Question

Which industries do you believe have the best profit prospects based on your projection of earnings growth?

Which firms in these industries have the best prospects based on your projection of earnings growth?

Among those industries with the best prospects based on your projection of earnings growth, do these industries appear to be good investments in light of their P/E ratios?

Among those firms with the best prospects based on your projection of earnings growth, do these firms appear to be good investments in light of their P/E ratios?

Answer 1

Solution

Here I am taking the example of a developing country - India

Here in India,there are many industries which I believe have the best profit prospects based on my projection of earnings growth like paints,non-banking financial companies,housing finance companies,etc.,

One among them is the Indian Paint Industry.The Indian paint industry is mainly dominated by the few large players even though there are a number of unorganized & small players.

As per the recent conference held by Indian Paint Association in 2019,it was estimated that the Industry would reach a size of ₹70,000 crores (i.e.,₹700 billion) by FY 21-22 from the present level of about ₹50,000 crores (i.e.,₹500 billion)

Historically,the growth rate shown by the paint industry is 1.5 - 2 times that of the GDP growth of the Indian economy.

The following are the reasons why I believe that the earnings growth would be spectacular for the Indian Paint Industry is :

1.The price of Crude Oil has reduced from the historical levels of $120 plus / barrel.Very important and significant raw material in paint manufacturing is hydrocarbons which are extracted from the crude oil.So,due to low crude oil prices,the cost of manufacturing paint will significantly reduce.

2.By implementation of GST (Goods and Service Tax) - This became a plus for the organized players as it became a minus for the unorganized players.This will lead to efficiencies in terms of bulk manufacturing and distribution / logistics cost.

3.Growing middle class incomes - The govt.has recently announced pay commission ,so the salaries of all central govt. employees will see a very significant increase.So,the disposable incomes for crores of families across the nation will increase which will be responsible for boosting the demand for the paint.

4.Rise in the labour cost - Since there is rise in the labour cost,people are now NOT AT ALL willing to buy low quality products from local / unorganized players as they are not willing to compromise on the PRICE because the labour costs have risen much more than than the material cost.

Based on my earnings projections growth,Berger Paints,Asian Paints,Nerolac and Nippon Paints have the best prospects

Yes these industries,since they are having good prospects in terms of earnings growth,are presently having high P/E ratios.

So,even though for short-term they may not be the right investment choice ,but in a long-term perspective they are worth investment.

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