is one of the most expensive stocks. But then, when has that stopped a stock from moving higher? If that was the case, Jubilant Foodworks would have never had the rally it had – HUL would have topped out at 450 or 500. Why are investors willing to pay this kind of premium?

The answer lies in the factor that we sometimes ignore; the growth factor. The company has seen double digit volume growth in a seasonally weak quarter. Over the last many years, the company has grown its topline and bottomline in double digits and the stock has been one of the most consistent performers over a 20 year period. In fact if you were to just take FY16 into account, the stock would be available at around 25x earnings, still expensive but then at least you have visibility and certainty of earnings.

Bottomline, the stock may well correct 10% if the market gets into further risk on mood and we see a shift from defensives to high beta. But as of now there is no evidence to believe that the stock will change its texture of being a consistent long term outperformer

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