Can we Invest in Asian Paints’ Share After Recent Steep Price Correction?

Dear Friend!

I had recently prepared and posted a brief investment research report of Asian Paints on this blog.

I find that indeed Asian Paints is very good company. However the market has made it undue preference and made it very, very expensive to invest in.

Have a look at the market snapshot of Asian Paints share:

Asian Paints' Share's Market Snapshot

A PE multiple of 47.42 and a P2BV of 14.84? How can one justify such high valuations, that too for a company that is displaying decent but ordinary profitability margins?

The final conclusions and my investment advice are as follows:

Final Conclusions:

1. Asian Paints is without doubt a great company with market leadership and strong brand value. It will shine in any value investor’s portfolio.
2. The EBDITA, EBT and PAT margins are decent but nothing to brag about. The company is consistently profitable for many years into the past.
3. Current Ratio is a bit weak but TOL/ TNW and Long-term Debt-Equity Ratio are strong.
4. Free cash flows are good and well deployed.
5. PE Ratio of 47.42 makes the share highly expensive.
6. Price to Book Value Ratio (P2BV) of 14.84 again makes the share very expensive and unaffordable.
7. The market condition parameters of five-year price graph and five year returns do not favour buying the share presently.
8. Though the company is distributing a good proportion of the profits as dividends, the high market price has pulled down the dividend yield.

 Final Investment Advice:

1. Asian Paints is a good company.
2. Market price is too high.
3. Only during post Lehman Brothers bank collapse like situations will the price come down. Even then it will never come down enough to bring down below a PE of 15 and P2BV of below 1.5. Buy the Shares of Asian Paints only during such times. Certainly not now.

Please read the full investment research report:

• Read at: Asian Paints Investment Research Report
• Download a free pdf version at: Download Asian Paints Investment Research Report

Happy Investing!

Thank you,

With Best Regards

Anand

What is the Difference Between Rate of Interest and Rate of Return?

Interest Rate:

Interest rate is the promised or specified or coupon rate of interest payable on the principal amount of the loan or the nominal value of the instrument like a bond or a fixed deposit.

For example let us consider the following picture of 9% Treasury note of the US:

Picture of 9% US Treasury Note indicating the nominal value and rate of interest

In this example:

• The principal or nominal value of the instrument is US$ 1000
• The coupon rate or rate of interest is 9%
• The annual interest receivable is US$ 90

Rate of Return:

Rate of return is the actual rate actually obtained or earned by the investor on the investment.

Can there be a difference between interest paid and actually earned by the investor? How is it possible?

Yes, indeed it is possible.

How?

Because there is what is called a secondary market for bonds, treasury notes and various other kinds of debt instruments, where these are sold at prices different from the nominal value.

For example the “9% US$ 1000 Treasury Note” can be trading at either US$1100 or US$ 800 depending on the market demand and supply. Let us examine two situations where the note is bought at US$ 1100 and 800.

Bought at US$ 1100:

• The principal or nominal value of the instrument is US$ 1000
• The coupon rate or rate of interest is 9%
• The annual interest receivable is US$ 90
• Actual cost of investment is US$ 1100
• Interest rate actually obtained or earned by the investor is (US$ 90/ 1100)*100 = 8.18%
• Rate of Return therefore is 8.18% and not 9%

Bought at US$ 800:

• The principal or nominal value of the instrument is US$ 1000
• The coupon rate or rate of interest is 9%
• The annual interest receivable is US$ 90
• Actual cost of investment is US$ 800
• Interest rate actually obtained or earned by the investor is (US$ 90/ 800)*100 = 11.25%
• Rate of Return therefore is 11.25% and not 9%
• This rate of return actually obtained is also called the yield .

Suggested Further reading:

• Yield Definition
• What is Dividend Yield?
• Yield Slide