Edelweiss 47 Doc

8/10/2019 Edelweiss 47 Doc

1/47

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

[email protected]

PoojaLath

+912266203075

[email protected]

TanmaySharma

+912240407586

[email protected]

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
http://www.edelresearch.com/webcast/webcast_new.aspx?Id=26082&Type=ynaj9XvqmJoptbYzJzovtA==


2/47

ConsumerGoods

2 EdelweissSecuritiesLimited

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


3/47

AsianPaints


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


4/47

ConsumerGoods


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


5/47

AsianPaints


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


6/47

ConsumerGoods


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


7/47

AsianPaints


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


8/47

ConsumerGoods


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


20.0

25.6

31.2

36.8

42.4

48.0

1990 1991 2001 2005 2008 2011 2025E 2030E

(%)

UrbanisationRate


9/47

AsianPaints


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


0.0

20.0

40.0

60.0

80.0

100.0

1990 2001 2008 2030

(%)

UrbalIncome RuralIncome


10/47

ConsumerGoods


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


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


11/47

AsianPaints


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


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


12/47


13/47

AsianPaints


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


Chart21: Shareoforganisedandunorganisedcosintotaldecorativepaintsmarket


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


14/47

ConsumerGoods


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


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


15/47

AsianPaints


Table4:AsianPaintsColourWorlddealers(2.7xin6years)


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


16/47

ConsumerGoods


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


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


17/47

AsianPaints


UltimaProtekhighlightingitssuperiorantiageingquality.Thecompany,aspartofproduct

promotion,alsosponsoredatelevisionshowHarGharKuchKehtaHaionColorschannel.It

was a 10part series featuring celebrities talking about their childhood memories and the

housewheretheyspenttheirchildhood.

Table6: Adspendsaspercentageofsalesofpaintcompanies


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


18/47

ConsumerGoods


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


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


19/47

AsianPaints


Table8:EffectofappreciationanddepreciationofINRonmargins


Chart

22:

INR

appreciating

against

USD


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)


20/47

ConsumerGoods


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


Table9:AsianPaintsCapacityexpansion


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


21/47

AsianPaints


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


22/47

ConsumerGoods


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


23/47

AsianPaints


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


24/47

ConsumerGoods


Table10:Keylaunchesbymajorrealestatedevelopers


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


25/47

AsianPaints


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


26/47

ConsumerGoods


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)


FY03 05

FY03

GDP6.8%


27/47

AsianPaints


Chart28:AutovolumetrendvsGDPrecoveryfromFY0911

Source:Bloomberg,Companies,Edelweissresearch

Chart

29:

Edelweiss

estimate

of

~280bps

of

recovery

in

GDP

over

FY14

17E


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)


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)


28/47


29/47

AsianPaints


Table12:InternationalgeographiesSalesgrowth(%YoY)


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


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


30/47

ConsumerGoods


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%


31/47

AsianPaints


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


32/47

ConsumerGoods


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)


33/47

AsianPaints


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.


34/47

ConsumerGoods


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.


35/47

AsianPaints


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


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


36/47

ConsumerGoods


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


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


37/47

AsianPaints


Fig.1:AsianPaintsplannedentryinhomedcorspace


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


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


38/47

ConsumerGoods


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


39/47

AsianPaints


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.


40/47

ConsumerGoods


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.


41/47


42/47


ConsumerGoods

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


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


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


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


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)


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

Documents

Edelweiss 47 Doc