Why Asian Paints Ltd. Stock Price Has Corrected?

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.