-PAT and midcap CAGR convergence in
#AsianPaints
- Is the valuation catching up?
Here's what Niraj Shah and Alex Mathew discussing on today's 'The Editors' Cut'.
For the latest news and updates, visit: ndtvprofit.com
#AsianPaints
- Is the valuation catching up?
Here's what Niraj Shah and Alex Mathew discussing on today's 'The Editors' Cut'.
For the latest news and updates, visit: ndtvprofit.com
Category
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TVTranscript
00:00 A small word on a company which was amongst the talk of town, Alex, for the whole of last quarter,
00:06 for upcoming competition for them. Absolutely, and I'm glad you didn't give the name because I was
00:11 going to tease it a little bit. This is a market capitalization of 2.75 lakh crore. It's a large
00:20 cap stock, obviously, and it's a stock that has dropped 15.4 percent year-to-date just in 2024.
00:27 And from the high, it has dropped close to 20 percent. It is a company, as Neeraj pointed out,
00:34 that has seen tremendous competition, or rather is expected to see tremendous competition in
00:40 the upcoming months, and in fact, it has possibly reacted to that. But the argument that you are
00:46 making on Editor's Cut today is that Asian Paints is trading at significantly lower valuations than
00:54 it has in the past. Let's talk about why, though. Yeah, so before the why, I think the headline is
01:01 that after multiple years, the growth or the CAGR growth, compounded annual growth rate,
01:08 which is what a stock or a market cap or any statistic grows year after year with that base,
01:13 so that's the CAGR number. I'm sure people are aware of it, but I just amplified, I kind of laid
01:17 it out. The PAT and the market cap CAGR performance has converged. Okay. And how I'm saying this,
01:26 if you just look at one, of course, the chart of the last three years, Asian Paints has kind of
01:33 flatlined. It's maybe moved around a bit, you will see gyrations, but point to point, Asian Paints
01:38 in the last three years has flatlined. So it's gone nowhere, right? So the market cap has gone
01:43 nowhere, but there has been earnings growth naturally. So, and this is a bit of an anomaly
01:49 for Asian Paints. It's happened for HUL, some of the IT companies back in 2000 and 2010s and
01:54 2020s, but it's not quite happened for Asian Paints because it's had a glorious 2011 to 2020.
02:00 Now, here's what happened. I mean, the decade of CAGR has converged. Here's what's happened.
02:05 If you look at FY2014 to FY2024, this is what I'm trying to say. It's nearly converged. It's
02:13 not completely converged. The PAT growth CAGR was 16.6% and the market cap growth was 18%.
02:22 Not too far away. Now, do you believe that this is normal? This is what should happen,
02:27 but picture what happened until FY21, Alex, that's the key point. From FY14 to FY21,
02:33 Asian Paints PAT growth was about 14 odd percent, 14 and a half, but those statistics will come up
02:40 on your screen, but the market cap growth from FY14 to FY21, can we have that valuation plate
02:47 on the table just to make my point? From FY14 to FY21, the PAT growth was 14.67%. The market cap
02:57 growth was 24.63%. Nearly 25%, which is incredible. Yeah. No, I think we've got these numbers wrong.
03:06 The CAGR growth number is not 18%, it's 24.63%. Nearly 25%. We got this number wrong, but be there
03:13 as it may. I mean, forget the graphics. The PAT growth was 14. The market cap was 24. So,
03:18 imagine what this three-year flatlining for Asian Paints has done. And the decline in the year to
03:25 date as well. Yeah, and the decline in the year to date has done to its CAGR performance on the
03:30 market cap, because the PAT numbers have still remained steady. If in fact, the PAT growth from
03:36 21 to 24 is much better, which is what pulls up that decadal PAT growth CAGR, right, to about
03:42 16.6 versus 14.67 in the preceding. So, what we're essentially saying is that the stock price
03:48 increase has not matched the increase in the earnings and in the profitability. Yeah. Yes.
03:54 And what we're saying is that maybe that was coming, because at some point of time,
03:58 stocks don't grow to the trees. At some point of time, they have to kind of, you know, revert to
04:02 mean. And this is Asian Paints' reversion to mean. The actual competition came up only in Feb and
04:07 March 2024. The talk of the competition being there for the last two years, and reasons always
04:12 come out later. But stock prices tell you a story. And the stock price over the last two years,
04:17 two and a half years, was telling you that at some point of time, the market was saying that,
04:21 hey, we can't pay such a top dollar to a company which is essentially in a commodity product.
04:25 So, are we saying then, and is the argument that despite the fact that valuations have come off
04:32 quite substantially, the multiples have come off, that is normal, that's par for the course,
04:37 and that's something you can expect going forward as well. And possibly, if you're looking at the
04:43 rapid rate of growth that Asian Paints saw when it was growing very, very quickly,
04:48 you would bet on a smaller player? Is that the inference? No, so the inference, Alex, is that
04:52 for the longest time, the last two, three years, and this is the last point here,
04:56 for the longest point in the last few years, people have gripped about the valuation
05:01 excesses in Asian Paints. I think now you can argue that if you take a long time frame,
05:05 then the Asian Paints valuations don't look excessively expensive, because there is a
05:09 pad growth to support that 18% market cap growth. It's trading at circa 40 times,
05:14 which is the cheapest in the last seven, eight, or nine years that we've seen. And the tailwinds
05:19 that stay, right, for Asian Paints, the factors to watch, I mean, infrastand and the housing demand,
05:23 I don't need to spell too much that. I mean, everybody in their aunt knows that.
05:26 The increasing competitive intensity might impact margins. If they do, then that's a bit of a
05:33 problem for Asian Paints. But valuations at 40 times one year forward, lowest in the last seven
05:39 years, I think that tells you now the story that the valuation excesses have been corrected,
05:44 seemingly, and which is what I think the Macquarie notes said yesterday, which is what the Motilal
05:49 Oswal notes said about a week back. I think people are now finding comfort in the fact that
05:54 there is a bit of a convergence in the kind of madness that we saw in the market cap coming off
05:59 a little bit, and the pad growth still seems strong. All right, so that's the word on Asian
06:04 Paints. Let us know what you think. In fact, dealer checks, or not, I must say dealer checks
06:09 in the sense anecdotal evidence, where we've all spoken to people and they've been very confident
06:14 that nothing's going to shake the market cap or the market share for Asian Paints. That remains
06:19 to be seen, however. Let us know what you think.
06:22 [Music]