Asian Paints Ltd.

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 Asian Paints Ltd.
Industry LTP Base Case Fair Value Bull Case Fair Value Recommendation Time Horizon
Paints Rs. 2215 Rs. 2115 Rs. 2285 Buy on dips to Rs 1956-1966 band and add further on dips to Rs 1837-1847 band 2 quarters
About the Company:
HDFC Scrip Code ASIPAIEQNR Asian paints (ASPN) is in the business of manufacturing, selling and distribution of paints, coatings, products related to home décor and
BSE Code 500820
providing paint related services. Its decorative coatings segment, which is the largest contributor to the company’s revenues features a
NSE Code ASIANPAINT
comprehensive portfolio including paints, painting tools, water proofing solutions, wall coverings and adhesives. It has also forayed into
Bloomberg APNT:IN
the home improvement space including two categories of kitchen and bath-fitting comprising ranges of modular kitchens (Sleek) and
CMP Nov 27, 2020 2215
Equity Capital (cr) 96 sanitary ware (Ess Ess). ASPN has over 50% market share in the domestic paints market and enjoys close to 60% share in the domestic
Face Value (Rs) 1 decorative paints segment.
Eq- Share O/S(cr) 96
Market Cap (Rscr) 212640 Valuations & Recommendation:
Book Value (Rs) 105.6 ASPN is the undisputed market leader in the Indian paints industry for over 6 decades now. Over this period, many domestic and foreign
Avg.52 Wk Volume 2362222 players have entered the market trying to carve out a share for themselves. While few have done well, none have been able to challenge
52 Week High 2249
the prowess of ASPN. This is a testament to the well-established brand, distribution and supply channels, and the operational
52 Week Low 1431
infrastructure set up by the company.
Share holding Pattern % (Sept 30, 2020)
Promoters 52.79 India is the world’s third largest consumer of paints by volume and even with a double-digit growth, the industry has a lot of potential.
Institutions 23.07 Following a washout Q1FY21, ASPN has had a very strong recovery in Q2FY21 on the back of festive season. This trend is expected to
Non Institutions 24.14 continue in Q3FY21 with a pick up of the wedding season. The pent up demand is more than encouraging and the company has done a fine
Total 100.0
job with broadening its product offerings with new innovations and complimented it with a new safe servicing platform. All these factors
provide some context as to why the company has been able to retain its leadership over the years.
Fundamental Research Analyst
Karan Shah
Karan.Shah@hdfcsec.com Over the past few years, ASPN has done well in terms of strengthening its distribution network and broadening its product portfolio.
Recently, it is in midst of massive expansion (it is nearly doubling its capacity), which would create further entry barriers for peers. ASPN is
working on a probable decade long vision to emerge as India’s top home improvement/decor company.

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Asian Paints Ltd.
With further recovery expected in H2FY21 and FY22, the company can see improvement in margins and growth and hence the stock has
run up in the recent times on the back of these triggers. ASPN has creditably posted much faster recovery compared to most discretionary
peers, which should ensure premium valuations. We feel investors can buy the stock on dips to Rs.1956-1966 band (57.50xFY22E EPS) and
add more on dips to Rs 1837-1847 band (54.0xFY22E EPS) for a base case target of Rs 2115 (62.0xFY22E EPS) and a bull case target of Rs
2285 (67.0xFY22E EPS) over the next two quarters.
Financial Summary (Rs Cr)
Particulars (Rs cr) Q2FY21 Q2FY20 YoY-% Q1FY21 QoQ-% FY19 FY20 FY21E FY22E
Net Revenues 5350 5051 5.93 2923 83.06 19342 20211 19532 23245
EBITDA 1265 955 32.51 484 161.24 3525 4162 4229 4962
APAT 852 845 0.82 220 287.93 2159 2710 2681 3271
Diluted EPS (Rs) 8.90 8.80 1.14 2.29 288.65 22.51 28.25 27.95 34.10
P/E (x) 98.39 78.4 79.24 64.95
EV/EBITDA 60.33 50.95 49.82 42.07
RoE-% 24.09 27.58 24.88 26.94
(Source: Company, HDFC sec)
Long term Triggers
Industry trends and barriers to entry
India is the world’s third largest consumer of paints by volume. The industry has grown by 12-18% in the last 15 years, there exists a high
correlation between the paint industry’s growth and GDP. The paint industry volume growth has a GDP multiplier of 1.5-2X. Some of the
reasons the industry has done well are increasing urbanization, increasing disposable income and shortening repainting cycles. Repainting
cycles are 3-5 years versus 8-10 years earlier for interior paints and 7-8 years versus 12-16 years for exterior paints.
The per capita consumption of paints in India is ~ 3 kgs, much lower in comparison to the other countries in the world. This will be one of
the important drivers of paint companies in India. The industry is expected to undergo huge headwinds due to the current COVID crisis
which might take a few quarters to recover. It will also take some time before demand stabilizes once again. However the long term
prospects of paint companies are bright. The Indian paint market is estimated to be 50,000 Cr, 65-70% of this is held by the organized

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Asian Paints Ltd.
players and the rest 30-35% by the unorganized players. GST has brought the unorganized players in the tax net, price differential between
unorganized and organized continues to narrow. GST is 18% for paint companies instead of 28% tax paid in the pre GST era.

Largest distributor network

Over the past few decades, Asian Paints has disrupted the paints industry in several ways. Firstly, in the 1950s and 1960s, the firm
removed channel partners like distributors and wholesalers from its distribution channel; hence today, decorative paints is the only mass
market category where the manufacturer directly reaches 70,000+ points of sale (paint dealers), without any channel intermediation.
Secondly, the price at which a paint dealer sells Asian Paints’ products to a painter / contractor leaves only 3-5% average margin with the
dealer. Hence, in order make a healthy ROI (returns on invested capital), the paint dealer requires high inventory turns, which is the
biggest area of differentiation between Asian Paints and its competitors. Asian Paints has built its strengths around demand forecasting
using its technology investments, which then helps it deliver a voluminous product (paints are at least 7-10x more voluminous vs FMCG
products), directly to 70,000+ dealers, 3-4 times every day. Thirdly, Asian Paints has kept product price hikes to a bare minimum – less
than 3% CAGR over the past two decades. This is because Asian Paints keeps extracting incremental operating efficiencies by investing in
technology and in building systems and processes. Without access to such operating efficiencies, several paint manufacturers have found
it difficult to survive in India and this has helped Asian Paints consolidate market share very substantially. This is also the reason why the
company has been able to maintain its market share to over 50% for so many decades and will continue to remain the market leader going
forward.

New innovative products and segments

The paints sector in India has undergone a transition over the past few decades. Asian Paints has limited product price hikes to less than
3% CAGR. While the paint material cost has gone up at a CAGR of less than 3%, labour cost has increase at a much higher rate of 8-10%
CAGR. This in turn has meant that today on average, 65% of a paint project cost in India is labour, up from ~20% two decades ago. In order
to use this transition as a source of disruption, Asian Paints has spent more than a decade in establishing value-added labour-oriented
offerings like Asian Paints Home solutions, Water Proofing solutions, Color consultancies, etc. Moreover, the firm has indigenized
mechanized solutions (express-painting solutions) which are used by labor workforce to execute these paint projects in less than half the
time it otherwise takes painters via manual painting processes. There might also be a possibility that Asian Paints could offer such
mechanized solutions in a DIY format to customers directly. Asian Paints has also been focusing on new specialized products at the
premium end, in small, niche categories that have a superior margin profile than standard products (bathroom fittings, modular kitchen,
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Asian Paints Ltd.
waterproofing, specialty chemicals, adhesives). Its entry in waterproofing has gathered momentum and is gaining share. Asian Paints has
introduced an entire range of waterproofing products under the SmartCare brand that are formulated using specialized chemicals.
Penetration into these new, niche categories with premium-end product launches should aid Asian Paints in driving overall margin
expansion. In addition, Asian Paints has forayed into adjacent categories/ accessories of paints, like rollers, masking tapes, sand paper, and
wallpapers, etc. to leverage its superior distribution reach. In doing so, it aims to be a one-stop shop providing the entire range of painting
solutions for painters.
Short term Triggers
H1FY21 review:
New safer way of service offering to retain dealer loyalty
Asian Paints has been providing direct cash transfer into the bank accounts of over 40,000 contractors across the country. For the first
time in history, Asian Paints has relaxed credit terms for payment to the company. They have given extra credit of 45 days to the dealers
with a 2% discount available on the payment if made within these extra 45 days. The firm is also providing a comprehensive Covid-19
insurance coverage to people working inside a dealer’s shop and to contractors / painters attached to some of these dealers. Asian Paints
is also providing free sanitization of dealers’ shops. Competitors like Akzo Nobel, Kansai Nerolac and smaller organized or unorganized
players are either not providing such support to the channel partners or are providing some of this support on a chargeable basis.

Pent up demand witnessed

Paints demand cannot be easily substituted by other products (Asian Paints is already amongst the leading wallpaper manufacturers with
their brand Nilaya). 80-85% of decorative paints demand in India is repainting of households where each household has a certain
repainting cycle. Demand for interior paints are at the risk of being deferred as, given the Covid-19 crisis, consumers might take a few
months before they feel comfortable about inviting labour into their homes. If a household was scheduled to get their interior walls
painted during the summer of 2020, it is likely that they will delay this paint project by few months. However, it is unlikely that they will
get their walls painted at the end of the next cycle i.e. 7-8 years later. Also, those households which were scheduled to get their walls
painted in 2021, will perhaps not defer their paint projects. Hence, during a 12-18 months period, we are likely to see pent-up demand
from lockdown-affected households along with normal demand from the 2021-scheduled households, and hence a deferment of demand
due to the lockdown. This will translate into a very strong FY22 for Asian Paints. A strong Q2FY21 further re-asserts this view as the
company revenue grew by 5.9% YoY with decorative business volume growth of 11% and the demand in tier 2/3/4 towns which has
already surpassed pre-covid levels.
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Asian Paints Ltd.
Festive Season sales
Paint companies do witness surge in sales pre Diwali. Given the current situation, this year’s Diwali was expected to be a washout for paint
companies. However, the company has seen a strong quarter with a healthy digit volume growth. The pent up demand and recovery in
Q2FY21 has far exceeded expectations. This is expected to be followed by another strong quarter in Q3FY21 as the wedding season picks
up. Apart from these triggers, the management also believes that staying at home has caused the desire for home improvement in people.
As a result of these factors, the road to recovery is on track for the company.

Gross margins to improve

Some of the raw materials used by paint companies are – acids & chemicals, pigment extender, minerals, resins, solvents, additives,
extender, monomers and oils. Crude oil and its derivatives account for 50-55% of total raw material costs and 40-45% of the raw materials
are imported. Increasing raw materials prices and rupee depreciation will put pressure on margins of paint companies. There is an inverse
correlation between crude prices and paint manufacturers gross margins. Over the past few months crude has taken a beating and this
should help gross margins of paint companies in the very near future. However, as the coronavirus fears subside, crude prices will stabilize
to normal levels.

What could go wrong

Labour shortage and price of labour increasing compared to product mix - Post the initial lockdown, there has been a labour shortage
across the industry. Hence the labour costs have also increased owing to scarcity of labour. Further lockdowns in the future can affect the
labour costs and company margins.

Automotive segment suffering – Demand in the automotive sector has been lack luster over the past few years. While the sector seems to
be improving, any risks in the industry will in turn affect paint companies too.

Growth linked to GDP - FY21 can be a dampener – As is true for most consumption based industries, growth in FY21 is expected to be
subdued. While this fact might be digested, an absence of a strong recovery in FY22 can be a threat.

Home business suffering – Asian paints home business has suffered over the past three quarters with some recovery seen in Q2FY21 both
in demand and profitability. This being a new business will require some time before it can be scaled up.
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Asian Paints Ltd.
High base acting as a headwind for superior financial performance: PBT growth (adjusted for the one-off corporate tax cut), has
significantly slowed to 7.7% in the four years ending FY20. From over 45% at the start of the decade, RoCE has come down to early-20s in
recent years due to falling net fixed asset turnover and worsening cash conversion cycle.

About Company
Asian Paints is India’s leading paint company with a group turnover of Rs 202.1 billion. Asian Paints operates in 15 countries and has 26
paint manufacturing facilities in the world servicing consumers in over 60 countries across four regions viz. Asia, Middle East, South Pacific
and Africa. Besides Asian Paints, the group operates around the world through its subsidiaries: Asian Paints Berger, Apco Coatings, SCIB
Paints, Taubmans, Causeway Paints and Kadisco Asian Paints. Asian Paints manufactures wide range of paints for Decorative and Industrial
use. In Decorative paints, Asian Paints is present in all the four segments v.i.z Interior Wall Finishes, Exterior Wall Finishes, Enamels and
Wood Finishes. It also offers Water proofing, wall coverings and adhesives in its product portfolio. In the Industrial coatings space, Asian
Paints operates through two 50:50 joint ventures with PPG Inc, USA., one of the largest automotive coatings manufacturer in the
world. The first Joint Venture ‘PPG Asian Paints Pvt Ltd’ services the increasing requirements of the Indian automotive coatings market.
The second JV ‘Asian Paints PPG Pvt Ltd’ services the protective, industrial powder, industrial containers and light industrial coatings
markets in India. Vertical integration has seen Asian Paints diversify into chemical products such as Phthalic Anhydride and Pentaerythritol,
which are used in the paint manufacturing process. The company has discontinued production of Phthalic Anhydride from end of July
2017. In the Home Improvement and Décor category, the company is present in the Kitchen and Bath fittings space and offers various
products under Sleek and Ess Ess brand respectively. The company has recently launched ‘Viroprotek’ range of hand, Surface and space
sanitizers and disinfectants. It is also offering ‘San Assure’ a sanitization service and ‘Safe Painting’ service for its customers. Asian Paints
has also recently launched range of Furniture, Furnishings and Lighting Products under three brands - Nilaya, Royale and Ador, thus
offering wide spectrum of offerings in the ‘Home Décor’ category. It has also launched ‘Beautiful Homes Service’ - an exclusive end-to-end
solution that provides consumers a personalized interior design service with professional execution to create their dream homes. ASPN
has over 50% market share in the domestic paints market and enjoys close to 60% share in the domestic decorative paints segment.

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 Asian Paints Ltd.
Financials
Income Statement Balance Sheet
(Rs Cr) FY18 FY19 FY20 FY21E FY22E As at March FY18 FY19 FY20 FY21E FY22E
Net Revenues 16825 19342 20211 19532 23245 SOURCE OF FUNDS
Growth (%) 11.70 14.96 4.50 -3.36 19.01 Share Capital 96 96 96 96 96
Operating Expenses 13627 15817 16049 15303 18283 Reserves 8314 9424 10034 11330 12760
EBITDA 3198 3525 4162 4229 4962 Shareholders' Funds 8410 9520 10130 11426 12856
Growth (%) 7.07 10.22 18.08 1.61 0.17 Long Term Debt 492 597 321 321 321
EBITDA Margin (%) 19.01 18.22 20.59 21.65 21.35 Short Term Debt 41 31 19 19 19
Depreciation 360 431 781 818 861 Net Deferred Taxes 417 568 444 444 444
EBIT 2837 3094 3381 3411 4102 Non Current Liabilities 149 163 188 182 217
Other Income 221 227 304 287 400 Minority Interest 328 363 404 435 467
Interest expenses 35 51 102 74 74 Total Source of Funds 9837 11240 12284 13605 15102
PBT 3023 3270 3583 3623 4428 APPLICATION OF FUNDS
Tax 1041 1099 855 911 1125 Net Block 3405 5530 5032 4825 4191
APAT 2109 2159 2710 2681 3271 CWIP 1405 210 140 140 140
Growth (%) 7.31 2.40 25.50 -1.06 22.00 Goodwill 327 321 320 320 320
EPS 21.99 22.51 28.25 27.95 34.10 Other Non-Current Assets 641 565 652 630 747
Right of Use Assets 0 0 920 920 920
Total Non Current Assets 5779 6626 7064 6835 6318
Investments 2141 2570 2019 2019 2019
Inventories 2658 3150 3390 3478 3885
Trade Receivables 1737 1913 1799 1873 2102
Cash & Equivalents 405 445 783 2153 4039
Other Current Assets 1064 957 1100 1063 1265
Total Current Assets 5864 6466 7072 8567 11291
Trade Payables 2160 2394 2137 2141 2532
Other Current Liab & Provisions 1786 2027 1734 1676 1994
Total Current Liabilities 3946 4421 3870 3816 4526
Net Current Assets 1918 2044 3201 4751 6765
Total Application of Funds 9837 11240 12284 13605 15102
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 Asian Paints Ltd.
Cash Flow Statement Key Ratios
(Rs Cr) FY18 FY19 FY20 FY21E FY22E (Rs Cr) FY18 FY19 FY20 FY21E FY22E
Reported PBT 3139.1 3310.7 3634.0 3623.4 4427.7 EBITDA Margin 19.0 18.2 20.6 21.7 21.3
Non-operating & EO items -260.8 -168.7 -138.7 -101.9 -180.0 EBIT Margin 16.9 16.0 16.7 17.5 17.6
Interest Expenses 35.1 51.0 102.5 74.5 74.1 APAT Margin 12.5 11.2 13.4 13.7 14.1
Depreciation 360.5 430.7 781.9 817.8 860.9 RoE 26.3 24.1 27.6 24.9 26.9
Working Capital Change -79.7 -427.4 -737.1 -164.4 -209.7 RoCE 22.6 20.8 23.7 21.1 23.2
Tax Paid -1080.7 -982.0 -1010.8 -910.5 -1124.7 Solvency Ratio
OPERATING CASH FLOW ( a ) 2113.4 2214.3 2631.9 3338.9 3848.2 Net Debt/EBITDA (x) (0.4) (0.4) (0.4) (0.4) (0.4)
Capex -1408.8 -1133.6 -366.9 -610.5 -226.7 Net D/E 0.0 0.0 (0.0) (0.2) (0.3)
Free Cash Flow 704.7 1080.7 2265.0 2728.4 3621.5 PER SHARE DATA
Investments 117.0 130.4 -253.6 0.0 0.0 EPS 22.0 22.5 28.3 28.0 34.1
Non-operating income -307.5 79.5 99.1 101.9 180.0 CEPS 25.7 27.0 36.4 36.5 43.1
INVESTING CASH FLOW ( b ) -1599.3 -923.7 -521.4 -508.6 -46.6 BV 87.7 99.2 105.6 119.1 134.0
Debt Issuance / (Repaid) -44.0 63.1 -261.4 0.0 0.0 Dividend 8.7 10.5 12.0 12.0 16.5
Interest Expenses -35.2 -51.2 -100.9 -74.5 -74.1 Cash Conversion (days) 32.8 30.2 43.7 48.5 42.8
FCFE 625.5 1092.6 1902.7 2653.9 3547.4 Debtor days 37.7 36.1 32.5 35.0 33.0
Share Capital Issuance 0.0 0.0 0.0 0.0 0.0 Inventory days 57.7 59.4 61.2 65.0 61.0
Dividend -1217.8 -1048.7 -2120.7 -1385.9 -1840.7 Creditors days 46.9 45.2 38.6 40.0 39.8
Others -82.2 153.9 17.8 0.0 0.0 VALUATION
FINANCING CASH FLOW ( c ) -1379.1 -883.0 -2465.2 -1460.4 -1914.8 P/E 100.7 98.4 78.4 79.2 64.9
NET CASH FLOW (a+b+c) -865.0 407.6 -354.7 1369.9 1886.8 P/BV 25.3 22.3 21.0 18.6 16.5
EV/EBITDA 66.5 60.3 50.9 49.8 42.1
EV / Revenues 12.6 11.0 10.5 10.8 9.0
Dividend Yield (%) 0.4 0.5 0.5 0.5 0.8
(Source: Company, HDFC sec)

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27-Nov-19

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One Year Price Chart

27-Feb-20

27-Mar-20

27-Apr-20
Asian Paints Ltd.

27-May-20

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27-Oct-20

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(Source: Company, HDFC sec)

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 Asian Paints Ltd.
Disclosure:
I, Karan Shah, BBA, author and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also
certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately
preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.

Any holding in stock –No

HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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