RESEARCH ANALYSIS — ASIAN PAINTS LIMITED
RESEARCH ANALYSIS — ASIAN PAINTS
HISTORY
After WWII and Quit India, paint Imports stopped in India, after which there were only a few foreign companies and Shalimar paints that manufactured paints.
At that time, four friends got together in a garage to start a company that manufactured paints. In 1952, this company made 23 crores worth of sale and in 1962 became the biggest paint manufacturing company at the time. The name is “Asian Paints”.
MANAGEMENT
The company was started by four friends Champaklal Choksey, Chimanlal Choksi, Suryakant Dani and Arvind Vakil.
The four families together held the majority shares of the company. But disputes started over the global rights in 1990s when the company expanded beyond India. The disputes resulted in Mr. Choksey selling his 13.7% shares and exiting in 1997. Mr. Choksey eventually died in July 1997 and his son Atul took over. After failed collaboration talks with the British company Imperial Chemical Industries, Mr. Choksey’s remaining shares were mutually bought by the remainder three family and Unit Trust of India. As of 2019, the Choksi, Dani and Vakil families roughly hold share of 45%.
The current Chairman of Asian Paints is Mr. Suryakant Dani & Mr. KBS Anand is the Managing Director.
BUSINESS MODEL
Let’s talk about the business of Asian Paints which is quite straight forward. The company mainly operates in the paint segment which is categorised into Decorative & Industrial Coating. The largest contributor to the group revenue is the decorative coating segment. This business features a comprehensive portfolio, including paints, painting tools, water-proofing solutions, adhesives, services and home décor.
So, let us understand the decorative segment first, in the 50s when the paint was sold in India, people would hire the painter near their homes which used to buy paints from the unorganized sector as they used to get the paint for cheap price. The painter would come with that paint, paint the house and leave. Asian Paints wished to change this way of thinking. They wanted to transform paint from a mere commodity to a brand. That’s what they did. They converted the customers from buying from the unorganized sector to organized sector. Now whenever we plan to paint, we generally ask what kind of paint and which brand is going to be used, thats the brand power and brand trust Asian Paints has developed for itself.
In order to fuel the paint category, the Company had introduced segments like waterproofing and adhesives to offer solutions to customers and partnered with painting contractors to bring in mechanisation in the paint market by introduction of tools and leveraging its distribution network.
Furthermore, the Services vertical under decorative paint has become a pillar of growth. This is an important vertical because usually consumers/customers every few years repaint or design their houses. They hire architects and interior designers to make changes to their homes and make it look beautiful. So, through this vertical, Asian Paints continues to partner with the customers and is able to reach out to influencers like painters, architects and interior designers.
Lastly, Asian Paints forayed in the home décor business to truly realise its vision of being the most inspirational home décor brand. The digital properties of the Company namely, ‘beautifulhomes.com’ and ‘asianpaints.com’, have grown to be the most sought-after digital décor destinations. The Company launched a consumer app that has seen significant success within its first year itself.
The company also owns physical property under ‘AP Homes’ Stores continue to be the Company’s flagship décor delivery channel offering complete Décor Solutions under one roof. They are multi-category décor stores offering décor inspiration, engaging in-store experience, personalisation consultations and holistic décor execution across multiple categories.
The other segment is the Industrial Segment, it is used in Car, OEM coating, marine coating, and is also used in packaging coating. So when India started expanding after the 1970s, there was a gap in Industrial paint demand and supply. There was no big player, who could supply those amounts of paint. So Asian Paints started targeting those markets and expanded in the industrial sector. Asian Paints operates in the industrial coatings segment through two 50:50 Joint Ventures with PPG Industries Inc. USA. Of the total industrial paint demand, about two-thirds come from the automotive sector and the rest comes from the Non-Automotive Sector.
In addition to this, an extremely small part of the revenue comes from the Home Improvement Business. Asian Paints forayed into this space six years ago and have been stepping up the offerings consistently. Currently operational in the two categories of kitchen and bath fittings comprising ranges of modular kitchens and sanitary-ware. The company have recently introduced wardrobes as well. Asian Paints forayed into the kitchen business by acquiring 51% stake in Sleek International Pvt. Ltd. (Sleek) in FY13–14. During FY17–18, the Company acquired the remaining 49% stake in Sleek from the previous promoters to make it a 100% subsidiary and forayed into the bath business by acquiring the front-end business of “Ess Ess” in FY14–15.
The company also has international operations to cater to the international market which is span across 15 countries, with significant presence in South Asia and the Middle East. Asian paints in among the top three players in decorative paints in all these regions except in Singapore, Oman and Indonesia.
Now, as we have discussed about the business segment and products, let us understand the manufacturing and sales point of Asian Paints.
Talking about the manufacturing units of Asian Paints, they are spread across the country. They are located in North India, Central India, and South India. This helps them a lot in transportation. Because paint is in demand everywhere, and transportation costs are saved, which enables them to sell their products at a slightly cheaper rate than others, with more profit.
Also, Asian Paints has an extremely strong distribution network. You may be surprised to hear that the distribution network of Asian Paints is widespread. How does this help them? Whenever they launch a new product, they can take it to the customers directly and get feedback easily. Accordingly, they can either change the product or push it.
INDUSTRY DYNAMICS
The overall domestic paint market is worth 50,000 crore out of which decorative paint constitutes 37,500 crores. Out of this, Asian Paints hold 55% of the market. The rest of the market share comes from the other competitors and unorganised players.
The rest of the domestic paint demand comes from industrial paints. Out this, 2/3rd of the demand is from the automotive sector.
As per data, per capita use of paint in India is 1.3kg paint/year. It has recently increased to 3.5kg per kg per capita. Speaking of the world average, the world average is 5kg. So there are still chances of demand increasing. That’s where the international operations comes in handy. They expect future growth coming in from international operations. However, currently the company’s international business has been challenging due to continuing subdued economic conditions in most of the markets where it operates. But the management expects it to consolidate by the end of this financial year.
KEY ISSUES
Raw materials constitute major expense for Asian Paints. One should always try to see where its raw material cost comes from And what are the chances of its cost increasing? I’ll give you an example of Asian Paints. To make paint, Asian Paints needs two raw materials. Crude oil and TiO2. If the price for these two increase, it can impact the margins and profitability of Asian Paints. We have to look at the price of crude oil. If the price of raw materials increases, then the margin will decrease. But what we have observed for some time is that the price of crude oil has been stagnant at 60–70 dollars per barrel.
As I told you, crude oil is its most important raw material. So currency is also important because all of that crude oil is imported to India, and if India’s currency depreciates, the raw material cost will rise, and their margins will come down. Good companies always keep their margins constant.
The second key issue is from the Automobile sector, the automobile sector is down these days. And it impacts the paint industry too. As I mentioned earlier, 2/3rdof the industrial market demand comes from industrial sector. So, if vehicles are not in demand, then the demand for paint will be low. Sales will be affected, hence profit will be affected. So investors have to be careful to watch how Asian Paints are performing in the industrial sector.
The third key issue is the unorganised sector, the products provided by the unorganised sector are generally regarded as a very cheap alternative to the branded products. Generally, when the economy slow downs or there are individual budget constrain, people tend to opt for these cheap alternatives. The unorganised sector still has a large market share in the domestic paint industry. It roughly stands around 30–35%.
FUTURE OUTLOOK
Being the market leader in the paint, every investor is interested to understand what next? Where will further demand originate from?
To understand this, let take two major growth drivers:
Housing Sector/ Real Estate — The government has said that in the future it is planning Housing For All. They will provide housing for all, this will eventually increase the demand for paint.
Economic Growth — As we discussed in the beginning, the industrial sector is important in the paint sector. If the economy booms, industrial growth will follow which can lead to an increase in the demand for industrial coating.
As mentioned earlier, the company also forayed into home improvement sector as it is trying to give a full solution if you want to make a house. From the bathroom to kitchen all solutions are available at one place through their home-décor setup. This segment is a focus area for our future growth, as India’s real estate market is slated to grow backed the rising affordable homes segment drive in the country.
FINANCIALS & VALUATIONS
Talking about the financials, let’s talk about the balance sheet first, the total assets stand at 15,661 crores. That’s a huge number and the better part of it goes towards the fixed asset which is plant, property and machinery. The figure stands at 5,256 crores. The figure was 2,956 crore in FY17. This shows that the company is continuously expanding and incurring capex to boost the revenue. The other part goes towards Investments, the total investments as on FY19 is around 2,100 crores.
And lastly, inventories forms the other major chunk of asset for the company. On the liabilities side, the total liabilities as on FY19 is at 5,777 crores. The liabilities is very less which is a great thing. Out if this, almost half of the liability comes from Trade Payables. This means the company can owe its vendors for inventory-related goods, such as business supplies or materials that are part of the inventory for a longer period and pay at a later stage. If you check the asset side, there is hardly any trade receivables. This basically means that the company has no problem in recovering money from its debtors and the payments are received very smoothly and in time. One more important point I would like to highlight here is that the company hardly has any debt obligations which is a good sight as the company doesn’t need to borrow money to run its day-to-day operations.
In the income statement, the total revenue of the company has increased to 19,576 crores in FY19 from 17,118 crores in FY17 representing an absolute growth of 14%. The profit has rose from 2,025 crores in FY17 to 2,198 crores in FY19. The margins has remained consistent in the range of 11–13% in the last few years to the economic slowdown. The management expect to scale their margin back to 15%.
In the cash flow statement, the company consistently generates free cash flows. In FY19, the company generated 1,064 crores, 688 crores in FY18 and 843 crores in FY17. Consistent generation of free cash flow means that the company is not facing any kind of cash crunch to run its day to day operations.
Talking about The P/E ratio or Price-Earnings ratio. It basically means how much you are willing to pay to earn one rupee. The lower the P/E ratio, the better we think it is for the company. As you can see on the screen, I am trying to compare the P/E ratio of Asian Paints with that of its competitors. As you can see, The P/E ratio of Asian Paints is 67.58. That of Berger Paints is 88. And Kansai Nerolac’s 60. So in terms of P/E, Asian Paints is rightly placed.
SHOULD YOU INVEST?
The paint industry is a lucrative industry. Because of which new players are entering the business which may hamper the growth. For example, JSW recently entered the paint industry.
It will be critical to see how the company’s diversification strategy works. It has built a complete eco-system, from paints to adhesives to sealants to home-decor to kitchenware to sanitary and further. With this, the company has created one stop destination and has created a significant moat around its business.
