Asian Paints: The Quest For Transformation

 

Asian Paints (AP) is India’s largest and Asia’s second largest paint company serving consumers in over 65 countries with 26 paint manufacturing facilities located across 19 countries. It is the market leader in the domestic decorative paint segment with a market share of about 50%. The Company manufactures a wide range of paints for decorative and industrial purposes. Its product range includes decorative paints, automotive paints, industrial paints, and ancillaries (primers and fillers).
Recently, it forayed into the home decor and bath fittings space in India, with the acquisition of the Sleek Group and Ess Ess in 2013 and 2014, respectively.

 

Dominance in the decorative paint market

Asian Paints features among the top 10 decorative paint players globally, it derives over 80% of its top line from the decorative paints segment which is a higher margin business (than the industrial paints business).
Despite increasing competition from domestic and major foreign paint companies, AP has been able to maintain its leadership in the domestic decorative paint segment (market share~over 50%). It recorded revenue CAGR of 10% during FY11-15 driven by volume CAGR of 8% (amid economic slowdown) during the same period.
The Company has been able to perform consistently, primarily by leveraging its diversified product offerings, strong supply chain and enviable distribution & logistics network of over 40,000 dealers (nearly double of the 2nd largest domestic player~ Berger Paints) and 32,500 ‘color worlds’ outlets across the country.

revenue-segmentation-and-margin-movement

International operations

Asian Paint is the world’s 11th largest coating company and it aspires to become one of the top five decorative coatings companies world-wide. The Company derives about 13% of its revenues from international operations, mainly from Middle East (55% of export) and Asia (28% of export).

It commissioned a new manufacturing facility in Oman recently with annual capacity of 21,000 Kilo Litre and it is also setting up a green-field plant in Indonesia.  It has witnessed increase in sales in Nepal, post the earthquake and expects that the growth momentum in Nepal would continue in the near future.

The quest for transformation

The quest for transformation and diversification led Asian Paints to acquire Sleek Group in 2013. The Group caters to organized modern kitchen space (components like cabinets, appliances and accessories) through a network of over 250 dealers across India. The Company also forayed into bath space by acquiring ESS ESS, a quality player in the bath fittings segment in 2014.

Asian Paints even ventured into branded adhesives, a sector where Pidilite is a leading player with 70% market share. So far, Pidilite was successful in fighting the global players due to its superior distribution network and brand value- both of which may not be a big barrier for AP. The Company can easily capitalize its existing distribution network of over 40,000 dealers, but a substantial number of adhesives are also sold through kirana shops, which will be a key challenge for Asian Paints. Till now, the company has launched 3 types of adhesives based on usage: Loctite Quick, Loctite Rapid And Loctite Tough for which print ads have already started.

 

 

GDP revival, strong monsoon and pay hike to cheer volumes

The According to IMF, India is poised to grow at 7.5% in 2016 and 2017, this is a positive sign for the industry as there is a high correlation between the paint industry’s growth and GDP growth rate, the volumes in this industry grow 1.5-2.0x of the GDP.
The Monsoon forecast for 2016 is above normal and the government has announced a pay hike of 30% for central government employees, these are further the positive signs as these would boost the disposable income of the consumers.
Above all, the economic recovery and repainting demand coupled with the new government’s focus on increasing spending on infrastructure projects such as smart cities and housing for all is expected to lead to revenue CAGR of 15% between 2016 and 2018.

In the wake of competition from organized players, the Company’s strategy to take advantage of the benign crude oil prices by taking price cuts to boost volumes turned out to be favorable. But 75-80% rally in the crude oil prices since their 2016 lows could pose a threat to the elevated gross margins which the company has enjoyed so far.

The stock currently trades at 40 times its FY 17 estimated EPS. However, the market remains firm on the company due to the rising demand for paints, government’s initiatives and the Company’s entry into the adhesive segment.

Q4 FY16 concall ~ Key takeaways

Overall business review:

  • Gross margins; raw material prices have bottomed out in monomers, solvents and Ti02. 
  • Rural growth is outpacing the urban in most geographies.
  • Growth in southern India is lower than other parts of the country (Asian Paints is big player in Kerala).
  • Repainting constitutes 80% of total demand. The best repainting cycle is in tenanted houses (repainting occurs due to maintenance).

Decorative Business:

  • Decorative business registered double digit volume growth in India.
  • Cumulative price decrease of 2% for FY16 against increase of 0.39% in FY15.
  • Several new products launched during the year including – “Royale Matt”, “PGE Advance” and “Tractor Star”.

Sleek (acquired in Aug 2013):

  • Registered net sales of INR 134.7 Cr. in FY16; incurred loss of INR 19 crores.
  • Launched ‘smart kitchen range’ for easy installation and design.
  • Due to the weak consumer sentiment, the pace of progress has been slower than estimated earlier.

ESS ESS (acquired in June 2014):

  • Registered net sales of INR 106.2 Cr. in FY16; incurred loss of INR 30.2 Cr.
  • Launched ‘Bathsense’, sanitary ware range in certain markets of West Bengal.
  • Response to premium range of bath fittings ‘Royale’ was good.

Locite (co-branding intitiative):

  • Introduced Locite in certain western markets of the country. It has exclusive rights to price the product in the retail market.
  • The product is a distribution arrangement with Henkel Adhesives Technologies, Germany, one of the largest adhesive players in the world.
  • As of now, its only a distribution arrangement as Henkel is not comfortable in the retail market. AP purchases the product and sells the same.

International Business:

  •  Performed well amidst challenging market conditions in some key markets.
  • Bangladesh and Sri Lanka experienced stable political environment supporting the business conditions.
  • Growth in Egypt, despite sluggish economic environment.
  • Markets in the Middle East – Oman, Bahrain and UAE, as well as Trinidad saw subdued economic conditions due to the drop in oil prices.

This report is strictly meant for educational purpose and it may be of interest to researchers as well as students. The Astute Investor acknowledges the fact that a couple of estimates/figures provided in this report have been sourced from various financial news websites (Reuters, Money Control, 4-traders) and research reports available in the public domain.

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