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EdelweissResearchisalsoavailableonwww.edelresearch.com,
BloombergEDEL,ThomsonFirstCall,ReutersandFactset. EdelweissSecuritiesLimited
Asian
Paints
is
one
of
the
best
discretionary
plays
on
macro
recovery
given that paint volumes surge a healthy 1.52.0x GDP. Moreover,
decisive policy measures by the new businessfriendly government will
spururbandemand.Diversificationintowaterproofing,modularkitchens
and bath fittings places the company in a sweet spot to corner higher
walletshare(MascoCorpinUShasdonethissuccessfully).With22%EPS
CAGR,347bpsRoCEspurtoverFY1417Eandmetamorphosisintoahome
dcorcompany,weanticipatevaluationstoremainrich.ReiterateBUY.
GDPrevival,urbandemandrecoverytocheervolumes
Weestimatevolumestoclock13%CAGRoverFY1417E(~8%overFY1214)anchored
by
the
much
anticipated
recovery
in
urban
sentiments,
GDP
revival
and
toothless
competition(Akzo,Nippon,Jotunfailedtomakeheadway).Additionally,lowpercapita
paintconsumption(onefourthofChina),strongdistributionnetwork(2xnextplayer)
andreductioninrepaintingcycle(downto5from7years)bodewell.Industrialpaints
growthhaslikelybottomedoutgiventhepickupintheinvestmentcycle.
Internationalstroke:Investingingrowth;synergyinhomedcor
Internationalbusiness issettogatherpacewithexpandedcapacity (Bangladesh)and
investmentinfuturegrowthdrivers(Ethiopia).Thecompanyisstrategicallyexpanding
inhomedcorandscalingitupviadistributionsupportandeffectivebranding.
Premiumisation,
GST,
appreciating
INR
to
bolster
margin
Potentialmargintriggers includeproductmix improvementdueto increasingsalience
ofwaterbasedpaints/premiumlaunches,likelyGSTimplementation,appreciatingINR
(5%appreciationimprovesEPSby6.7%)andrampupincapacityutilisation.
Outlookandvaluations:Lustrousgrowth;reiterateBUY
Domestic decorative volume growth is likely to improve and we are positive on new
growthdrivers.Weassign31xP/EtoFY17EEPS,arrivingatatwoyeartargetpriceof
INR720(~41%upside).ReiterateBUYandrateitSectorOutperformer.
COMPANYUPDATE
ASIANPAINTSThegrowthpalette
EDELWEISS4DRATINGS
AbsoluteRating BUY
RatingRelativetoSector Outperformer
RiskRatingRelativetoSector Medium
SectorRelativetoMarket Underweight
MARKETDATA(R:ASPN.BO,B:APNTIN)
CMP : INR509
TargetPrice : INR720
52weekrange(INR) : 565/373
Shareinissue(mn) : 959.2
Mcap
(INR
bn/USD
mn)
:
488/8,217
Avg.DailyVol.BSE/NSE(000) : 1,108.1
SHAREHOLDINGPATTERN(%)
Current Q3FY14 Q2FY14
Promoters* 52.8 52.8 52.8
MF's,FI's&BKs 9.4 7.9 8.3
FII's 18.0 19.5 19.0
Others 19.9 19.9 19.9
*Promoterspledgedshares
(%ofshareinissue)
: 9.2
PRICEPERFORMANCE
(%)
Stock NiftyEWConsumer
GoodsIndex
1month 2.5 9.1 0.6
3months 7.9 16.8 4.8
12months 6.0 20.1 (0.0)
AbneeshRoy
+9122
6620
3141
PoojaLath
+912266203075
TanmaySharma
+912240407586
IndiaEquityResearch|ConsumerGoods
June3,2014
Financials
YeartoMarch FY14 FY15E FY16E FY17E
Revenues
(INR
mn) 127,148
150,344
178,301
213,695
Rev.growth(%) 16.2 18.2 18.6 19.9
EBITDA(INRmn) 19,979 23,916 28,636 34,832
Netprofit(INRmn) 12,188 14,760 18,126 22,292
Sharesoutstanding(mn) 959 959 959 959
DilutedEPS(INR) 12.7 15.4 18.9 23.2
EPSgrowth(%) 9.4 21.1 22.8 23.0
DilutedP/E(x) 39.8 33.1 26.9 21.9
EV/EBITDA(x) 23.7 19.8 16.4 13.3
ROAE(%) 33.0 33.7 34.7 35.7
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GDPGrowthtoReviveFortunesofPaintIndustry
ThereisahighcorrelationbetweenthepaintindustrysgrowthandGDPgrowthrate(asper
our calculations, the correlation between Asian Paints volume growth and Indias GDP
growth rate is a strong 0.76x)paint industry volumes grow 1.52.0x Indias GDP. We
anticipateGDPtosurgeto7.5%(5.4%,6.3%and7.5% inFY15,FY16andFY17)ridingona
new stable and businessfriendly government in the saddle at the Center. Hence, we
anticipatethepaintindustrytogrowatamuchfasterpace.Weestimate11%,13%and15%
YoYvolumegrowthforAsianPaintsinFY15,FY16andFY17,respectively.
Table1:PositivecorrelationbetweenpaintindustryandGDP
Fig. 1:RevivalinGDPgrowthpositiveforpaintindustry
Chart1:AsianPaintsvolumegrows1.52.0xGDPgrowthrate
Source:Edelweissresearch
IncomeLevel Increasein GDPwill increasestandardofliving. Withrisein incomelevel,consumerswill
increaseconsumptionwhichinturnwill helpthedecorativesegment.
HousingSector Growthinhousingsectorwill increaseurbanisation,providecheaperloans andshiftfromsemi
permanenttopermanenthousingstructureswill increasespendinginthedecorativesegment.
IndustrialSegment Theindustrialsegmentca nbefurtherbrokendownintoprotective,general industrial,automotive
powderand marinecoatings.This segmentaccounts for25%ofthepaintindustry'srevenue.
InfrastructureInvestment Newprojects in roads andportswill increaserevenuesofpaintindustryanddrivetheindustrial
segment.
GrowthinPaintIndustry
IncreasedInfrastructureInvestment
ExpansionofIndustrialSegment
BoominHousingSector
IncreasedIncomeLevel
IncreaseinGDP
0.0
4.0
8.0
12.0
16.0
20.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
(%)
GDP ForecastedVolumeGrowth ActualVolumeGrowth
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UrbanRecoverytoSpurGrowth
Urbandemandrevivaltoboostpaintdemand
Rural growth, that had consistently outstripped urban growth for the past many years, is
now gradually losing steam; this is amply evident from the Q4FY14 results of a few
consumercompanies.
As
aresult,
players
who
were
focusing
on
enhancing
their
presence
in
rural areas and introducing products catering to the rural population are shifting focus to
urban areas and are now introducing more urbancentric products (premium products
whicharealsomarginaccretive).Thecentralgovernment,bolsteredbyahistoricmandate,
is likely to herald policies boosting urban demand; BJP is focused on infrastructure
development, fasterexecutionofpolicies,developmentof100newsmartcitiesandasset
creation under NREGA. This urban revival will potentially benefit companies like Asian
Paints,whichhaveahigherurbansalienceintermsofsales.
Urbandemandonthemend
As per consumer sentiment tracker BluFin, consumer confidence in India improved for
fourth consecutive month in February; the Consumer Confidence Index (CCI) shot up 0.5
points to 42.6 (highest since August 2012). The rising score could be an early sign of
recovery.Persistent inflation,slowereconomicgrowthandhigh interestrateshad ledtoa
flattish inflation index, indicating cautious consumer stance. However, with CAD under
controlandCPI&WPIeasingatad,inflationisnowtaming.Thoughurbanconsumershave
graduallyadaptedtofood inflation,theseearlysignsoftapering inflationareencouraging.
Consumerspendingislikelytopickpaceasthenewgovernmentshedspolicyparalysisand
kick starts growth. Also, as per latest findings by Nielsen, consumer confidence in urban
IndiaincreasedbysixpointsinQ1CY14to121thehighestlevelofoptimismsinceQ4CY12.
IndiaretaineditspositionasthesecondmostoptimisticcountryinNielsenssurvey.
Chart2:ConsumerconfidenceindexOnanuptrend
Source:BluFin,Edelweissresearch
33.0
35.2
37.4
39.6
41.8
44.0
Aug
1
2
Sep
1
2
Oct
1
2
Nov
1
2
Dec
1
2
Jan
1
3
Feb
1
3
Mar1
3
Apr1
3
May
1
3
Jun
1
3
Jul1
3
Aug
1
3
Sep
1
3
Oct
1
3
Nov
1
3
Dec
1
3
Jan
1
4
Feb
1
4
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NewBusinessFriendlyGovernmenttoSpurGrowth
BJPmanifestocheerspaintcompanies
BJP,initsmanifesto,hasemphasizedontheneedtobuildinfrastructureandhaspromised
tobuild100newsmartcitiesaclearpositiveforpaintcompanies.Also,ithasstatedthatit
will look at urbanisation as an opportunity, building upon areas like housing. Urban
developmentwill
be
based
on
integrated
habitat
development
and
on
concepts
like
Twin
Cities and Satellite Towns. Real estate and infrastructure development will in a
proportionate manner increase paint demand, benefitting paint companies, especially the
leaderAsianPaintsasitcommandsthepreferredstatusowingtohighbrandrecall.
Newgovernmenttospurjobmarket
Thejobmarket inIndia issettorevivewithastablegovernmentcomingintopoweratthe
Centre.Aspermediaarticles,only3mnjobswerecreatedduringtheUPAtenurefromFY05
10.SentimentshaveturnedpositiveasthenewgovernmentassumespowerandasperABC
Consultants(placementfirm)survey,~84%employersindicatedthatthetotalheadcountin
theirfirmswillriseinFY15.Revivalinthejobmarketwillbeasignificantdriverofeconomic
growth
as
it
will
spur
per
capita
consumption,
which
in
turn
will
boost
GDP.
Chart3:Highersalarygrowthratebodeswellforpaintcompanysmargins
Source:AonHewitt,Edelweissresearch
NDAregimetoboosturbantrade
In Edelweiss report,BLINDSPOT Thebig switch:BharatNirman to IndiaShining?, dated
April02,2014,ourstrategyteamhasanalysedevolutionoftheIndianeconomyunderthe
two alliances thatgoverned India in the past 15 yearsNDA (19982004) and UPA (2004
2014).
The study throws up an interesting factunder UPA (especially starting 2006), there has
beenaremarkableshift intermsoftradefromurbantoruralIndia,withprice increasefor
agrigoodsfaroutpacingthatofmanufacturedgoods.This,webelieve,hasbeentriggered
by massive increase in minimum support prices (MSPs), procurement of food grains by
government, pick up in government spending in irrigation/agriculture sector, rise in agri
creditandexpansioninsocialsectorschemesunderUPAcomparedtoNDA.Therisingrural
0.0
2.8
5.6
8.4
11.2
14.0
FY10 FY11 FY12 FY13 FY14E
(%)
Salarygrowth GDPgrowth
Thejobmarketwillgrowatleast
by30%andwithModiinpower,
thenumber
of
vacancies
expected
areabout15mn,farbetter
comparedtotheprevious
numbers.
UditMittal,MD,
UnisonInternational
AsperaFICCIsurvey,almost93%
ofthe76CEOssaidtheyforeseea
substantialimprovementinthe
nearterm
economic
situation,
whilethebalance7%participants
expectedmarginalimprovementin
thesituation
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prosperity is evidenced in capital deepening, income trends of farm workers and rural
consumption patterns more generally. Thus, in the past 10 years, tractor sales have
catapulted,useoffertilisers&pesticideshas increased,productivitygainshavebeen large
across crops, rural wages have seen unprecedented rise (outpacing GDP growth in recent
years)anddiscretionaryspendingsawsustaineduptrend.Inourview,withNDAbackinthe
saddle,thetermsoftradewillreverseinfavourofurbanIndia(aswasthecaseduring1998
2004,
which
saw
little
productivity
gains
in
crops,
minimal
MSP
hikes
etc).
Chart4:TradeshiftedfromurbantoruralareasunderUPA;couldreviveunderNDA
Source:CMIE
Chart5:HighMSPsinriceunderUPA Chart6:accompaniedbyhighprocurement
Source:
Food
Corporation
of
India,
CMIE
90
100
110
120
130
140
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
(Indexre
basedto100)
WPIfoodarticlesrelativetononfoodarticles
90
140
190
240
290
340
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(Re
basedto100)
Riceminimumsupportprice(INR)
10.0
16.0
22.0
28.0
34.0
40.0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(MT)
Ricebufferstocks Ricebufferrequirementnorms
NDA UPA
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Chart7:Similartrendinwheataswell Chart8:accompaniedbyhighprocurement
Source:FoodCorporationofIndia,CMIE
Chart9:Sharpincreaseinagriandirrigationspending Chart10:alsoagricredit
Source:UnionBudgets,GovernmentofIndi,RBI,CMIE
90
125
160
195
230
265
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(Re
based
to100)
Wheatminimumsupportprice(INR)
5.0
7.5
10.0
12.5
15.0
17.5
FY90FY98 NDA
(FY98FY04)
UPA
(FY04FY14)
(CAGR,%
)
Budgetexpenditureonagriandirrigation
0
10
20
30
40
50
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(M
T)
Wheatbufferstocks
WheatBufferrequirementnorms
NDA UPA
5.0
12.0
19.0
26.0
33.0
40.0
FY9
0
FY9
2
FY9
4
FY9
6
FY9
8
FY0
0
FY0
2
FY0
4
FY0
6
FY0
8
FY1
0
FY1
2
(%)
Agricreditoutstandingasa%ofNominalagriGDP
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Chart11:SharpgrowthintractorsalesunderUPA Chart12:alsofertiliserconsumption
Source:Crisil,FertiliserAssociationofIndia
Chart13:ImprovementinproductivityofallcropsunderUPA
Chart14:Rapidriseinruralwages
Source:RBI,CMIE,MinistryofAgriculture
(10.0)
(5.0)
0.0
5.0
10.0
15.0
FY9098 NDA
(FY98FY04)
UPA
(FY04FY14)
(CAG
R,%
)
Tractorsales
1,750
1,900
2,050
2,200
2,350
2,500
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(Kg/Hectare)
Cerealsyield(3Ymovingaverage)
NDA
(5.0)
0.0
5.0
10.0
15.0
20.0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14td
(%,yoy)
Ruralwagesofunskilledlabourers GDPatmarketprices
NDAUPA
(1.0)
0.4
1.8
3.2
4.6
6.0
FY91FY98 NDA
(FY98FY04)
UPA
(FY04FY13)
(CAGR,%
)
Fertilizer salesvolume
800
880
960
1,040
1,120
1,200
F
Y97
F
Y99
F
Y01
F
Y03
F
Y05
F
Y07
F
Y09
F
Y11
F
Y13
(Kg/Hectare)
Oilseedsyield(3Ymovingaverage)
NDA
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Increasingmigrationtopropelurbangrowth
Urbanisationhasbeengrowingatafastpaceas:(i)theaspirationalvalueisincreasing;and
(ii)urbanareasprovide lucrativeopportunities leadingtoincreasedmigration.Asper2011
census,urbanpopulationsharetototalresidentshas increasedto31.16%from28.53% in
2001andas perUNStateof theWorldPopulation report,40.76% of India'spopulation is
expected to reside in urban areas by 2030. This increasing trend of urbanisation coupled
withrevival
in
urban
demand
bodes
well
for
companies
that
have
higher
urban
salience.
Real estate demand will grow proportionately, thus boosting paint demand. Also, the
repaintingcycleisshorterinurbanareas(afactorofhigherpercapitaincome)comparedto
ruralareas.
Chart15:UrbanpopulationinIndiaOntherise
Source:McKinseyGlobalInstitute,Edelweissresearch
Chart16:Rateofurbanisationonanuptrend
Source:McKinseyGlobalInstitute,Edelweissresearch
20.0
25.6
31.2
36.8
42.4
48.0
1990 1991 2001 2005 2008 2011 2025E 2030E
(%)
UrbanisationRate
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ShorterRepaintingCycleBodesWell
Asper industrysources,~70%of thetotaldecorativepaintsdemand in Indiacomes from
repainting(higherforAsianPaintsat~8590%)andbalancefrom freshconstruction.Fresh
construction is a function of improvement in real estate and infrastructure development,
which
in
turn
is
linked
to
GDP
growth.
Repainting,
on
the
other
hand,
is
influenced
by
factors like increase in income levels, number of festive & marriage days and lifestyle of
people.RepaintingcycleinIndiahasreducedsignificantlyfrom7yearsaboutadecadeago
to 5 years now; the trend is expected to continue as income levels rise and lifestyle
improvementinducesconsumerstochangethelookandfeeloftheirhomesmoreoften.
Repainting also depends on occasions like marriage, etc. Such occasions coupled with
increase in per capita incomes are leading to higher consumption of paints and shorter
repaintingcycle.
Change inthemindsetofpeople isanotherreasonfortheshorterrepaintingcycle.Earlier,
peoplepaintedtheirwallsonlywhentheystartedtopeeloff,butnowpaintisperceivedas
dcorand
customers
are
open
to
investing
more
in
beautification
of
homes.
AsianPaintsderives8590%ofdemand fromrepainting,which ishigher thanthe industry
average.Weexpectthistoputthecompany inanadvantageousspotcomparedtopeers,
who rely on fresh painting demand. Upgrading in paint quality is a key characteristic of
repaintingwhichbodeswellforAsianPaintspremiumisationstrategy.
Chart17:Urbanincomesharetoimproveaspercentageoftotalincome
Source:McKinseyGlobalInstitute,Edelweissresearch
0.0
20.0
40.0
60.0
80.0
100.0
1990 2001 2008 2030
(%)
UrbalIncome RuralIncome
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AsianPaints:MarketLeaderinanOligopolyMarket
An oligopolistic market is characterised by a few sellers producing and selling either
homogeneous or close substitutes of products. The domestic paint industry is thus
oligopolistic in nature, with more than 90% of the organised decorative paints market
dominated by the top four playersAsian Paints, Berger Paints, Kansai Nerolac and Akzo
Nobel.AsianPaintshasthelionsshareofthismarketwith~54%marketshare.Someofthe
essential characteristics of any oligopolistic market are pricing power, entry barriers,
productdifferentiationandadvertisement&sellingcosts.AsianPaints,themarket leader,
exhibitsallthesecharacteristicsandispoisedtogainfromanysurgeinthepaintindustry.
Fig.2:DecorativebusinessinIndiaisanoligopolisticmarket
Source:Edelweissresearch
Robustpricing
power
Oneofthemostimportantfeaturesofanoligopolisticmarketisthatfirmsarepricesetters
rather than price takers. Asian Paints, by virtue of being the market leader, enjoys strong
pricingpower,whiletheindustryexhibitspricingdisciplineandfollowstheleaderinpricing
action.
Asian Paints tries to maintain and operate within a range of gross margin. Raw material
prices largely determine the companys pricing strategy. The primary raw materials,
titaniumdioxide(TiO2)andmonomers,beingcrude linkedare impactedbycrude inflation
andalsocurrencyfluctuation.ThoughglobalTio2priceshaveremainedflattish inthepast
oneyear,currencydepreciationhashadanadverseimpact,compellingpaintcompaniesto
hike pricesAsian Paints effected total price increase of 6.1% in FY14, followed by other
competitors.
Despite
this
price
increase,
Asian
Paints
delivered
consistent
double
digit
volumegrowthevenamongsttoughmacroenvironment.Recently,thecompanytooktwo
price hikes effective from May 1, 2014, and from June 1, 2014, of 1.0% and 1.2%,
respectively,tooffsettheincreasedmonomerprices.
Oligoplistic
market
Pricingpower
Advertisement
&sellingcostProduct
Differentiation
Entry
Barriers
Theresbeenamassive
transformationintheIndian
consumer.Earlier,peopleusedto
paintwhenwallswerepeeling.
Now,itsaboutdcor.We
perceivedthisbeforemostofour
competition.
K.B.S.Anand,MD&CEO,
AsianPaints
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Table2:PricehiketakenbyAsianPaintsovertheyears
Source:Company,Edelweissresearch
Robustvolumegrowthstrongdespiteslowdown,pricehikes
Despitehavingtaken6.1%priceincreaseinFY14,AsianPaintsclocked~11%volumegrowth.
Paint demand thus remains resilient inspite of pricing action. Weexpect the company to
continuetodeliverstrongvolumegrowthridingrobusturbanrecovery.Comparedtoother
companies in the consumergoodsspaceEmami,NestleandHULAsianPaintsvolumes
haveremainedresilientdespitediscretionaryslowdown.Weexpectitsvolumegrowthtobe
muchfasteraseconomicgrowthpickspace.
Chart18:Volumesresilientdespiteslowdown
Source:Company,Edelweissresearch
Date Pricehike(%)
Jun14 1.2
May14 1.0
Feb14 2.1
Sep13 1.8
Aug13 1.0
May13 1.2
Jan13 (0.2)
May12 3.2
Mar12 2.1
Mar12 1.4
Dec11 2.2
Jul11 1.3
Jun11 2.5
May11 4.4
Q4FY11 1.0
Dec10 3.0
Aug10 1.2
Jul10 2.6
May10 4.2
3.0
6.8
10.6
14.4
18.2
22.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
(%)
AsianPaintsVolumeGrowth
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likeAsianPaintstocapturemarketsharefromsuchplayersaswell.Ifwetaketheuniverse
ofthetop5organisedplayersinthedecorativepaintssegment,AsianPaintshasconstantly
gainedmarketsharefrom44% inFY05to53.7%inFY13.KansaiNerolac,AkzoNobeland
ShalimarPaints,ontheotherhand,havelostmarketsharesoverthesameperiod;Bergers
marketsharehasremainedconstantoverthepastfourfiveyears.
Chart
20:
Market
share
of
paint
companies
in
decorative
paints
segment
Source:Edelweissresearch
Chart21: Shareoforganisedandunorganisedcosintotaldecorativepaintsmarket
Source:Edelweissresearch
Highentry
barriers
Oligopolisticmarketspresentahugeentrybarrier,therebysecuringmarketshareofexisting
players from outside threat.Since thedomesticpaintmarket isdominated bya few large
players, it makes entry difficult owing to their strong distribution network, pricing power,
robustcapacityandbrandstrength.AsianPaints,beingthe largestplayer, isthe leaderon
allfrontsasfarasbarrierstoentryareconcerned.
0.0
20.0
40.0
60.0
80.0
100.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
(%)
AsianPaints Berger Kansai Akzo Shalimar
0.0
20.0
40.0
60.0
80.0
100.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
(%)
Organisedshare Unorganisedshare
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Unmatcheddistributionstrength
AsianPaintsstrongdealernetworkcreatesahugeentrybarrierfornewplayersandmakes
itdifficultforexistingplayerstomakeinroadsintothedecorativemarket.Thecompanyhas
strong distribution in terms of dealer network (in urban and rural areas) and tinting
machines,whichmakesitdifficultforotherplayerstocompete.AsianPaintsleveragesupon
itsstrongbrandstrength,efficient inventorymanagement,avibrantproductvarietyanda
largedealer
network
while
negotiating
with
dealers.
Distribution is thus the key parameter differentiating Asian Paints from other paint
companies. The company invests heavily in dealers and IT services to improve the supply
chainmanagement.Ithasatotaldealernetworkof35,000andit isplanningtoadd1,500
2,000 dealers to its network every year. Though other players are also increasing their
dealernetwork,theyhavea longwaytogo(BergerPaintsdealernetwork ishalfofAsian
Paints).
Tinting machines, which are colour dispensing machines, is another crucial factor that
bolsters a companys distribution strength. Asian Paints has been adding ~1,000 tinting
machinesperyearwithatotalof27,000currently.Largenumberoftintingmachineshelps
retaindealers
as
these
machines
result
in
low
inventory
at
the
dealer
level.
It
also
helps
provideawider variety ofcolours tocustomers. Tintingmachinesentailan investment of
INR0.300.35mnandtheyarebecomingan integralpartofthebusinessfordealersasthey
helpmeetrisingdemand.
AsianPaintsmaintainsstrongrelationshipswithdealers,helpingthecompanyretaindealers
andalsoenhancebrandpushthroughthem.Dealerrelationshipindirectlyresultsinagood
relationship with customers. The companys top management meets dealers personally.
AsianPaintsalsoorganisesevents(AsianPaintsRangmanch'fordealersinMumbai)forits
dealerswhichgives themasenseofbelongingtothecompany.Thecompanybuiltasolid
connectwithconsumersbyprovidingdifferentserviceswhichhelpsthemchoosetheright
paintfortheirhomes,calculatetotalamountofpaintingcost,understanddifferenttypesof
paints
available
for
selection
etc.
Asian
Paints
has
a
detailed
website
from
where
a
consumer can get live consultancy on paints online via Colour Consultancy Online from
whereaconsumercanchatonlinewithacolourconsultantandgethis/herqueriessolved.A
consumercanalsoscheduleameetingwithacolourconsultantofAsianPaintsathishome
tosolvehisqueriesthroughtheconsultancy@hometabonthewebsite.Thecompany,apart
fromColourConsultancyOnline,alsohasanonlinechatapp,AskAparna,wherequeriescan
besolvedonlineviachatbyconsumers.Apartfrom this,AsianPaintsalsoofferstools like
paintselector,budgetcalculators,dealerlocatoretc.,whichprovideconsumerstheeaseof
resolvingallthequeriesandneedsrelatedtotheirpaintingneeds.
Table3:Dealernetwork,tintingmachinesanddepotsofpaintcompanies
Source:Company,Edelweissresearch
TintingMachines Depots Dealers
AsianPaints 27,000 110 35,000
BergerPaint 12,000 125 16,500
KansaiNerolac 7,500 75 15,000
AkzoNobel 5,500 NA 8,500
Tintingmachine:Paintinggrowth
story
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Table4:AsianPaintsColourWorlddealers(2.7xin6years)
Source:Company,Edelweissresearch
Formidablebrandstrength
Each company in the paint industry has created its own brandAsian Paints hasRoyale,
Aspira,Tractor;BergerhasSilk,EasyCleanetc.Purchasesareheavily influencedbybrand
recall, which is directly proportional to the advertising frequency and its impact on
consumers.
Asian Paints has been able to create strong brand equity with dealers, painters and
customers,
making
it
difficult
for
a
new
player
to
compete.
A
strong
brand
helps
build
a
strongemotionalconnectwithcustomers.This,coupledwithsuperiorqualityofproducts,
helps create strong brand loyalty, making Asian Paints the preferred paint company for
repainting.
Asian Paints has travelled a long way in its brand building exercise right from 1954 when
Gattu',acartoonkidcreatedbyR.K.Laxman,wasitsmascot,whichwaschangedtoalogo
inredandgoldenyellowin2002.Afteradecade,thelogowasrelaunchedtomakeitlook
more freshandcontemporary.Thenew logoreflectsamoremeaningfulandpersonalised
engagementwith thecustomer.Theflowingribbon thatcreates the APdesignhighlights
easyflow,smoothnessanddynamismthatthecompanyprovides.
Fig.3:AsianPaintsChangingwithtimes
Source:Company
ColorWorldDealers
FY08 10,000
FY09 12,000
FY10 14,600
FY11 18,000
FY12 21,100
FY13 24,000
FY14 27,000
AsianPaintswasapartofthenine
Indiancompaniesthatwere
includedintheForbes'World's100
mostinnovative
growth
companies
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Productdifferentiation
Each player in an oligopolistic market attempts to differentiate its products to attract
consumers. Investments in innovation also help earn better margins as it commands a
premium over other plain vanilla offerings. Asian Paints has been at the forefront of
differentiation and innovation. It was the first company to allow consumers to choose a
particularpatternandcolourfortheirwalls.In2004, itlaunchedapremiumrangeofpaint
RoyalePlay.
Recently,
it
launched
ultra
luxury
paint
Royal
Aspira
with
differentiated
features like five years warranty, teflon surface protector, antimicrobial formula, crack
bridgingpropertyetc.
Differentiation can also be via services. In 2009, the company introduced dealerowned
Colour Ideastores, which is a retail formatwhereacustomercan get free instorecolour
consultancybytrainedprofessionalsalongwithanoptiontovisualisethecolourchoiceona
ColourVisualiser.AsianPaints launched70newColourIdeastores inFY14takingthetotal
count to around 170 stores. It has also launched Ezycolour Store andEzycolourBeautiful
HomeGuidewhichletscustomerstrydifferentcoloursandtextures,selecttherightcolour
and finish for each room, to find a paint that best fits their budget etc. All these
differentiations and innovations keep brands alive and helps develop strong customer
loyalty.
Table5:AsianPaintsDifferentbrandsacrosssegments
Source:Company,Edelweissresearch
Effectiveadvertising
Advertising and sales promotion (A&P) activities play an important role in an oligopolistic
market,enablingplayerscapture highermindshare byharping on thesuperiorityof their
products. Asian Paints has maintained high level of A&P spends as a percentage of sales
over the years.A&P spends include differentiated advertisements on TV and other media
like
newspapers
etc.,
and
target
based
promotional
offers
to
dealers
etc.
The company spends heavily on A&P across product categories (mass to premium) to
outpacecompetitorsinspecificsegments.SaifAliKhanisthebrandambassadorforcertain
offerings(AsianPaintsRoyale,RoyalAspira)forinteriorwalls.Thecompanylaunchedanad
campaignforitshighendemulsionforinteriorsRoyalAspirawithSaifAliKhanandSohaAli
Khan.ForexteriorpaintslikeApexUltimaitreliesmoreonconceptualeyecatchingadsthan
onbrandambassadors(similartoPidilitesstrategy).AsianPaintshiredRahulDravidtore
launchtheApcolitebrand.Itrecently launchedaninterestingadfor itsexteriorpaintApex
InteriorPaints ExteriorPaints MetalFinishes
ValueforMoney TractorAcrylicDistemper
TractorEmulsion
TractorSytheticDistemper
AceEmulsion
ApexExteriorEmulsion
UtsavEnamel
Premium ApcolitePremiumEmulsion
ApcoliteAdvancedEmulsion
ApexUltima ApcolitePremiumGlossEnamel
ApcolitePremiumSatinEnamel
PremiumSemiGloss
Luxury RoyaleGlitter
RoyaleLustre
RoyaleLuxury
Emulsion
RoyaleShyne
ApexDuracastFinetex
ApexDuracastRoughTex
ApexDuracast
CrossTex
ApexDuracastPebbleTex
ApexDuracastSwirlTex
ApexUltimaProtek
SuperLuxury RoyaleAspira
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UltimaProtekhighlightingitssuperiorantiageingquality.Thecompany,aspartofproduct
promotion,alsosponsoredatelevisionshowHarGharKuchKehtaHaionColorschannel.It
was a 10part series featuring celebrities talking about their childhood memories and the
housewheretheyspenttheirchildhood.
Table6: Adspendsaspercentageofsalesofpaintcompanies
Source:Edelweissresearch
Fig.4:RahulDravidinarecentAsianPaintsApcoliteadvertisement
Source:Company
%
of
Revenue FY07 FY08 FY09 FY10 FY11 FY12 FY13AsianPaints 3.9 4.8 4.6 4.8 4.5 4.1 4.6
BergerIndia 3.9 4.0 4.2 4.6 4.9 5.1 5.6
AkzoNobel 5.6 6.6 7.3 9.2 9.2 5.3 5.0
KansaiNerolac 3.1 3.2 3.4 4.0 3.8 3.8 3.6
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MarginSettoPaintCheeryPicture
AsianPaintsenjoyshigherEBITDAmargincomparedtootherorganisedplayerslikeBerger,
Kansai and Akzo Nobel as its products command a premium and has higher operating
leverage due to its larger scale. Also, strong brand strength, efficient inventory
management,wideproductvarietyandalargedealernetworkhelpnegotiatebetterterms
withdealers.Operatingleveragealsokicksinowingtoalargescale.
However, the companys margin fluctuates depending upon raw material prices (in turn
dependson INRmovement).Theotherconcernonmargin is increase inpoweranddiesel
prices.
In H2FY14, Asian Paints other expenses shot up due to higher transportation cost on
accountofstrikeattheSriperumbudurplant.MarginislikelytoimproveinFY15giventhat
transportationcostwillnormalise(willnotneedtotransportpaintsfromotherfactoriesto
areascateredbytheSriperumbudurplantastheissuehasbeenresolved;strikewascalled
offinApril2014).
Weexpectmargintoimprovedueto:(i)stabilisingINR;(ii)operating leverageduetopick
upindemandandenhancedcapacityutilisation;and(iii)premiumisation.
Table7:EBITDAmarginprofileofpaintcompanies
Source:Edelweissresearch
StabilisingINR
to
curb
raw
material
prices
INR movement affects gross margins of paint companies as key raw materialsTiO2 and
monomersare indirectlycrude linked.Withastablegovernment inpowerweexpectINR
to strengthen as economic growth revives. The currency has already appreciated from
INR68/USDinAugust2014toINR59nowwithCADundercontrol.
Asian Paints directly imports ~30% of total raw material (largely TiO2). If we take into
account crudelinked raw materials, ~50% of total COGS get impacted by INR movement.
Manyotherrawmaterialsarealsolinkedtocrudeoilprices.
CrudeoilpricesarecurrentlysteadyatUSD108perbarrel.Assumingcrude tobeat these
levels, it isonlycurrency fluctuation that willaffect rawmaterialcosts.On a conservative
basis,ifweassumethat~40%oftotalrawmaterialisaffectedbycurrencymovement(both
directlyandindirectly)keepingallothervariablesconstant,then5%INRmovementleadsto
6.7% impactonstandaloneEPS.WhenINRappreciates,grossmarginbenefitflowsfortwo
tothreequartersaspricecut istakenwitha lag.Thus,anyINRappreciationwillpaveway
formarginexpansioninFY15.
(%) FY07 FY08 FY09 FY10 FY11 FY12 FY13
AsianPaints 15.1 16.4 13.2 19.8 18.3 16.2 16.5
BergerPaints 9.9 10.1 8.4 10.5 10.6 10.4 11.1
KansaiNobel 14.0 14.1 11.5 15.5 13.6 13.0 11.8
AkzoNobel 11.1 10.4 11.6 12.4 12.0 8.7 8.4
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Table8:EffectofappreciationanddepreciationofINRonmargins
Source:Edelweissresearch
Chart
22:
INR
appreciating
against
USD
Source:Edelweissresearch
INRmn FY14 Rupeedepreciatesby5% Rupeeappreciatesby5%
Revenues 104,188 104,188 104,188
Costofgoods sold
Rawmaterial consumed 57,587 58,739 56,435
Indigenous@60% 34,552 34,552 34,552
Imported@40% 23,035 24,187 21,883
Purchaseofstockin trade 2,566 2,566 2,566
Changes in inventory (753) (753) (753)
Total COGS 59,400 60,551 58,248
Grossprofits 44,788 43,637 45,940
Staffexpenses 4,824 4,824 4,824
Otherexpenses 22,191 22,191 22,191
Total expenses(ExcludingCOGS) 27,016 27,016 27,016
EBITDA 17,773 16,621 18,924
Depreciation 2,123 2,123 2,123
EBIT 15,650 14,498 16,801
Otherincome 1,737 1,737 1,737
Financecost 261 261 261
PBT 17,125 15,974 18,277
Tax 5,335 4,976 5,694
CorePAT 11,790 10,997 12,583
EPS 12.3 11.5 13.1
%changein EPS (6.7) 6.7
%ofsales
Grossmargins (%) 43.0 41.9 44.1
EBITDAmargins (%) 17.1 16.0 18.2
EBITDAmargin(decline)/expansion (bps) (111) 111
40.0
46.0
52.0
58.0
64.0
70.0
May
11
Aug
11
Nov
11
Feb
12
May
12
Aug
12
Nov
12
Feb
13
May
13
Aug
13
Nov
13
Feb
14
May
14
(INRperUSD)
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Operatingleverageonrobustvolumes,enhancedcapacityutilisation
Operating leverage is a function of improvement in sales and effective fixed cost
rationalisation.AsianPaintshasbeenabletosustainstrongvolumegrowthof~11%YoYin
FY14 despite economic slowdown. We expect it to gain from urban recovery as it has
commissionedamanufacturingfacilityinKhandala(inFebruary2014withinstalledcapacity
of 300,000KL per annum) and enhanced capacity at Rohtak plant (from 150,000KL per
annumto
200,000KL
per
annum
in
Q1FY14).
With
such
huge
capacity
in
place
and
likely
volumegrowthboost fromrecovery inurbandemandandrevival inGDPgrowth,optimal
capacityutilisationwillkickinoperatingleverage.
The companys other expenditure as a percentage to sales has surged over the past five
quarters because of issues like strike at the Sriperumbudur plant (leading to higher
transportationcosts)andpower&dieselcostinflation(Khandalaplantwasinitiallyrunning
on DG sets further heightening power costs). These issues have been resolvedstrike at
Sriperumbudurplanthasbeencalledoffandpower issueat theKhandalaplanthasbeen
solved. We expect other expenditure to remain high but will remain constant as a
percentage of sales. Freight costs may see some inflation owing to diesel prices moving
North,butrapidvolumesurgewillleadtoscalebenefitandtherebyspurmargin.
Chart23:Otherexpenditureaspercentageofsale
Source:Company,Edelweissresearch
Table9:AsianPaintsCapacityexpansion
Source:Company,Edelweissresearch
16.0
18.0
20.0
22.0
24.0
26.0
Q1FY04
Q3FY04
Q1FY05
Q3FY05
Q1FY06
Q3FY06
Q1FY07
Q3FY07
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Q1FY12
Q3FY12
Q1FY13
Q3FY13
Q1FY14
Q3FY14
(%ofsales)
Area Capacity
Feb14 KhandalaIndustrial Area,Maharashtra 3,00,000KLpa
Apr12 Rohtak,Haryana 50000KLpa;extendedand started
Feb12 Rohtak,Haryana 150000KLpa;shutdown
Apr10 Rohtak,
Haryana
1,50,000
KL
pa
Feb07 Taloja,Maharashtra 14000KLpa
Apr06 Baddi,HimachalPradesh 1800KLpa;shutdown
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Margintogetpremiumisationboost
With increasing per capita income and improvement in aspirational levels, consumers are
looking forbetter qualityandaremorewilling to uptrade.Most consumer companiesare
tappingthisopportunityandfocusingonpremiumisingtheirportfolios.
Thistrendhasbeenapparent inthepaint industryaswellwithconsumersupgradingfrom
distempers,putties
etc.,
to
more
premium
emulsions.
Asian
Paints
has
also
benefitted
from
pick up in this trend backed by higher saliency of premium products, wider variety of
technologicallyadvancedanddifferentiatedpremiumproducts,strongdealernetworktobe
abletocatertodemandanditsstrongbrandequity.
AsperanACNielsenreport,thepaintindustryiswitnessingpremiumisationascontribution
ofexterioremulsionshasincreasedto20.3%in2012from13.5%in2008andthatofinterior
emulsionsincreasedto16.8%infrom12.3%overthesameperiod.Theshareof lowerend
distempersdeclinedto11.5%in2012from12.9%in2008.
We expect premiumisation trend to increase at a faster pace, particularly in urban areas,
withurbangrowthrevivalonthecardsandthenewgovernmentsemphasisonbuilding100
new
cities.
Improvement
in
per
capita
income
of
urban
population
will
also
boost
premiumisation.
AsianPaintshasastrongpremiumportfoliowithRoyale,Apcolite,Protek,etc.,initsstable.
Recently,thecompany launchedasuperpremiumofferingRoyaleAspira(INR600perlitre)
and relaunchedApcolite asApcoliteAdvanced as a more premium offering. With strong
marketing campaigns and brand ambassadors like Saif Ali Khan and Rahul Dravid for its
premium offerings, Asian Paints has been aggressive in marketing its premium end of
portfolio.Weexpectittobenefitfromimprovementinmixandseeimprovementinmargin.
Waterbasedpaintstoboostmargin
There
has
been
a
steady
shift
towards
the
use
of
water
based
paints
from
oil
based
paints
notonlybecauseoftheenvironmentaladvantages,butalsobecauseofeaseofapplication.
Consumerspreferwaterbasedpaintsastheydryquickly,emitlessodourandareeasierto
clean(withwater).Solventbasedpaints,ontheotherhand,containhigh levelsofVolatile
OrganicCompound(VOC),take longertodryandemitstrongodour.Thishasledtostrong
consumerinclinationtowardswaterbasedpaints/emulsionsasevidentfromtheirincreased
contribution to overall paint demand. From a paint manufacturers perspective, water
based paints carry 57% higher margin than oilbased paints. This is the reason behind
higherfocusofpaintcompaniesonwaterbasedpaints.Asperindustryreports,theshareof
waterbased paints in the decorative paints market is ~52%, while balance 48% is solvent
based.Companiesofferwaterbasedenamelsthatgivelookandfeelofoilbasedenamels.
Asian
Paints
has
the
highest
revenue
contribution
from
waterbased
emulsion
and
distempers(morethan50%).Also,thecompanyisincreasinglyintroducingmoreproductsin
this category. In line with global paint companies, Asian Paints has been emphasizing on
paints with reduced VOC. Vast opportunity to further increase contribution from water
basedpaintsbodeswellformarginimprovement.Anothertriggerformarginimprovement
isuptradingofconsumersfromdistemperstoemulsions.
Weexpectthatwithanew
governmentcomingin,things
wouldimproveintermsof
investmentclimateand
subsequently,theprotective
coatingbusiness,inwhichweare
rankedfirst,willnaturallybegin
growingatafastpace.
AbhijitRoy,MD,
BergerPaints
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Apart from many waterbased emulsions like Royale,Apex Ultima,ApexWeather Proof
emulsionsetc.,AsianPaintsalsohaswaterbasedenamelsundertheAsianPaintsPremium
Semi Gloss Enamel brand. It also has water based wood finishes. We expect revenue
contribution of waterbased paints to improve riding higher focus led by innovations and
aggressivemarketing.
Chart24:Shareofemulsionsincreasingovertheyearsfortheindustry
Source:ACNielsen,Edelweissresearch
2.0
9.4
16.8
24.2
31.6
39.0
Enamel
IntEm
ulsion
ExtEm
ulsion
Distemper
Cemen
tPaint
WoodFin
Putty
Primers,
Thinners
(%)
2008 2012
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AnticipatedIndustrialPaintSegmentRevivalaBoon
Industrialpaintscontribute~7%toAsianPaintstotalrevenueandthesegmentcontinuesto
remainaffectedbyslowdown inautomotiveand industrialpaintssectors.Thecompany is
present in the automotive coating segment via JV with PPG (PPG AP) and is the second
largest
supplier
to
the
auto
segment
in
India
(behind
Kansai
Nerolac).
It
is
the
largest
player
in auto refinish segment. In the nonauto industrial segment, Asian Paints participates
througha JV (APPPG) thatcoversprotectivecoatings, floorcoatings,roadmarkingpaints
and powder coatings segments. With the businessfriendly BJP government coming into
power,growthintheindustrialsegmentislikelytopickupphenomenally,particularlyinthe
infrastructuresector.Thiswilldriveperformanceofthe industrialcoatingssectorasthere
will be an increase in the public and private investments due to the new government
comingin.
Realestaterevivaltospurindustrialpaintvolumes
Whilerepaintingcontributes8590%toAsianPaintsoveralldemand,1015%isdependent
onnew
real
estate
development.
Since
the
past
six
eight
months,
real
estate
prices
in
afew
metrosandtierIcitieshavebeenunderpressure.However,owingtoimprovedsentiments
due to a stable government at the Centre, property prices are expected to stabilise and
volumesaresettoimprove.ThiswashighlightedinalatestresearchreportbytheEdelweiss
real estate team, Real EstateRising on a strongfoundation, dated May 16, 2014. Any
improvement in inflation,highGDPgrowthaswellasreduction in interestrateswilldrive
consumerdemand,whichshouldbenefittherealestatesector.
Therealestatesectorhasbeengearingupinanticipationofarecoverybystrengtheningits
operations and improving balance sheets. New launches by real estate developers have
pickedupspeedoverthepastfewyears.Becauseoftheexpectedrecoveryintheentirereal
estate sector, completion of these projects is expected to accelerate. When this pent up
supplyhitsmarkets,itshoulddrivevolumesofpaintcompanieslikeAsianPaints.Also,many
realestatedevelopershavelinedupattractiveprojectlaunchpipelines.
Thedemandforindustrialpaintis
goingtobedrivenbythepickupin
theautomobileindustryand
growthininfrastructure.
Infrastructureis
at
the
lowest
level
inthecountrytoday,hencewesee
asustainedgrowthintheindustrial
paintsbusiness."
HMBharuka,MD,
KansaiNerolac
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Table10:Keylaunchesbymajorrealestatedevelopers
Source:Edelweissresearch
Revivalinautosectortospurindustrialpaints
With~24%marketshare,PPGAPisthesecondlargestplayerintheautomotiveOEMpaint
segment after Kansai Nerolac. The companys revenue clocked 10.3% CAGR over FY0913
and it has been profitmaking since inception. However, performance of the automotive
segmentwas
dented
in
FY13
and
FY14
owing
to
slowdown
in
the
automobile
industry.
Total
vehicleproduction fellby0.3%YoY inFY13and7.4% inFY14.Asaresultof theeconomic
slowdown,manyfirsttimebuyershavedelayedtheircarpurchases.Forexample,firsttime
buyersfellto37%forMarutiSuzukicomparedto~50%acoupleofyearsback.
keyImmediatelaunches
launcharea
(msf) INRpsf TotalValue
DLF
DLFCamelias 3.55msftotal projectsize 1.4 26,000 36,400
DLFCrest 2.66msftotal projectsize 0.8 16,000 12,800
DLFUltima 2.2msfproject 0.8 9,000 7,200
OberoiRealty
OasisWorli 0.6 45,000 25,650
OberoiExotica,Mulund 3.2 12,000 38,400
OberoiExquisiteIII 2.2 16,500 36,300
Borivali land 4.5 15,000 67,500
SobhaDevelopers
SobhaSiliconOasis 1.5 5,500 8,250
SobhaValleyView 0.7 6,000 4,200
Kanakapuraroad 0.7 5,000 3,500
GodrejProperties
Panveltownship 3.5msftotal projectsize 1.2 5,250 6,458
Chemburredevelopment 1.0 17,500 16,625
Ghatkoparredevelopment 0.2 15,000 2,850
Gurgaon,Sector79 0.8 5,500 4,510
Gurgaon,Sector88A 0.5 6,250 2,875
MahindraLifespace
Sector59,Gurgaon 0.4 10,000 4,400
Andheriproject 0.4 13,500 4,995
Bannerghatta,Bengaluru 0.5 6,500 3,185
KoltePatilDevelopers
Wakad,Pune 2.0 5,500 11,000
Kondhwa 0.4 5,000 2,200
Mirabilis,Bangalore 0.6 5,000 3,000
Hosur Road,Bangalore 0.6 4,500 2,610
BrigadeEnterprises
BrigadeNorthridge,Yelahanka Junction 0.4 4,850 1,940
BrigadePanorama,MysoreRoad Highway 0.9 5,200 4,792
MeadowsPhase2,Bangalore 0.9 3,500 3,080
Exotica Tower2 0.7 4,750 3,420
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Table11:Autoproductiondatasuggestsdemandhasbeenlowsincepasttwoyears
Source:
SIAM,
Edelweiss
research
Whileurbanautodemandhasbeensoft,ruralautodemandhasbeenstrongsincethepast
few years. Lackluster economic growth had impactedjob creation, while wages had been
increasing in line with inflation. Thus, discretionary purchasing power, especially in urban
areas,hadtakenahit.
Chart25:Ruralwagesgrowingfasterthannationalincome
Source:CMIE,
Edelweiss
research
FY11 FY12 FY13 FY14
Passengercars 2,442,820 2,536,625 2,426,509 2,310,336
%growth 3.8 (4.3) (4.8)
Utilityvehicles 314,307 371,492 565,417 558,787
%growth 18.2 52.2 (1.2)
Total vans 216,533 237,954 239,434 196,693
%growth 9.9 0.6 (17.9)
Total passengervehicles 2,973,660 3,146,071 3,231,360 3,065,816
%growth 5.8 2.7 (5.1)
HeavyCommercialVehi cl es 345,597 384,801 279,626 221,564
%growth 11.3 (27.3) (20.8)
LightCommercialVehi cl es 413,973 544,335 552,335 476,983
%growth 31.5 1.5 (13.6)
Total commercialvehi cl es 759,570 929,136 831,961 698,547
%growth 22.3 (10.5) (16.0)
Total vehicleproducti on 3,733,230 4,075,207 4,063,321 3,764,363
%growth 9.2 (0.3) (7.4)
(4.0)
1.8
7.6
13.4
19.2
25.0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(%,yoy)
Ruralwages NationalIncome
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ManagementcommentaryonautomotivesegmentinFY14
Q1FY14: Industrial and automotive segments remained under pressure due to tough
businessconditions.ThesesegmentsmarginsdippedQoQ.
Q2FY14:Industrialandautomotivesegmentscontinuedtoremainunderpressure.
Q3FY14:Demandcontinuedtobeweak inindustrialsegment.Inthe industrialspace,non
automotive
segment
continued
to
face
slowdown
pressure.
However,
growth
in
the
automotivesegmentwasdecent intherefinishingspace(OEMscontinuedtofacesluggish
demand).AsianPaintsraisedpricesinthisportfoliotoprotectmargin.
Q4FY14: Slow demand in automotive segment resulted in a challenging environment for
paint companies. However, margins improved due to lower inflation in material cost and
betteroperationalefficiencies.
Historicalanalysissuggeststhatautosectorrecoveryislikely
Analysisofautosectordemandshowsthat inthepastthreerecoverycyclesofFY99,FY03
andFY09,whenGDPgrowthrecoveredby~200bps,autodemandsurgedbymorethan20%
CAGRovertwoyearsposttroughyear.Theprimarydemanddriversfortheautosectorare
improvementin
GDP,
high
liquidity
and
improvement
in
purchasing
power.
We
expect
GDP
growth to improve to5.4%, 6.3% and7.5% inFY15E, FY16E andFY17E,respectively, from
~4.5% inQ4FY14.Also, improvedconsumersentimentdue toastablegovernmentshould
drivejobcreationandwagehikes.Analysisby theEdelweissautosectorresearch team in
the report Automobiles GetSet,Go!! dated May 19, 2014 indicates current underlying
conditions are similar to earlier cycles, thereby infusing confidence of recovery in auto
demandalongwithGDPrecovery.
Chart26:AutovolumetrendvsGDPrecoveryfromFY9800 Chart27:AutovolumetrendvsGDPrecoveryfromFY0305
Source:Bloomberg,SIAM,Edelweissresearch
10
16
22
28
34
40
100
160
220
280
340
400
PV 2W M&HCV
Vol.CAGR(%YoY)
GDP(bpsovertroughperiod)
FY98 00
FY98
GDP4.8%
10
16
22
28
34
40
100
160
220
280
340
400
GDP(LHS) PV 2W M&HCV
Vol.CAGR(%YoY)
GDP(bpsovertroughperiod)
FY03 05
FY03
GDP6.8%
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Chart28:AutovolumetrendvsGDPrecoveryfromFY0911
Source:Bloomberg,Companies,Edelweissresearch
Chart
29:
Edelweiss
estimate
of
~280bps
of
recovery
in
GDP
over
FY14
17E
Source:Edelweissresearch
10.0
16.0
22.0
28.0
34.0
40.0
100
160
220
280
340
400
GDP(LHS) PV 2W M&HCV
Vol.CAGR(%
YoY)
GDP(bpsovertroughperiod)
FY09 11
FY09
GDP6.7%
3.0
4.5
6.0
7.5
9.0
10.5
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
GDP(%YoY)
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Table12:InternationalgeographiesSalesgrowth(%YoY)
Source:Company,Edelweissresearch
AsianPaintsisfollowingthefootstepsofotherconsumercompanieslikeGodrejConsumers
andMaricoandhasmarked itsentry inAfricabyacquiring51%equity inKadiscoChemical
Industry, Ethiopia. This acquisition will help the company enter other markets of Africa.
Africa isan immenseopportunityforAsianPaintsandwith itsscaleandsize,thecompany
canexploitthisuntappedmarket,whichisgrowingatafastpace(especiallyNigeria).
Africas GDP is growing at more than 5% and it can be compared to the situation that
existedinIndia10yearsago.Africaiswellpoisedforgrowthwithsixofthe10regionswith
fastest
growing
GDP
globally.
Growth
is
stable
in
the
region
with
sustained
and
gradual
reduction of debt and inflation. As paints volume growth has high correlation with GDP
growth,thepaintsectorislikelytopostrobustgrowth.ThoughNorthAfricaisfacingsome
issues,subSaharanAfricaisgrowingwell.Nigeria,whichisgrowingatmorethan7%(setto
becomethelargesteconomyinAfrica),standssecondtoSouthAfrica.
Table13:AfricaPaintindustrysize
Source:Frost
&
Sullivan,
Edelweiss
research
Mostconsumercompanies,havingrealisedAfricaspotentialwellinadvance,havebuilt
presenceintheregion.
Table14:Africascontributiontoconsumercompanies
Source:Company,Edelweissresearch
Africahasalargepopulationwhichisyoung,hasgoodGDPgrowthpotentialandhasalarge
portionofunorganisedmarket,makingitalucrativeplayforconsumercompanies.
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Caribbean (1.4) 8.7 2.0 (3.0) 9.5 15.0 7.9
MiddleEast 22.6 45.8 15.0 (4.0) 1 2.1 26.0 14.5
Asia 20.0 31.0 21.0 21.0
SouthAsia 33.4 38.5 28.0
SouthEastAsia 5.2 19.3
SouthPacific (7.2) 13.2 7.0 4.0 20.9 25.0 16.3
Region Paintsandcoatingmarketsize(USDmn)
NorthAfrica 910
SouthAfrica 603
EastAfrica 111
WestAfrica 258
Company ContributionfromAfricanregion(%)
GCPL 12.0
Dabur 7.0
Marico(in SouthAfrica) 9.0
Emami 1.0
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Chart31:AfricaPaintmarketindifferentgeographies
Source:IRL,Edelweissresearch
Chart32:AfricaVolumeshareofdifferentgeographiesinpaints
Source:IRL,Edelweissresearch
0
84,000
168,000
252,000
336,000
420,000
SouthAfrica
Algeria
Egypt
Morocco
Nambia
Senegal
Tunisia
Zambia
(tonnes)
2011 2016E
SouthAfrica
23%
Algeria
21%
Egypt
25%
Morocco
16%
Nambia
1%
Senegal
3%
Tunisia
10%
Zambia
1%
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HomeImprovement:TheNewFrontier
Asian Paints ventured into thehome improvement segment by the acquisition of Sleek, a
modularkitchenbrand.ItrecentlyenteredintoabindingagreementwithEssEssBathroom
Products (Ess Ess) to acquire its entire frontend sales business including brands, network
and
sales
infrastructure.
~10%
of
Asian
Paints
dealers
are
already
selling
bathroom
fittings
andthissynergyeffectwillhelpthemtoincreasethesalesofEssEssproducts.AsianPaints
willbenefitbyitsentryintothesealignedbusinessasitwillgetthesynergyofitsvastdealer
networkwhichcanalsobeusedforthehomeimprovementsegment.Globally,MascoCorp
inUShassuccessfullyaccomplishedsimilardiversificationintoahomedcorcompanyfrom
aplumbingproductscompany(detailsinAnnexureI).
Inthenearfuture,inourview,thecompanymayacquiretilesandsanitarywarecompanies
astheseportfoliosarenecessaryforittobeamarketleaderinthedcorbusinessandthese
businessescanalsogetsynergiesfromtheitsvastdealernetwork.Withpresenceinpaints,
waterproofing,modularkitchensandbathfittings,AsianPaintsaimstogainhigherwallet
share of existing customers. With aspirations of being a complete home dcor company,
AsianPaints
may
enter
home
furnishing
and
sanitary
ware
segments.
As
per
PWCs
India
Home Furnishing Market Forecast and Opportunities, 2018, report the home furnishing
market is expected to post 8% CAGR over 201318 riding higher per capita incomes and
increaseinthenumberofworkingwomen.
Modularkitchen(Sleek)
In 2012, household consumption in India grew at 12%, leading to growth in the modular
kitchenmarket.Thedomesticmodularkitchenmarket isatanascentatINR21bn(in2012)
with the potential to grow up to INR60bn by 2016. The market segment is largely
unorganised (7075%) and is mostly cornered by local and small players. Unorganised
playersincludecarpenterswhodesignkitchensbasedonrequirementsofcustomers.
Generally,endusersinthissegmentareurbanmiddleclassandaffluenthouseholds.Dueto
increase in urbanisation, rise in working women, increase in disposable incomes and
aesthetics of modular kitchens over traditional kitchens, this segment has been gaining
consumer traction. Thus, modular kitchen has become an attractive space. Key players in
thissegmentincludeGodrejInterio,Sleek,Hafele,Gilma,HaeckerandVenetaCucine.
InNovember2013,AsianPaintsenteredthissegmentwiththeacquisitionof51%stake in
SleekGroup(foreightmonthinFY14salesstoodatINR793mn,3.9%PBITmargin),aleading
player in modular kitchen segment with seven years of experience. The company has 30
showroomsandanetworkof250dealers.TheacquisitionwasastrategicfitforAsianPaints
as the company will derive distribution synergies by selling spare parts of Sleek through
Asian
Paints
dealer
network.
Sleek: It commenced operations as a wire basket manufacturer in 1993 and went on to
becomeacompletekitchensolutionsprovider.Thecompanyhas tiedupwith theworlds
best modular kitchen companies like Grass (Austria), Lamp (Japan) Scilm (America), Sige,
TechnoinocandAirforce(Italy).
Homeimprovementisanaligned
business.The
basic
customer
is
the
samethehomeowner.Thisisa
largepotentialmarketthats
growing.Eventually,wewanttobe
inallareasofhomeimprovement
fromfurnishingstobathrooms.
K.B.S.Anand,MDandCEO,
AsianPaints
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Chart33:ModularkitchensOrganisedandunorganisedplayersshare
Source:PWC,Edelweissresearch
Chart34:ModularkitchensMarketsize
Source:PWC,Edelweissresearch
Wallpapers(Nilaya)
Wallpaperscanbeusedtodecorateinteriorsandceilingsofhomesandoffices.Wallpapers
come in various styles and designs and can be easily applied (approximately 8 hours)
withoutanydampnessandleakagesandareeasytomaintain.Peopleusewallsasacanvass
to express their imagination, thus makingwall papers an attractive segment for the paint
industry.Digitalprintedwallcoveringsarethelatestinnovationintheindustry.Wallpapers
attract customers looking for convenience and time saving (fixing takes eight hours
compared
to
1012
days
for
painting).
People
with
breathing
problems,
skin
problems
or
odour allergies also prefer wall papers over painting. Asian Paints has entered this space
withNilaya(launchedinFebruary2014atTajPalace).However,akeyissuewithwallpapers
isthattheyarenotsuitableforwallswithleakageproblems.
Unorganized
Sector
70%
Organized
Sector
30%
16.0
27.2
38.4
49.6
60.8
72.0
2012 2016
(INRbn)
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Wallproofing(SmartCare)
Wallproofingisanothersolutionprovidedbythepaintindustry.Dampnessaffectsexterior
aswellasinteriorwallsandthisproblemisexacerbatedduringmonsoon.Consumersexpect
painting companies to provide a dampness solution along with painting. Initially, Asian
Paints directed consumers to unorganised players or other companies like Pidilite, which
providedwaterproofingsolutions.However,recentlyitenteredtheconstructionchemicals
spaceunder
which
it
offers
water
proofing
solutionsSmartCare
products
like
damp
block
(interiorwaterproofingsolutions),dampproof(exteriorwaterproofcoating)andcrackseal
(crackfilingcompound).
Bathroomfittings(EssEss)
The Indian bathroom fittings market isapproximately ~INR45bn, of which 15% belongs to
the premium segment. Indian brands like CERA,Jaguar and Hindustan Sanitaryware are
dominantplayers inthemarket.Rapidurbanisationis leadingtohigherstandardsof living,
whichresultsinhigherdemandforsuperpremiumorluxurybathroomproducts.
AsianPaintshasentered intoabindingagreementwithEssEss toacquire itsentire front
end sales business including brands, network and sales infrastructure. Ess Ess is an
establishedplayerinthebathandwashbusinesssegmentsinIndia.Ithasmorethan1,500
dealers inIndiaandeightbranchoffices(Mumbai,Delhi,Ahmedabad,Bengaluru,Chennai,
Kerala,KolkataandSecunderabad)andafactoryHimachalPradesh.ItexportstotheUK,Far
EastandMiddleEast.ThismovebyAsianPaintsisinlinewithitsstrategytobeaonestop
solution inthehomedcorspace.EssEss isaprofitableentity.WeexpectAsianPaintsto
utilise its paints distribution network to drive Ess Ess sales. We also expect it to drive
marketingofEssEss(currentlylowbrandequity)andtakeittothenextlevel.Thishasbeen
thecasewithSleek,whichsawmarkedincreaseinadvertisingpostacquisition.
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GSTImplementation:AKeyTrigger
GST,whichwastobe implemented inApril2010,hasnotseenthe lightofthedayasyet.
However, with a strong government in the saddle at the Centre, chances of its
implementation are bright. GST aims to replace the multiple acts contained in indirect
taxationlikecentralexcise,additionalexcise,valueaddedtax,octroiandservicetaxthatare
leviedbytheCentreandstategovernmentsandreplacethembyauniformtax.
Asian Paints too will reap benefits of GST as it will gain from the lower tax rate planned
under the regime, which will be executed by increasing the tax base and minimising
exemptions. Under the current regime, there is taxation at different points like on the
finished product when it is movedout of the factoryandalso during retail sales. GST will
abolishthiscascadingtaxasunderittaxwillbeleviedatonepointi.e.,pointofsale.Thus,
lower incidenceoftaxwill leadtoreduction inmanufacturingcost,whichwillresult inlow
cost ofproduction. It mayalso lead to lowerprices, whichwillboostconsumption.Lower
priceswillalsohelpAsianPaintswrestmarketsharefromunorganisedplayersasconsumers
of lattercould shift towards organisedplayersbecauseof lowerprices.~35%of thepaint
industryis
unorganised
and
as
it
too
will
come
under
GST
ambit,
it
will
be
alevel
playing
fieldwithorganisedplayerslikeAsianPaintswhichhavegothigheconomiesofscale.
Under the current regime, CST is levied on interstate sale of goods, but stock transfer
betweenfactoryandC&Fagent/depotofthesameentityisnotliableforCST.Toreducethe
CST liability many companies currently operate depots/C&F agents in all major states to
avoidCST. The result is increasednumber ofdepotsand warehouses, which leads tocost
equalto12%ofrevenuetowardsmaintenanceofthesefacilities.Withtheintroductionof
GST, CST will bephasedout and companies need not bear these additional infrastructure
costs.Acompanycanthenhaveonlyfourorfivebigwarehousesfromwhere itcansupply
thegoodstodealerswithouthavingtopaytaxesforinterstatesaleofgoods.AsianPaints,
whichhasaround110depots,willhavetoevaluatewhetherthetaxsavingsfromreduction
ofdepots
is
higher
than
the
increase
in
transportation
cost
because
of
this.
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RobustGrowthMomentum;ReiterateBUY
UrbangrowthinIndiaissettorevivewithastronger/stablegovernmentcomingtopower,
which had, in its election manifesto, outlined a strong focus on urban growth recovery,
infrastructuredevelopment,fasterexecution,developmentof100newcities,amongother
initiatives. WebelieveAsianPaintsiswellpoisedtoreapbenefitsofthis impendingurban
recovery
riding
its
strong
market
share,
pricing
power,
brand
strength
and
wide
spread
dealernetwork(2xnextplayer).
We expect Asian Paints to be one of the best plays on the much anticipated recovery in
macros given that paint volumes surge a healthy 1.52.0x GDP. Weexpect the companys
volumestoclock13%CAGRoverFY1417E(~8%overFY1214)anchoredbytherecoveryin
urbansentiments,GDPrevivalandtoothlesscompetition(globalbehemothsAkzo,Nippon,
Jotun failed to make headway in India).Additionally, lowper capitapaint consumption in
India (one fourth Chinas) and reduction in repainting cycle (5 years now from 7 years a
decadeago)renderthecompanythebestplayonpaints.
Industrialsegmentgrowth,whichhaslanguishedoverthepastfewquarters,islikelytopick
up,especiallyintheautomotivespace(formslargepartofnondecorativesegment),ledby
likelyimprovementindiscretionaryspendsandhigherinvestmentsbythenewgovernment.
We expect distribution synergies between home dcor segments and the existing paint
distributionnetwork.Also,investmentsinhomedcorbrands(Sleek,EssEss)willhelpthese
businessesgainscaleridingAsianPaintswellentrenchedbrandequity.
Though Asian Paints is trading at close to its all timehigh valuations and despite the fact
that consumer companies have gone out of flavour in the current bull run, we remain
positive on the stock because it is a quality play in the consumer discretionary segment.
With 22% EPS CAGR, 347bps RoCE spurt over FY1417E and metamorphosis into a home
dcor company, we expect valuations to remain rich. On account of strong performance
coupledwith
investment
in
new
growth
drivers
(construction
chemicals,
wall
paper,
Sleek,
EssEss),weassign31xtoFY17Eearnings(against3yearaverage1yearforwardPEof~31x)
withtwoyeartargetpriceofINR720.WemaintainBUY/SectorOutperformerrating.
Chart.35:OneyearforwardP/Eband
Source:Company,Edelweissresearch
50
170
290
410
530
650
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
(INR)
10x
15x
20x
25x
30x
35x
EPSlikelytopost22%CAGRover
FY1417E
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AnnexureI
Globalcompaniesventuringintohomeimprovement
MascoCorporation
Masco Corporation was founded in 1929 when Alex Manoogian started the first
commerciallysuccessful
Masco
screw
product
factory
in
the
US.
Though
it
began
as
ascrew
manufacturing factory,today it istheworlds leadingmanufacturerofhome improvement
and dcor business. The enterprise focused on innovation and quality and years later,
Masco Corporation is still dedicated to these priorities. In 1954, it started production of
single handled faucet, revolutionising the plumbing industry. Continuing its diversification
strategy,MascoCorporation entered thecabinetmanufacturing business in 1985. Moving
ahead, it diversified into architectural coating business and windows business. The
achievements of past decades clearly show that its strategy lead to success as operating
margindidwellfordecorativebusinesscomparedtotheplumbingbusiness.
Chart1:Masco:Contributionfromdifferentbusinesses
Source:Company,Edelweissresearch
AsianPaintsisfollowing in itsfootsteps.Itstartedasapaintcompanyand isnowtryingto
diversifyintodifferentbusinesses,buthavingsynergiesindistributionnetwork.Itsaimsisto
beamarket leader inhome improvementanddcorspaceandtomake thisdreamcome
true, it has acquired Sleek, a modular kitchen company, and EssEss, a bathroom fittings
company.ThoughitisalongjourneyforAsianPaintstoachieveitsdream,webelievethat
theinnovativepathtakenbyitisanexcellentstrategicmove.Inthenearfuture,inourview,
Asian Paints may acquire companies in segment like tiles and sanitary ware as these
portfoliosarenecessaryforittobeamarketleaderinthedcorbusiness.
0.0
20.0
40.0
60.0
80.0
100.0
CY2000
CY2001
CY2002
CY2003
CY2004
CY2005
CY2006
CY2007
CY2008
CY2009
CY2010
CY2011
CY2012
CY2013
(%)
PlumbingProductsRevenues DecorativeProductsRevenues
Installationand
Other
Services Cabinets
and
Related
Products
OtherSpecialtyProducts
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Fig.1:AsianPaintsplannedentryinhomedcorspace
Source:Company,Edelweissresearch
PPGIndustries
ThejourneyforPittsburghPlateGlassCompany(PPG)startedwaybackin1883whenCapt.
John Ford and John Pitcam decided to establish a plate glass factory in Creighton, United
States.Thecompanyhasrapidlyexpanded,servingclientsthroughouttheworld.Though it
startedasaplateglassfactory,itvertically integrated itsportfoliowiththeconstructionof
analkaliplantinBarberton,Ohio,in1899whichprovidedrawmaterialforglassmaking.For
the first time in1900s,PPGdiversified itsproductrangebymoving intocoatingsbusiness
with the acquisition of Wisconsinbased Patton Paint Company. Though being a globally
famousglasscompanywhichfocusedcontinuouslyonproductinnovationandquality,today
itis
also
aleading
global
coating
company.
PPGs
excellent
strategic
plan
to
diversify
into
differentbusinesses,butviathesamedistributionchannel,provedtobeagoodstrategicfit
forthecompany.
Fig.2:PPGIndustriesEntryindiversebusinesses
Source:Company,Edelweissresearch
Asian
Paints
Sleek,ModularKitchen
Business
ESSESS,Bathroom
FittingBusiness
Sanitaryware
Company(likely)
TilesCompany
(likely)
GlassCompany
(?)
FurnishingCompany
(likely)
Foundedplateglassfactory
Diversifiedintocoatingbusiness
Enteredopticalbusiness
Starteditsfibresglassbusiness
IntroducedDesignaColorsystem,customtintingconsumer paints
AcquiredSigmaKalonGroup,aworldwidecoatingsproducer
AcquiredarchitecturalcoatingsbusinessofAkzoNobel
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AnnexureII
ElNinoanditsimpactonmonsoon
Monsoon plays an important role in deciding the number of paint days available for any
householdasexteriorpainting isnotpossibleduringmonsoon.Q2FY14witnessedastrong
andprolonged
monsoon,
which
did
impact
paint
companies
as
it
resulted
in
loss
of
painting
days. We believe, if the reverse happens, the same will be beneficial for paint companies
fromaneartermperspective.
As confirmed by the Australian Bureau of Meteorology and also by other meteorological
departments, 2014 is expected to be an El Nino year which will result in a below normal
monsoon in India. This will lead to lesser number of rainy days or in other words more
number of available painting days. Though belownormal monsoon will affect agriculture
growth and impact overall growth as India is still largely dependent on monsoon, low
monsoon in a year only has a shortterm impact in terms of food inflation, price rise etc.
Also,abelownormalmonsoonwillhavealargerimpactongrowthinruralareascompared
tourbanareas,sothenegativeimpactoflowmonsoonislargelyshieldedbyrevivalinurban
demand.
Though
a
good
monsoon
is
always
beneficial
for
the
overall
economy,
which
in
turn benefits companies as well, El Nino does notmean that the impact will be reversed.
Historically, inthepastdecade,ElNinohasnot impactedAsianPaintsgrowthandvolume
growthhasremainedindoubledigitsdespitedroughtorbelownormalmonsoon.
Chart2:AsianPaintsVolumegrowthinElNinoyears
Source:Skymet,Edelweissresearch
9.0
10.6
12.2
13.8
15.4
17.0
2004 2009 2012
(%)
ElNinoyearsinlastdecade
1883 1990 1940 1952 1970 2000 2013
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AnnexureIII
Competitors
BergerPaints
BergerPaints(Berger) isthesecond largestpaintcompany in IndiaafterAsianPaints.The
company
has
a
strong
brand
name
with
brands
likeBerger
Easy
Clean,
Silk,
Rangoli,
WeatherCoat etc. The company has a strong distribution network of ~16,500 dealers and
has~12,000tintingmachines.Asfaras internationaloperationsareconcerned,Bergerhas
presenceinRussiawhereithasaproductionfacilitywithamanufacturingunitinKrasnodar.
The company entered Nepal in 2000 when it acquired Jenson & Nicholson. It has also
acquired Bolix SA of Poland and also tied up with Becker of Sweden. In 2013, Berger
acquiredthedecorativebusinessofSherwinWilliams India.Bergerrecentlycommissioned
its Hindupur plant (total capacity of 300,000Kl) in Andhra Pradesh and will increase its
capacityinaphasedmanner.
KansaiNerolac
KasaiNerolacisthethirdlargestdecorativepaintcompanyinIndia.Thecompanyhasgood
brand strength, particularly in the interior paints segment with brands like Nerolac
Impressions,NerolacHD etc. It has high exposure to the industrial paints segment (~45%
contribution),whichhasresultedinthecompanyssubduedperformance.Thecompanyhas
taken significant initiatives to improve revenue from the decorative business. It recently
launchedHDpaintsunderNerolacandwasthefirstplayertolaunchecofriendlyZeroVOC,
lowVOC,lowodourrangeofdecorativepaints.
AkzoNobel
AkzoNobel,theworldsNo.1paintcompany,istryingtoincreasemarketshareinIndia,but
hasfailedtodoso.Toachievethis, ithas launchedsomeinnovativeproductsandhasalso
increasedproduction.Ithasstartedanewgreenfieldfacilitywhichcommencedproduction
in
2013
and
will
supply
a
range
of
decorative
paints.
It
is
also
planning
to
improve
distributionchannelsfortheDuluxbrand.
JotunIndia
TheJotunGroup,whichbeganoperationsin2005inIndia,isoneoftheworldslargestpaint
groupswith74companiesand29productionfacilities.Itsfirstproductionplantwasopened
inRanjangaoh,50kmoutsideMumbai,whichhasacapacityof40MLofpaint.Currently,itis
not an immediate threat to other companies in the paints industry. Unlike other paint
industries, ituses theshopinshop concept throughwhich itsellspaints. However, in the
pastfewyears,noadvertisingorpromotionwasdoneandhencethebrandof Jotun India
haserodedinconsumersmind.
NipponIndia
NipponIndia,anothermajorcompetitorofAsianPaints,enteredIndiain2006andisamong
theleadingpaintmanufacturersinAsia.InAugust2013,itlaunchedodourlesspaintNippon
PaintOdourLessAirCare, which is the first paint product that uses carbon technology to
cleantheair.Though it iscontinuously innovatinganddevelopingproducts, ithasfailedto
takeawayAsianPaintsmarketshare.
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CompanyDescription
AsianPaints isthelargestpaintscompanyinIndiaandfiguresamongthetop10playersin
theworld.Thecompanyhas25manufacturingplantsin17countries,servingconsumersin
65countriesglobally.Thedecorativesegmentaccountsforalmost70%oftheoverallpaints
market. Paints sales in domestic and international markets contributed 81% and 13%,
respectively, to the companys consolidated revenue; chemical sales accounted for the
balance.
Among
Asian
Paints
international
businesses,
while
the
Middle
East
contributes
the lionsshareat51% torevenue,theCaribbeancontributes14%.AsiaandSouthPacific
contribute27%and8%,respectively.
InvestmentTheme
The paints industry is expected to post robust volume growth led by strong repainting
demand and from construction. Growth in the repainting segment, accounting for about
90%ofdecorativedemand,isonaccountofgooddemandinruralandsmalltowns.Further,
expected growth in construction activity over the next five years creates opportunity for
freshpainting.ThoughAsianPaintsisexpectedtogrowaheadofthemarketonaccountof
itspricingstrategyatthelowerend,highergrowthinpremiumproducts,brandequityand
distribution
strength,
moderation
in
real
estate
and
auto
segments
can
act
as
barrier.
KeyRisks
A slowdown in the economy is the biggest risk for the paints industry, as about 75% of
demandfordecorativepaintsarisesfromrepainting,which,inturn,dependsheavilyonthe
countryseconomiccondition.
Ariseincrudeoilpriceandrupeedepreciationcouldhurtthecompanysmarginascrude
derivativesaccountformajorityofAsianPaintsinputcosts.
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Peercomparisonvaluation
Marketcap DilutedPE(X) EV/EBITDA(X) ROAE(%)
Name (USDmn) FY15E FY16E FY15E FY16E FY15E FY16E
AsianPaints 8,236 33.1 27.1 19.9 16.6 33.5 34.4
AkzoNobelIndiaLtd 795 24.4 23.7 17.5 15.2 18.4 21.1
BergerPaintsIndiaLtd 1,419 32.5 27.6 18.8 15.8 23.9 26.1
HindustanUnilever
21,653 30.2 27.4 21.7 19.4
85.6 74.4
ITC 44,236 26.7 23.5 17.4 15.2 37.1 37.7
KansaiNerolacPaintsLtd 1,243 29.2 23.9 16.9 14.1 16.0 17.7
PidiliteIndustries 2,683 28.6 23.0 19.0 15.1 26.1 27.3
UnitedSpirits 6,953 54.6 44.4 27.6 23.6 9.7 10.9
AVERAGE 31.8 29.1 19.6 18.0 31.2 36.9
Source:Edelweissresearch
Cashflowmetric
YeartoMarch FY13 FY14E FY15E FY16E FY17E
Operatingcashflow 10,989 14,954 16,138 18,934 22,735
Financingcashflow (6,007) (6,320) (8,168 ) (9,49 7) (11,5 00 )
Investingcashflow (7,970) (2,808) (5,700) (5,700) (5,700)
Changein cash (2,989) 5 ,826 2,270 3,738 5,536
Capex (7,230)
(2,000)
(5,500)
(5,500)
(5,500)
Dividends paid (5,155) (5,948) (7,253) (8,907) (10,954)
Ratios
YeartoMarch FY13 FY14E FY15E FY16E FY17E
ROAE(%) 36.3 3 3.0 3 3.7 3 4.7 3 5.7
ROACE(%) 47.6 43.7 45.1 45.8 47.2
Debtordays 29 32 32 32 32
Inventorydays 98 103 103 103 103
Payabledays 77 87 88 88 88
Cashconversncycle(days) 50 48 47 47 47
Currentratio 1.5 1.6 1.7 1.8 1.9
Debt/EBITDA 0.1 0.1 0.1 0.1 0.1
Debt/Equity 0.1 0.1 0.1 0.0 0.0
Adjusteddebt/equity 0.1
0.1
0.1
0.0
0.0
Interestcoverage(x) 46.2 44.7 52.9 70.9 97.9
Operatingratios
YeartoMarch FY13 FY14E FY15E FY16E FY17E
Totalassetturnover 3.0 3.0 3.0 3.0 3.1
Fixedassetturnover 6.0 5.4 6.0 6.4 7.1
Equityturnover 3.6 3.4 3.4 3.4 3.4
Valuationparameters
YeartoMarch FY13 FY14E FY15E FY16E FY17E
DilutedEPS(INR) 11.6 12.7 15.4 18.9 23.2
YoYgrowth(%) 12.7 9.4 21.1 22.8 23.0
CEPS(INR) 13.7 15.8 18.9 22.6 27.4
DilutedP/E(x) 43.8 39.8 33.1 26.9 21.9
Price/BV(x) 14.4 12.1 10.3 8.6 7.2
EV/Sales (x) 4.4 3.7 3.2 2.6 2.2
EV/EBITDA(x) 27.8 23.7 19.8 16.4 13.3
Dividendyield(%) 0.9 1.0 1.3 1.6 1.9
Balancesheet
Ason31stMarch FY13 FY14E FY15E FY16E FY17E
Sharecapital 959 959 959 959 959
Reserves 32,884 39,124 46,631 55,850 67,187
Shareholders'funds 33,843 40,083 47,590 56,809 68,146
Minorityinterest 1,608 2,047 2,593 3,250 4,059
Borrowings 2,510
2,660
2,460
2,260
2,060
Deferredtaxliability 1,544 1,544 1,544 1,544 1,544
Sourcesoffunds 39,504 46,334 54,186 63,862 75,808
Totalnet fixedas sets 24,560 24,911 28,102 30,935 33,411
Goodwillonconsolidation 442 442 442 442 442
Noncurrentinvestments 1,501 1,501 1,501 1,501 1,501
Currentinvestments 1,306 1,306 1,306 1,306 1,306
Cashand cashe qui va le nts 7, 52 0 13 ,3 46 1 5, 61 6 1 9, 35 3 2 4, 88 9
Inventories 18,303 2 0,699 2 4,438 2 8,931 3 4,639
Sundrydebtors 9,809 11,102 13,181 15,632 18,735
Loans&advances 3,211 3,211 3,211 3,211 3,211
Otherassets 1,215 1,215 1,215 1,215 1,215
Totalc.assets (excash) 32,538 36,227 42,045 48,988 57,800
Tradepayable 14,416 17,453 20,879 24,717 29,595
Otherc.
liabilities
&
prov 13,946 13,946 13,946 13,946 13,946
Totalc.liabilities&prov 28,362 31,399 34,826 38,664 43,541
Netcurrentassets (excash) 4,176 4,828 7,219 10,325 14,259
Usesoffunds 39,504 46,334 54,186 63,862 75,808
BV(INR) 35 41.8 49.6 59.2 71.0
Freecashflow (INRmn)
YeartoMarch FY13 FY14E FY15E FY16E FY17E
Netprofit 11,139 12,188 14,760 18,126 22,292
Add:Noncashcharge 2,369 3,418 3,770 3,913 4,378
Depreciation 1,546 2,457 2,509 2,867 3,224
Others 823 961 1,261 1,047 1,154
Grosscashflow 13,508 15,606 18,530 22,039 26,670
Less:Changes inWC 2,519 652 2,392 3,105 3,934
Cashfromopera ti ons 10,989 14,954 16,138 18,934 22,735
Less:Capex 7,230 2,000 5,500 5,500 5,500
Freecashflow 3,759 12,954 10,638 13,434 17,235