Asian Paints Ltd

Despite the increasing competition in the home decor segment with the entry of new players like Grasim Industries, Asian Paints has continued to maintain its lead, and its financials present an encouraging opportunity to investors who may want to infuse some colour in their portfolio

Asian Paints has evolved into a powerhouse in the paint and decor industry since its modest beginnings in 1942, spearheading innovation and customer-centricity. Over 25 years, it has transitioned into India’s premier paints company, securing a dominant position in the market since 1967. With a consolidated turnover of over ₹345 billion, Asian Paints ranks among the top 10 decorative coatings companies worldwide, holding the second position in Asia and the eighth globally. Its reputation for professionalism, rapid growth and shareholder value enhancement is renowned.

Operating in 15 countries with 27 manufacturing facilities, Asian Paints caters to consumers in over 60 countries through subsidiaries like Asian Paints Berger, Apco Coatings, and others. Its diverse product range encompasses decorative and industrial paints, waterproofing solutions, adhesives and wall coverings. In partnership with PPG Inc., USA, Asian Paints has ventured into industrial coatings, serving the automotive and industrial markets in India. Moreover, vertical integration extends its portfolio into chemical products vital for paint manufacturing.

Recent expansions include forays into home improvement and decor, introducing furniture, furnishings and lighting products under various brands. Initiatives like the ‘Beautiful Homes Service’ offer personalised interior design solutions. Strategic acquisitions have further broadened its scope, including partnerships with Weatherseal Fenestration for interior decoration, White Teak for decorative lighting products, and nanotechnology collaboration with Harind Chemicals and Pharmaceuticals.

Additionally, Asian Paints has taken an initiative in the sector of white cement manufacturing through a joint venture with Riddhi Siddhi Crusher and Land Transport and Associated Soap Stone Distributing Company in India and Fujairah, UAE, respectively. This endeavour signifies its commitment to diversification and global expansion, reflecting its dynamic approach to growth and innovation.

Sector Overview
The Indian paint Industry, after enduring two pandemicimpacted years, faced unexpected challenges in 2022 due to the Russia-Ukraine conflict, leading to soaring crude oil prices and subsequent increases in raw material costs. Despite these hurdles, the industry, valued at ₹700 billion, has maintained its status as one of the fastest growing sectors. While the pandemic and high crude oil prices have impacted volumes and profitability, the overall performance remains satisfactory.

Forecasts from the Indian Paint Association predict substantial growth, with the industry expected to reach ₹1,000 billion over the next five years, marking a 43 per cent increase from its current levels. The decorative segment, driven by a buoyant construction sector, experienced notable growth in 2022, although Q3FY23 saw subdued activity due to prolonged monsoons and a shorter Diwali period. Future growth in decorative paint consumption is expected to be fuelled by robust construction activity, government initiatives such as ‘Housing for All’, and increasing urbanisation.

With economic growth, urbanisation and rising purchasing power driving demand, India is poised for significant growth in the decorative paint sector. Urbanisation, in particular, will be a key driver, with projections indicating a substantial increase in urban population by 2030 and 2050. Government initiatives, such as increased infrastructure spending, further bolster growth prospects. The industrial segment, constituting over 30 per cent of the industry, has witnessed rapid expansion, primarily led by automotive coatings. India’s automotive industry has seen remarkable growth, becoming the thirdlargest vehicle market globally.

Despite challenges posed by the Russia-Ukraine conflict, price increases in paints have mitigated the impact of rising raw material costs, with some relief observed in key inputs during October 2022. Overall, the Indian paint industry remains resilient, supported by robust demand drivers and government initiatives, positioning it for sustained growth in the foreseeable future.

Financial Overview
Asian Paints boasts a market capitalisation of ₹274,402 crore. The promoters currently hold about 52.63 per cent of the Examining the Q3 results from a volume perspective reveals considerable strength. The decorative business saw a notable 12 per cent increase in volume and a 5.5 per cent rise in value. The compound annual growth rate (CAGR) figures are robust, reflecting a pursuit sustained over approximately the past 14-15 quarters. This narrative has demonstrated considerable consistency over time. Looking at the previous three quarters’ financial performance of Asian Paints on a consolidated basis, in 9MFY24 the revenue of the company stood at ₹26,680.7 crore which surged by 4.2 per cent as compared to ₹25,617 crore in 9MFY23, while the EBITDA of the company soared by 34.1 per cent and reached ₹5,893.6 crore as against ₹4,395.1 crore in 9MFY23.

Similarly, the net profit of the company jumped 46.3 per cent to ₹4,203.5 crore as compared to ₹2,872.3 crore in 9MFY23. The EBITDA margins for 9MFY24 improved by 490 bps to 22.1 per cent as compared to 17.2 per cent in 9MFY23. On a ninemonth basis, looking at the overall volume since Q2, there was a slight decline. The company is currently experiencing approximately 9 per cent volume growth and 4.6 per cent value growth. However, the CAGR numbers remain strong, exceeding 15 per cent.

Double digit Volume growth in Q3FY24, supported by Festive demand:

Looking at the company’s financial standing regarding liquidity and solvency, it becomes apparent that the interest coverage ratio stands at a healthy 40.3 times, the current ratio at 1.99, and the debt-to-equity ratio at 0.14. These ratios signify the company₹s minimal debt levels and its capacity to readily fulfil interest obligations. Overall, these indicators paint a picture of robust financial position concerning liquidity and solvency. Additionally, in evaluating performance metrics, the return on equity (ROE) is at 27.7 per cent while the return on capital employed (ROCE) currently stands at 34.4 per cent.

Impact of New Player in the Industry Grasim Industries, a leading company of the Aditya Birla Group, has entered the paint industry with the launch of its brand, Birla Opus. This move adds to competition in the decorative paints sector, which is currently dominated by major players like Asian Paints and Berger. Grasim aims to secure a profitable second position in the market and achieve revenues of ₹10,000 crore within three years. The company’s marketing strategy includes selling paint cans with QR codes, offering customers a 10 per cent discount for scanning them.

Grasim has doubled its investment to ₹10,000 crore for establishing its presence in the paint industry, with manufacturing facilities already operational in Haryana and a research and development facility in Maharashtra. The Indian paints industry is expected to grow significantly, driven by increased real estate demand and government initiatives. Grasim’s entry into the paint industry, along with other recent entrants like Pidilite and JSW, poses a challenge to established players.

Grasim’s significant capital expenditure highlights its commitment to the paints business, with the company expecting improved margin prospects due to softening raw material prices. Overall, this move by Grasim Industries will intensify competition among players and there might be a market share dilution and margin compression for several companies in the industry, especially the smaller ones that may be impacted the most. However, this will benefit the end users with increased price competition.

Outlook
Asian Paints has reported strong financial performance, with a notable 12 per cent volume growth and 5.5 per cent value growth in the decorative business, sustaining a consistent growth trend over 14-15 quarters. The overall coatings growth in India remains robust, and the industrial business exhibits growth in segments like the automotive OE and general industrial. Introduction of new products will contribute to double-digit revenue numbers. The company is committed to capital expenditure for expansion and backward integration initiatives, expanding its home décor business with 54 ‘Beautiful Homes’ stores across India.

Plans include increasing the home décor business to 8-10 per cent of the overall decorative turnover, with expected benefits of backward integration in margins and revenue growth. Asian Paints focuses on marketing and brand building, introducing innovative products and services like Beautiful Homes Painting Service alongside integrating the home decor business with its overall offerings for cross-selling opportunities. Globally, the company anticipates growth in South Asia, the Middle East and the GCC, particularly in the automotive OE and general industrial segments.

The company’s future plans involve concentrating on B2B projects, institutional business and innovation in product launches, with a commitment to maintaining strong growth and investor engagement. Significant capital expenditure is earmarked for brownfield expansion and backward integration initiatives, with completed expansions in Khandala (Maharashtra) and Kasna (Uttar Pradesh), augmenting overall capacity by approximately 120,000 kilolitres per annum.

Lastly, looking at the key valuation metrics, the company’s price to earnings (PE) ratio is at 50.9 times, which is substantially lower than its five-year historical median PE of 76.5 times, while its still trades above its industry PE of 44.1 times. Additionally, the EV/EBITDA ratio stands at 32.9, which is also lower than its five-year historical EV/ EBITDA median of 46.4. Overall, the company exhibits decent growth as earnings have grown consistently by approximately 14 per cent CAGR over the past 5-10 years. Therefore, at the current valuation the company looks pretty attractive. Hence, we recommend BUY