Full Question:
Why is the Asian Paints
stock on a correction mode (down more than 10%) even after a positive Q2 result
and positive outlook? Is crude oil a factor?
Everything
seems positive. The market share seems intact. Then what’s the reason it has
seen a steep decline in valuation?
Is the
expected rise in crude oil prices a possible factor?
Or is
this a permanent correction in its valuation from overvalued levels (PE~50) to
more realistic levels?
Answer:
Dear Friend!
You have yourself hit the nail
on the head answered your question. Asian Paints Ltd., is wonderful company and
brand in a general sense (because of very high PE Ratio I had not invested my
time in deep study of the share) but the share is already overvalued as per value
investing principles. Please see the following
picture:
Key Ratios:
Besides the high PE Ratio of
59.31 as against the recommended 10–15, which you have already identified
yourself, the Price to Book Value ratio is also very high at 18.58 times as
against the acceptable 1.5.
Dividend Yield:
The dividend yield is 0.69% as
against a minimum of 4–5%.
Distance from 52 week high:
Even after the correction the
current market price is still very near the scrip’s 52 week high!
Five-year returns:
The price of Asian Paints has
been continuously climbing for the last five years and the five-year returns or
price increase for this stock is 253%. Please see the price graph for this
scrip below:
Even though the price has
increased 2.5 times in the last five years the EPS has not grown at the same
pace - it has hardly grown 1.5 times - indicating that the market had raced
ahead of the earnings.
Market Nervousness:
As if all the above mentioned
headwinds are not enough the market is nervous after a steady gallop in the
Sensex in the last few months and in such situations the scrips that are
overpriced or over valued will correct first.
Conclusion:
Since the share is over valued
and the market is nervous after a trot in the last few months, Asian Paints’
share, in my opinion, has corrected recently and it may not be the end of the
road for the correction.
