ASIAN PAINTS - HOW EVERYONE GOT IT WRONG
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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