Institutional Equity Research
Institutional Equity Research
Institutional Equity Research
IOTA
Topline is driven by a favourable base and pent-up demand Asian 17 OCTOBER 2022
Paints (APL) is India's leading decorative paint company. The paints
division accounts for 98% of the company's revenue, while the home
Shareholding pattern
improvement division accounts for 2%. (Fittings for the kitchen and
bathroom). The business has 1,45,000 dealers in India, which is 2.3 Particulars Mar- Dec- Sep-21
22 21
times more than the No.2 player Promoters 52.6 52.6 52.8
Margins Likely to Increase Amid Volatility Input Prices Gross FIIs 19.5 20.5 21
margin decreased sequentially by 100bps as Asian Paints saw further
DIIs 7.6 7.2 6.8
inflation of 6% QoQ, which was largely mitigated by a 2% price
increase in Q1. Soon, Asian Paints aims to keep its gross margin Others 20.3 19.7 19.4
within a range of 38 to 40 percent as it expects input cost inflation to Total 100 100 100
sustain in the near term. Asian Paints expects savings from sourcing
efficiency/operating leverage to absorb some inflation shock.
Paint demands continues to remain broad based and balanced The Revenue (INR Cr)
Indian paint industry has seen a gradual shift in people's preferences
3,171.30 916.87 930.00
from traditional whitewash to high quality paints like emulsions and 5,981.76
enamel paints, which is providing the basic stability for the industry's
29,10
growth. 1.28
7,804.05
Capacity and network expansion to meet growing demand- With
the growing demand across the paint industry, the company has been Asian Paints Berger Paints
Kansai Nerolac Akzo Nobel
increasing its capacity level across its manufacturing units. Currently,
Indigo Paints Nippon Paint
the company has almost 1750000 in total throughout its manufacturing
units. The company has planned major investments to expand various
plants in order to meet the future demand.
Indian Outlook
The Indian economy is slowly loosing pace as monetary
policy normalises, inflationary expectations remain high
due to rising food and energy costs, and the global
economic situation worsens after the G20 recorded the
highest GDP rebound in 2021. It is estimated that real
GDP growth will be 6.2% in FY2024 and 6.9% in
FY2023.The rise in the import price of energy will cause
the current account deficit to grow while inflation will
slowly drop. The Indian economy is on the verge of
dominating the global economy. India now accounts for 7% of the global economy and ranks third in terms
of Purchasing Power Parity (PPP), trailing only China (17% PPP share) and the United States (15%).
Decorative paints account for more than 75% of the paint market and are primarily used in real estate for
exterior and interior wall paints, enamels, wood finishes, and so on. Furthermore, rapid urbanisation in
Indian cities, increased government project construction, and rising infrastructural development make the
decorative paints market in India more competitive for marketers.
Asian Paints (APL) is India's leading decorative paint company. The paints division accounts for 98% of
the company's revenue, while the home improvement division accounts for 2%. (Fittings for the kitchen
and bathroom). The business has 1,45,000 dealers in India, which is 2.3 times more than the No.2 player.
Despite being in a capital-intensive industry, the company has maintained a strong balance sheet and a
ROE of 20%. Revenue and bottom-line growth expectations were exceeded, but EBITDA margins were
lower than expected. Solid year-on-year sales growth aided PAT growth. The company raised prices by 3%
and has explained that it will continue to raise prices in order to maintain EBITDA margins in the 18-20%
range. The company's balance sheet is strong, with steady working capital management and a low debt-to-
equity ratio.
As the long-term story remains intact, the company will continue to focus on increasing market share, new
product offerings, and expanding distribution reach. Product mix enhanced sales of economy and luxury
emulsions, as well as premium water proofing and wood finishing touches. 40 patents and 300 unique
products, among the best in the industry. Tier 1/2 cities experienced strong double-digit growth,
particularly in the luxury and premium segments, and continued to grow faster than T3/T4 cities. During
the quarter, the company released ten new products. The premium valuation of APL is justified by its solid
reputation, market leadership, and strong balance sheet. During the last five years, APL has been a steady
compounder, with a 31% CAGR in share price appreciation.
Gross margin decreased sequentially by 100bps as Asian Paints saw further inflation of 6% QoQ, which
was largely mitigated by a 2% price increase in Q1. Soon, Asian Paints aims to keep its gross margin
within a range of 38 to 40 percent as it expects input cost inflation to sustain in the near term. Asian Paints
expects savings from sourcing efficiency/operating leverage to absorb some inflation shock.
During 2021, The industry leader in decorative paints, Asian Paints Ltd., has been severely impacted by
rising commodity prices really challenging Its gross margins. It decreased by 970 basis points (bps) to 34.7
percent in the September quarter as compared to the same period last year. One hundredth of a percentage
point is referred to as a basis point. The company's management stated that the rate of increase in raw
material costs was the highest in forty years and that they anticipate this trend to continue in the near
future.
Nearly 70% of the profit pool, 80% of the customer mindshare, and 60% of the value market are all held by
Asian Paints. Although it only applies to one quarter, the over 1000bps gross margin reduction is
extraordinary. Although management mentioned "severe input cost inflation," we believe that Asian Paints'
key decision-making factors are maintaining lower profit pools and competitor signalling. Simply put, this
suggests that it might take a few more quarters for gross margins to fully recover, which might have an
impact on the company's projected earnings. The management stated that it anticipates improved operating
margins by 4QFY22 and plans to raise EBITDA margins to levels of 18-20 percent moving forward. Asian
Paints and the entire industry's future valuations may be at risk if there are prolonged periods of margin
degradation brought on by factors other than inflation.
As a result of the high standards and quality that the company upholds, Asian Paint's products cost more
than those of its competitors. The Royal product line is marketed to high-income consumers with premium
pricing. Asian Paints employs value-based pricing for the medium and economy segments. According to
the unique qualities of the product kind, the pricing also changes. The raw materials utilised to make those
paints have an impact on pricing decisions as well, thus price changes are sometimes seen. The business
gives incentives and volume discounts to its distributors for big volume sales as well as discounts to its
clients during bulk purchases. Therefore, Asian Paints' total price strategy in its marketing mix is based on
the quality of its products, the level of competition, and the solutions that customers want. When compared
to other paint service providers, the painting consulting services are more expensive.
14,539
15,000
57,765.96
60,000.00 150,000
46,248.75
36,817.81 10,000
40,000.00 100,000
29,101.28
20,000.00 5,000
50,000
-
2022 2023 2024 2025 2026 2027 2028 - -
2022 2023 2024 2025 2026 2027 2028
Year
Number of stores New addition
0.00%
2022 2023 2024 2025 2026 2027 2028 15% 13% Change in volume growth 15%
%
12%
40,000.00
10%
10% 20,000.00 5%
5% - 0%
Revenue / Store Revenue/Litre
22 23 24 25 26 2of 7 APL
28
0% 20 Y20 Y20 Y20 Y20 Y20 Y20
0.45 FY FY2024
500FY2023
FY 2022 F F FY2025
F F FY2026
F F FY2027 40% FY2028
0.4 35%
400
Revenue/ Store in Cr
30%
Revenue/Litre
300 25%
0.3 20%
0.25 200 15%
0.2 10%
0.15 100
5%
0.1 0 0%
0.05 2022 2023 2024 2025 2026 2027 2028
0 Research analyst: Iota research ( contact@iotaresearch.in) l +22- 20567236, +22-76678564
Year
2022 2023 2024 2025 2026 2027 2028
INVESTORS ARE ADVISED TO REFER TO IMPORTANT DISCLOSURES MADE IN THE REPORTS
IOTA EQUITYYear
RESEARCH IS AVAILABLE ON www.iotaresearch.com/ Bloomberg
Revenue/L % Change
Paint demands continues to remain broad based and balanced
The Indian paint industry has seen a gradual shift in people's preferences from traditional whitewash to
high quality paints like emulsions and enamel paints, which is providing the basic stability for the
industry's growth. Furthermore, it is creating a highly competitive market in which players are employing
various strategies to capitalise on the growing market demand for a larger share. Furthermore, the rise in
disposable income of the average middle class, combined with increased investment in education;
urbanisation; rural market development; and various launches of many innovative products, such as
friendly, odour free, and dust & water-resistant paints, are major drivers propelling the growth of the Indian
paint market.
The Indian paints industry is expected to grow at a CAGR of around 10% from 2022 to 2025.
The decorative market is divided into several categories, including emulsion and enamel paints, distemper,
primer and thinner, and ancillary products. In 2019, decorative paint accounted for more than two-thirds of
the market, as demand for decorative paints is heavily influenced by the housing sector and the monsoon
season, whereas industrial paint demand is influenced by end-user industries such as automotive,
engineering, and consumer durables. Despite challenging inflation and geopolitical uncertainties, customer
confidence appears to be high in the new fiscal year. We anticipate strong consumer demand, and with
normal monsoons forecast, we anticipate a successful festival season. This year, Asian Paints was able to
expand its retail presence across emerging cities and ever-growing small towns by utilising allied delivery
channels and upgrading retailing formats to meet changing customer demands.
Asian Paints aspires to be one of the best providers in India in the Home Décor space, offering digital,
physical visualisation, and execution to its customers. We have been able to expand 'Beautiful Home
Stores' to various cities in order to ensure that customers receive the best in Home Décor. "We now have
29 stores and are rapidly expanding. Asian Paints' entry into the Bath and Kitchen market has gained
traction in the last two years, with exceptional revenue growth.
Asian Paints have looked at significantly expanding this business with innovations at the premium luxury
end in a strong manner. Kitchen and bath categories remain as a key focus in the Home Décor category
given the huge potential of housing in India supported by the Government as well.
During the FY2022, the company has started brownfield capacity expansion projects in the manufacturing
units of Ankleshwar, Kana and Khandala. In November 2021, the company has started expanding its
manufacturing unit in Ankleshwar, Gujarat from 130,000 KL to 250,000 KL paint capacity and resins and
emulsions capacity from 32000 MT to 85000 MT. The company has invested a total investment of Rs. 960
crores approximately for the expansion and is expected to be completed in two to three years. The company
has also planned to expand its Mysuru manufacturing unit. These capacity expansions are aimed at
improving the ability of the company to meet future demands in the domestic market. In order to meet the
demands of its international operations, APL has invested in setting up a second manufacturing unit in
Bangladesh. They have also invested in manufacturing facilities at Wada, Maharashtra for its Kitchen and
Bath Business.
APL is continuously increasing its urban footprint by expanding into major cities, suburbs, and Tier 3/4
towns. It has over 145000 retail touch points across the country and during the first quarter of FY22, the
company has added 5000 more retail touch points and planning to add atleast 5000 retail points every year.
T1/T2 centres kept expanding faster than T3/T4 centres. Due to price hikes, the premium category is
expanding more quickly in T1/T2 centres while down-trading is evident in T3/T4 centres.
The project-related industry has also aided in growth of APL. The B2B sector contributes around 15 to
25 % of APL's revenue. The markets for premium emulsion and water-proofing have expanded more
rapidly.
With new dealers and markets emerging and population and consumption increasing, there will be no
saturation in dealer touch points for the next 5 to 10 years for APL.
Asian Paints' Research & Technology team is a mission-driven organisation that consistently achieves
breakthroughs in product innovation while also working closely with all other internal stakeholders to
The entire 'Breakthrough Innovation' programme has created a massive ripple and transformation not only
at the Research & Technology function, but also throughout the organisation. Last year, the breakthrough
innovation project 'Misaal' created some ground-breaking products and chemistries in its fifth avataar.
These included two products, Hypertron and Ultron, with a novel cost-effective polyurea chemistry, a first
in the French polish category for wood, entry into admixtures with very different chemistries, and
disruption in the adhesive white glue category through a combination of novel product and packaging
innovation.
When it comes to providing learning and development opportunities for its employees, Asian Paints has
always been at the forefront. A dedicated training academy known as 'Sikshalaya' has been established at
the Research & Technology Centre, with a focus on upgrading employees' technical skills and expanding
in-house expertise to many more individuals. This year, a new cutting-edge infrastructure was built to
provide the most recent learning technology tools and to improve participants' learning experiences. This
year, the academy hosted 13 workshops in various fields of science and technology to help employees
improve their technical skills. Three of these workshops were created and delivered specifically for Asian
Paints by renowned academic experts from India and abroad.
A cutting-edge Waterproofing, Hygiene, and Application Experiential Zone has been established at the
Navi Mumbai Research & Technology facility. The experiential zone features various interactive displays
The Company's two new factories in Mysuru and Visakhapatnam have begun operations and have met their
environmental and sustainability goals.
Balance sheet
Financial Ratios
Efficiency Ratios
Asset Turnover (times) 1.25 1.24 1.25 1.07 1.27 1.3 1.26
Receivable days 37 36 32 44 49 51 51
Payable days 46 45 39 57 52 50 50
Inventory days 56 59 61 64 77 80 80
Liquidity Ratio
Current Ratio 1.55 1.52 1.73 2.03 2 2.18 2.33
Quick Ratio 0.96 0.89 0.96 1.39 1.19 1.33 1.48
Solvency Ratio
Debt to Equity Ratio 0 0 0 0 0 0 0
Debt to Capital Ratio 0.003 0.002 0.002 0.001 0.003 0.002 0.002
Premium valuation is justified by the company's leadership position, strong balance sheet, and strong
dividend payout. APL's premium valuation is justified by its leadership position in the domestic decorative
paints industry, focus on becoming a leading player in the home improvement segment, strong balance
sheet, and strong dividend payout. In the short to medium term, sustained product launches, distribution
reach expansion, and a shift from unbranded to branded products will be key growth levers.
Risk
Even though the stock may remain sideways in the short future, given the high level of noise surrounding
new competitors (Grasim, JSW, Astral, and JK) entering the segment, new players have always struggled
to progress beyond a certain threshold of sales, given the industry's oligopolistic nature. Even if new
Slowdown: Any type of slowdown will have a direct negative Add: C &CE 622
impact on the economy, affecting the construction industry
and, ultimately, the paint industry and Asian paints. Because Total equity value 371307
Cost of equity 13.50%
the majority of the raw materials used to manufacture paint are
Terminal growth rate 10.00%
imported, the company suffers losses due to a pandemic,
Number of shares 959197790
country tensions, and other factors.
Value per share 3871
VISION
“To be the fore runner of inspiring décor and to actively empower customers to create their dream
homes”
Since its humble beginnings in 1942, the company has come a long way. It was founded as a partnership
firm by four friends who were eager to compete with the world's largest and most well-known paint
companies operating in India at the time. Asian Paints grew to become a corporate force and India's leading
paints company over the course of 25 years. Since 1967, the company has been the market leader in paints
due to its strong consumer focus and innovative spirit. It is now twice the size of any other paint company
in India. Asian Paints manufactures a wide range of decorative and industrial paints, as well as wall
coverings, adhesives, and services.
Recently, the company reached an agreement with Weatherseal Fenestration to acquire a 51% stake.
Weatherseal, if incorporated in March 2022, would be in the interior decoration/furnishing business,
including the manufacture of uPVC windows and door systems. Asian Paints has also reached an
agreement to acquire a 49% stake in Obgenix Software, also known as White Teak. White Teak is in the
business of selling decorative lighting and fans
1st February, 1942 – Suryakant C. Dani, Champaklal H. Choksey, Arvind R. Vakil, and Chimanlal
N. Choksi form the 'Asian Oil & Paint Company.'
1945 – Asian Paints introduces small paint packs to serve the rural population and earns
Rs.3,50,000 in revenue.
1954 – Gattu, the mischievous child, is Asian Paints' new mascot.
1965 – The name of the company was switched from 'Asian Oil & Paint Company' to 'Asian Paints.'
1967 – Asian Paints has risen to the top of the Indian paint industry.
2004– Asian Paints is the only paint company to receive the Forbes Best Under a Billion Company
award.
2005– The British Safety Council has awarded the 'Sword of Honour' to four Asian Paints plants.
2006– Asian Paints' consolidated turnover exceeds Rs.3000 crore.
2010– Asian Paints has begun production at its new facility in Rohtak, Haryana.
2011– Asian Paints has partially reopened two plants of its Egyptian subsidiary that had been
closed due to a prolonged curfew.
2014– Asian Paints increased its stake in Berger International to approximately 96.7 percent and
delisted the company from the Singapore Stock Exchange.
2018 - Coatings World - Top Companies Report 2018 ranked Asian Paints ninth among many of
the world's top paint businesses.
2021- Asian Paints has signed a Memorandum of Understanding with the Government of Gujarat to
begin the planned expansion of paint production capabilities from 130,000 KL to 250,000 KL, as
well as resins and emulsions manufacturing capability from 32000 MT to 85000M.
Peer Comparison
1 in Number of dealers across players 1 player in the paint industry by revenue (INR Cr)
5,981.76
16 6,000.00
EBITDA (INR Cr)
29,101.28
14 7,804.05
5,000.00
12
4,000.00
10
8 3,000.00
6 Asian Paints Berger Paints Kansai Nerolac
2,000.00
4 Akzo Nobel Indigo Paints Nippon Paint
1,000.00
2
Asian Pints has the best operating margins in industry
0 -
Asian Berger Kansai Akzo Indigo Nippon
Paints Paints Nerolac Nobel Paints Paint
1,000.00 749.86
500.00 152 74.25 84.05 70.23
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Sensitivity Analysis
Represented
Particulars in 2022 2023E 2024E 2025E