Edelweiss 47

COMPANY UPDATE

ASIAN PAINTS
The growth palette
India Equity Research| Consumer Goods
Asian Paints is one of the best discretionary plays on macro recovery EDELWEISS 4D RATINGS
given that paint volumes surge a healthy 1.5‐2.0x GDP. Moreover, Absolute Rating BUY
decisive policy measures by the new business‐friendly government will Rating Relative to Sector Outperformer
spur urban demand. Diversification into water proofing, modular kitchens Risk Rating Relative to Sector Medium
and bath fittings places the company in a sweet spot to corner higher Sector Relative to Market Underweight
wallet share (Masco Corp in US has done this successfully). With 22% EPS
CAGR, 347bps RoCE spurt over FY14‐17E and metamorphosis into a home
MARKET DATA (R: ASPN.BO, B: APNT IN)
décor company, we anticipate valuations to remain rich. Reiterate ‘BUY’.
CMP : INR 509

Target Price : INR 720
GDP revival, urban demand recovery to cheer volumes 52‐week range (INR) : 565 / 373
We estimate volumes to clock 13% CAGR over FY14‐17E (~8% over FY12‐14) anchored Share in issue (mn) : 959.2
by the much anticipated recovery in urban sentiments, GDP revival and toothless M cap (INR bn/USD mn) : 488 / 8,217
competition (Akzo, Nippon, Jotun failed to make headway). Additionally, low per capita Avg. Daily Vol.BSE/NSE(‘000) : 1,108.1
paint consumption (one fourth of China), strong distribution network (2x next player)
and reduction in repainting cycle (down to 5 from 7 years) bode well. Industrial paints’ SHARE HOLDING PATTERN (%)
growth has likely bottomed out given the pick up in the investment cycle. Current Q3FY14 Q2FY14
Promoters * 52.8 52.8 52.8
International stroke: Investing in growth; synergy in home décor MF's, FI's & BK’s 9.4 7.9 8.3
International business is set to gather pace with expanded capacity (Bangladesh) and FII's 18.0 19.5 19.0
investment in future growth drivers (Ethiopia). The company is strategically expanding Others 19.9 19.9 19.9
* Promoters pledged shares : 9.2
in home décor and scaling it up via distribution support and effective branding. (% of share in issue)

Premiumisation, GST, appreciating INR to bolster margin PRICE PERFORMANCE (%)
Potential margin triggers include product mix improvement due to increasing salience EW Consumer
Stock Nifty
of water‐based paints/ premium launches, likely GST implementation, appreciating INR Goods Index
(5% appreciation improves EPS by 6.7%) and ramp up in capacity utilisation. 1 month 2.5 9.1 0.6
3 months 7.9 16.8 4.8
Outlook and valuations: Lustrous growth; reiterate ‘BUY’ 12 months 6.0 20.1 (0.0)
Domestic decorative volume growth is likely to improve and we are positive on new
growth drivers. We assign 31x P/E to FY17E EPS, arriving at a two‐year target price of
INR720 (~41% upside). Reiterate ‘BUY’ and rate it ‘Sector Outperformer’.
Financials
Year to March FY14 FY15E FY16E FY17E
Abneesh Roy
Revenues (INR mn) 127,148 150,344 178,301 213,695 +91 22 6620 3141
Rev. growth (%) 16.2 18.2 18.6 19.9 abneesh.roy@edelweissfin.com
EBITDA (INR mn) 19,979 23,916 28,636 34,832
Pooja Lath
Net profit (INR mn) 12,188 14,760 18,126 22,292 +91 22 6620 3075
Shares outstanding (mn) 959 959 959 959 pooja.lath@edelweissfin.com

Diluted EPS (INR) 12.7 15.4 18.9 23.2 Tanmay Sharma
EPS growth (%) 9.4 21.1 22.8 23.0 +91 22 4040 7586
tanmay.sharma@edelweissfin.com
Diluted P/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 June 3, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Consumer Goods

GDP Growth to Revive Fortunes of Paint Industry

There is a high correlation between the paint industry’s growth and GDP growth rate (as per
our calculations, the correlation between Asian Paints’ volume growth and India’s GDP
growth rate is a strong 0.76x)—paint industry volumes grow 1.5‐2.0x India’s GDP. We
anticipate GDP to surge to 7.5% (5.4%, 6.3% and 7.5% in FY15, FY16 and FY17) riding on a
new stable and business‐friendly government in the saddle at the Center. Hence, we
anticipate the paint industry to grow at a much faster pace. We estimate 11%, 13% and 15%
YoY volume growth for Asian Paints in FY15, FY16 and FY17, respectively.

Table 1: Positive correlation between paint industry and GDP
Income Level Increase in GDP will increase standard of living. With rise in income level, consumers will
increase consumption which in turn will help the decorative segment.
Housing Sector Growth in housing sector will increase urbanisation, provide cheaper loans and shift from semi –
permanent to permanent housing structures will increase spending in the decorative segment.
Industrial Segment The industrial segment can be further broken down into protective, general industrial, automotive
powder and marine coatings. This segment accounts for 25% of the paint industry's revenue.
Infrastructure Investment New projects in roads and ports will increase revenues of paint industry and drive the industrial
segment.

Fig. 1: Revival in GDP growth positive for paint industry
Boom in Expansion of Increased

Increase in Increased Growth in
Housing Industrial Infrastructure
GDP Income Level Paint Industry
Sector Segment Investment

Chart 1: Asian Paints’ volume grows 1.5‐2.0x GDP growth rate
20.0
16.0
12.0
(%)
8.0
4.0
0.0
FY15E
FY16E
FY17E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
GDP Forecasted Volume Growth Actual Volume Growth

Source: Edelweiss research
2 Edelweiss Securities Limited
Asian Paints

Urban Recovery to Spur Growth

Urban demand revival to boost paint demand
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
consumer companies. As a result, 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 urban‐centric products (premium products
which are also margin accretive). The central government, bolstered by a historic mandate,
is likely to herald policies boosting urban demand; BJP is focused on infrastructure
development, faster execution of policies, development of 100 new smart cities and asset
creation under NREGA. This urban revival will potentially benefit companies like Asian
Paints, which have a higher urban salience in terms of sales.

Urban demand on the mend
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, slower economic growth and high interest rates had led to a
flattish inflation index, indicating cautious consumer stance. However, with CAD under
control and CPI & WPI easing a tad, inflation is now taming. Though urban consumers have
gradually adapted to food inflation, these early signs of tapering inflation are encouraging.
Consumer spending is likely to pick pace as the new government sheds policy paralysis and
kick starts growth. Also, as per latest findings by Nielsen, consumer confidence in urban
India increased by six points in Q1CY14 to 121—the highest level of optimism since Q4CY12.
India retained its position as the second‐most‐optimistic country in Nielsen’s survey.

Chart 2: Consumer confidence index—On an uptrend
44.0
41.8
39.6
37.4
35.2
33.0
Dec‐12
Dec‐13
Aug‐12
Aug‐13
Oct‐12
Oct‐13
Apr‐13
Nov‐12
Nov‐13
Jan‐13
May‐13
Jan‐14
Sep‐12
Feb‐13
Sep‐13
Feb‐14
Mar‐13
Jun‐13
Jul‐13

Source: BluFin, Edelweiss research

Consumer Goods

New Business‐Friendly Government to Spur Growth

BJP manifesto cheers paint companies
BJP, in its manifesto, has emphasized on the need to build infrastructure and has promised
“The job market will grow at least
to build 100 new smart cities—a clear positive for paint companies. Also, it has stated that it
by 30% and with Modi in power,
will look at urbanisation as an opportunity, building upon areas like housing. Urban
the number of vacancies expected
development will be based on integrated habitat development and on concepts like Twin
are about 15mn, far better
Cities and Satellite Towns. Real estate and infrastructure development will in a
compared to the previous
proportionate manner increase paint demand, benefitting paint companies, especially the
numbers.”
leader—Asian Paints—as it commands the preferred status owing to high brand recall.

‐ Udit Mittal, MD,
New government to spur job market
Unison International
The job market in India is set to revive with a stable government coming into power at the
Centre. As per media articles, only 3mn jobs were created during the UPA tenure from FY05‐
10. Sentiments have turned positive as the new government assumes power and as per ABC
Consultants’ (placement firm) survey, ~84% employers indicated that the total headcount in
their firms will rise in FY15. Revival in the job market will be a significant driver of economic
growth as it will spur per capita consumption, which in turn will boost GDP.

Chart 3: Higher salary growth rate bodes well for paint companys’ margins
14.0
11.2
8.4
(%)
5.6
2.8
0.0
FY10 FY11 FY12 FY13 FY14E
Salary growth GDP growth

Source: Aon Hewitt, Edelweiss research

NDA regime to boost urban trade
As per a FICCI survey, almost 93% In Edelweiss report, BLIND SPOT ‐ The big switch: Bharat Nirman to India Shining?, dated
of the 76 CEOs said they foresee a April 02, 2014, our strategy team has analysed evolution of the Indian economy under the
substantial improvement in the two alliances that governed India in the past 15 years—NDA (1998‐2004) and UPA (2004‐
near‐term economic situation, 2014).
while the balance 7% participants
expected marginal improvement in The study throws up an interesting fact—under UPA (especially starting 2006), there has
the situation been a remarkable shift in terms of trade from urban to rural India, with price increase for
agri‐goods far outpacing that of manufactured goods. This, we believe, has been triggered
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
credit and expansion in social sector schemes under UPA compared to NDA. The rising rural
Asian Paints

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, use of fertilisers & pesticides has increased, productivity gains have been large
across crops, rural wages have seen unprecedented rise (outpacing GDP growth in recent
years) and discretionary spending saw sustained uptrend. In our view, with NDA back in the
saddle, the terms of trade will reverse in favour of urban India (as was the case during 1998‐
2004, which saw little productivity gains in crops, minimal MSP hikes etc).

Chart 4: Trade shifted from urban to rural areas under UPA; could revive under NDA
140
(Index re‐based to 100)
130
120
110
100
90
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
WPI food articles relative to non‐food articles

Source: CMIE

Chart 5: High MSPs in rice under UPA… Chart 6: …accompanied by high procurement
340 40.0
290 34.0
NDA UPA
(Re‐based to 100)
240 28.0
(MT)
190 22.0
140 16.0
90 10.0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Rice minimum support price (INR) Rice buffer stocks Rice buffer requirement norms

Source: Food Corporation of India, CMIE
Consumer Goods

Chart 7: Similar trend in wheat as well Chart 8: …accompanied by high procurement
50
265
NDA UPA
40
230
(Re‐based to 100)
30
195
(MT)
20
160
10
125
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
90
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Wheat buffer stocks
Wheat minimum support price (INR) Wheat Buffer requirement norms

Source: Food Corporation of India, CMIE

Chart 9: Sharp increase in agri and irrigation spending… Chart 10: …also agri credit
17.5 40.0
15.0 33.0
(CAGR, %)
12.5 26.0
(%)
10.0 19.0
7.5 12.0
5.0 5.0
FY90‐FY98 NDA UPA
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
(FY98‐FY04) (FY04‐FY14)
Budget expenditure on agri and irrigation Agri credit outstanding as a % of Nominal agri GDP

Source: Union Budgets, Government of Indi, RBI, CMIE

Asian Paints

Chart 11: Sharp growth in tractor sales under UPA… Chart 12: …also fertiliser consumption
15.0 6.0
10.0 4.6
(CAGR, %)
(CAGR, %)
5.0 3.2
0.0 1.8
(5.0) 0.4
(10.0) (1.0)
FY90‐98 NDA UPA FY91‐FY98 NDA UPA
(FY98‐FY04) (FY04‐FY14) (FY98‐FY04) (FY04‐FY13)
Tractor sales Fertilizer sales volume

Source: Crisil, Fertiliser Association of India
Chart 13: Improvement in productivity of all crops under UPA
2,500 1,200
2,350 (Kg/Hectare) 1,120

(Kg/Hectare)
2,200 1,040
2,050 960
NDA NDA
1,900 880
1,750 800
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Cereals yield (3Y moving average) Oilseeds yield (3Y moving average)

Chart 14: Rapid rise in rural wages…
20.0
15.0 NDA
UPA
10.0
(%, yoy)
5.0
0.0
(5.0)
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14td
Rural wages of unskilled labourers GDP at market prices

Source: RBI, CMIE, Ministry of Agriculture
Consumer Goods

Increasing migration to propel urban growth
Urbanisation has been growing at a fast pace as: (i) the aspirational value is increasing; and
(ii) urban areas provide lucrative opportunities leading to increased migration. As per 2011
census, urban population share to total residents has increased to 31.16% from 28.53% in
2001 and as per UN State of the World Population report, 40.76% of India's population is
expected to reside in urban areas by 2030. This increasing trend of urbanisation coupled
with revival in urban demand bodes well for companies that have higher urban salience.
Real estate demand will grow proportionately, thus boosting paint demand. Also, the
repainting cycle is shorter in urban areas (a factor of higher per capita income) compared to
rural areas.

Chart 15: Urban population in India—On the rise

Source: McKinsey Global Institute, Edelweiss research

Chart 16: Rate of urbanisation on an uptrend
48.0
42.4
36.8
(%)
31.2
25.6
20.0
1990 1991 2001 2005 2008 2011 2025E 2030E
Urbanisation Rate


Asian Paints

Shorter Repainting Cycle Bodes Well

As per industry sources, ~70% of the total decorative paints’ demand in India comes from
repainting (higher for Asian Paints at ~85‐90%) and balance from fresh construction. 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. Repainting cycle in India has reduced significantly from 7 years about a decade ago
to 5 years now; the trend is expected to continue as income levels rise and lifestyle
improvement induces consumers to change the look and feel of their homes more often.

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
repainting cycle.

Change in the mindset of people is another reason for the shorter repainting cycle. Earlier,
people painted their walls only when they started to peel off, but now paint is perceived as
décor and customers are open to investing more in beautification of homes.

Asian Paints derives 85‐90% of demand from repainting, which is higher than the industry
average. We expect this to put the company in an advantageous spot compared to peers,
who rely on fresh painting demand. Upgrading in paint quality is a key characteristic of
repainting which bodes well for Asian Paints’ premiumisation strategy.

Chart 17: Urban income share to improve as percentage of total income
100.0
80.0
60.0
(%)
40.0
20.0
0.0
1990 2001 2008 2030
Urbal Income Rural Income


Consumer Goods

Asian Paints: Market Leader in an Oligopoly Market

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 players—Asian Paints, Berger Paints, Kansai Nerolac and Akzo
Nobel. Asian Paints has the lion’s share of this market with ~54% market share. Some of the
essential characteristics of any oligopolistic market are pricing power, entry barriers,
product differentiation and advertisement & selling costs. Asian Paints, the market leader,
exhibits all these characteristics and is poised to gain from any surge in the paint industry.

“There’s been a massive Fig. 2: Decorative business in India is an oligopolistic market
transformation in the Indian
consumer. Earlier, people used to
paint when walls were peeling.
Now, it’s about décor. We
perceived this before most of our Entry Pricing power
competition.” Barriers

Oligoplistic
‐ K.B.S. Anand, MD &CEO,
Asian Paints
market
Product Advertisement
Differentiation & selling cost


Robust pricing power
One of the most important features of an oligopolistic market is that firms are price setters
rather than price takers. Asian Paints, by virtue of being the market leader, enjoys strong
pricing power, while the industry exhibits pricing discipline and follows the leader in pricing
action.

Asian Paints tries to maintain and operate within a range of gross margin. Raw material
prices largely determine the company’s pricing strategy. The primary raw materials,
titanium dioxide (TiO2) and monomers, being crude linked are impacted by crude inflation
and also currency fluctuation. Though global Tio2 prices have remained flattish in the past
one year, currency depreciation has had an adverse impact, compelling paint companies to
hike prices—Asian Paints effected total price increase of 6.1% in FY14, followed by other
competitors. Despite this price increase, Asian Paints delivered consistent double digit
volume growth even amongst tough macro environment. Recently, the company took two
price hikes effective from May 1, 2014, and from June 1, 2014, of 1.0% and 1.2%,
respectively, to offset the increased monomer prices.

Asian Paints

Table 2: Price hike taken by Asian Paints over the years
Date Price hike (%)
Jun‐14 1.2
May‐14 1.0
Feb‐14 2.1
Sep‐13 1.8
Aug‐13 1.0
May‐13 1.2
Jan‐13 (0.2)
May‐12 3.2
Mar‐12 2.1
Mar‐12 1.4
Dec‐11 2.2
Jul‐11 1.3
Jun‐11 2.5
May‐11 4.4
Q4FY11 1.0
Dec‐10 3.0
Aug‐10 1.2
Jul‐10 2.6
May‐10 4.2
Source: Company, Edelweiss research

Robust volume growth strong despite slowdown, price hikes
Despite having taken 6.1% price increase in FY14, Asian Paints clocked ~11% volume growth.
Paint demand thus remains resilient in spite of pricing action. We expect the company to
continue to deliver strong volume growth riding robust urban recovery. Compared to other
companies in the consumer goods space—Emami, Nestle and HUL—Asian Paints’ volumes
have remained resilient despite discretionary slowdown. We expect its volume growth to be
much faster as economic growth picks pace.

Chart 18: Volumes resilient despite slowdown
22.0
18.2
14.4
(%)
10.6
6.8
3.0
FY15E
FY16E
FY17E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Asian Paints Volume Growth


Consumer Goods

Volume growth is not only a function of price, but also other factors including per capita
consumption, market share gain, innovation, repainting demand, marriage days, festive
seasons etc. As per Nielsen, the per capital consumption of paints in India was 2.6kg in FY12
(2.2kg in FY08), one of the lowest compared to many other countries (one fourth that of
China). It is expected to increase to 4kg by FY16E. The low consumption indicates that there
is ample opportunity for growth in paints, with Asian Paints likely to benefit the most due to
its strong brand equity.

Chart 19: Low per capita consumption of paints in India
5.0
4.0
3.0
(kg)
2.0
1.0
0.0
2007 2008 2012 2016E
Per Capita Consumption

Source: AC Nielsen, Edelweiss research

Market share gains to continue
In 1967, Asian Paints became the leader in the decorative paint industry and since then has
maintained its pole position. The company’s market share in the decorative paints segment
surged from ~44% in FY05 to ~54% in FY13 among the top 5 players due to its strong dealer
network, brand equity, easy availability, customer centricity, advertisements and superior
quality.

The domestic paint industry has ~12 paint players in the organised sector and more than
2,000 in the unorganised space. Despite the presence of a large number of players in the
organised sector, the market is dominated by Asian Paints. Other players are not able to
match the scale and brand power of Asian Paints which being a dominant player gains
market share riding on these abilities. Also, the unorganised sector, ~35% of the total paint
market, provides enough opportunity for gaining and expanding the market share further as
more people are shifting from unorganised players to the more reliable organised ones. The
rising middle class population and increase in per capita incomes helps shift to branded
paints as house painting is a high investment warranting superior quality. Asian Paints
becomes the preferred pick due to its strong dealer network and brand recall.

Going forward, we expect Asian Paints to not only maintain its leadership in the decorative
paints market, but also gain incremental share. Also, players having a higher revenue
contribution from industrial segment stand to lose out in the decorative space. These
players are not able to back their brands in the decorative space with sustained investments
as investments are also made in the low‐margin technologically intensive industrial
segment. Drag in the industrial segment resulting in lower cash flows paves way for players
Asian Paints

like Asian Paints to capture market share from such players as well. If we take the universe
of the top 5 organised players in the decorative paints segment, Asian Paints has constantly
gained market share—from 44% in FY05 to 53.7% in FY13. Kansai Nerolac, Akzo Nobel and
Shalimar Paints, on the other hand, have lost market shares over the same period; Berger’s
market share has remained constant over the past four‐five years.

Chart 20: Market share of paint companies in decorative paints segment
100.0
80.0
(%) 60.0
40.0
20.0
0.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Asian Paints Berger Kansai Akzo Shalimar


Chart 21: Share of organised and unorganised cos in total decorative paints market
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Organised share Unorganised share


High entry barriers
Oligopolistic markets present a huge entry barrier, thereby securing market share of existing
players from outside threat. Since the domestic paint market is dominated by a few large
players, it makes entry difficult owing to their strong distribution network, pricing power,
robust capacity and brand strength. Asian Paints, being the largest player, is the leader on
all fronts as far as barriers to entry are concerned.

Consumer Goods

Unmatched distribution strength
Asian Paints’ strong dealer network creates a huge entry barrier for new players and makes
it difficult for existing players to make inroads into the decorative market. The company has
strong distribution in terms of dealer network (in urban and rural areas) and tinting
machines, which makes it difficult for other players to compete. Asian Paints leverages upon
its strong brand strength, efficient inventory management, a vibrant product variety and a
large dealer 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
chain management. It has a total dealer network of 35,000 and it is planning to add 1,500‐
Tinting machine: Painting growth 2,000 dealers to its network every year. Though other players are also increasing their
story dealer network, they have a long way to go (Berger Paints’ dealer network is half of Asian
Paints).

Tinting machines, which are colour dispensing machines, is another crucial factor that
bolsters a company’s distribution strength. Asian Paints has been adding ~1,000 tinting
machines per year with a total of 27,000 currently. Large number of tinting machines helps
retain dealers as these machines result in low inventory at the dealer level. It also helps
provide a wider variety of colours to customers. Tinting machines entail an investment of
INR0.30‐0.35mn and they are becoming an integral part of the business for dealers as they
help meet rising demand.

Asian Paints maintains strong relationships with dealers, helping the company retain dealers
and also enhance brand push through them. Dealer relationship indirectly results in a good
relationship with customers. The company’s top management meets dealers personally.
Asian Paints also organises events (‘Asian Paints Rangmanch' for dealers in Mumbai) for its
dealers which gives them a sense of belonging to the company. The company built a solid
connect with consumers by providing different services which helps them choose the right
paint for their homes, calculate total amount of painting cost, understand different types of
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
where a consumer can chat online with a colour consultant and get his/her queries solved. A
consumer can also schedule a meeting with a colour consultant of Asian Paints at his home
to solve his queries through the consultancy@home tab on the website. The company, apart
from Colour Consultancy Online, also has an online chat app, Ask Aparna, where queries can
be solved online via chat by consumers. Apart from this, Asian Paints also offers tools like
paint selector, budget calculators, dealer locator etc., which provide consumers the ease of
resolving all the queries and needs related to their painting needs.

Table 3: Dealer network, tinting machines and depots of paint companies
Tinting Machines Depots Dealers
Asian Paints 27,000 110 35,000
Berger Paint 12,000 125 16,500
Kansai Nerolac 7,500 75 15,000
Akzo Nobel 5,500 NA 8,500

Asian Paints

Table 4: Asian Paints—Colour World dealers (2.7x in 6 years)
Color World Dealers
FY08 10,000
FY09 12,000
FY10 14,600
FY11 18,000
FY12 21,100
FY13 24,000
FY14 27,000

Formidable brand strength
Each company in the paint industry has created its own brand—Asian Paints has Royale,
Aspira, Tractor; Berger has Silk, Easy Clean etc. Purchases are heavily influenced by brand
recall, which is directly proportional to the advertising frequency and its impact on
Asian Paints was a part of the nine
consumers.
Indian companies that were

included in the Forbes 'World's 100
Asian Paints has been able to create strong brand equity with dealers, painters and
most innovative growth
customers, making it difficult for a new player to compete. A strong brand helps build a
companies’
strong emotional connect with customers. This, coupled with superior quality of products,
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', a cartoon kid created by R.K. Laxman, was its mascot, which was changed to a logo
in red and golden yellow in 2002. After a decade, the logo was re‐launched to make it look
more fresh and contemporary. The new logo reflects a more meaningful and personalised
engagement with the customer. The flowing ribbon that creates the ‘AP’ design highlights
easy flow, smoothness and dynamism that the company provides.

Fig. 3: Asian Paints—Changing with times

Source: Company

Consumer Goods

Product differentiation
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
particular pattern and colour for their walls. In 2004, it launched a premium range of paint
Royale Play. Recently, it launched ultra luxury paint Royal Aspira with differentiated
features like five years’ warranty, teflon surface protector, anti‐microbial formula, crack
bridging property etc.

Differentiation can also be via services. In 2009, the company introduced dealer‐owned
Colour Idea stores, which is a retail format where a customer can get free in‐store colour
consultancy by trained professionals along with an option to visualise the colour choice on a
Colour Visualiser. Asian Paints launched 70 new Colour Idea stores in FY14 taking the total
count to around 170 stores. It has also launched Ezycolour Store and Ezycolour Beautiful
Home Guide which lets customers try different colours and textures, select the right colour
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.

Table 5: Asian Paints—Different brands across segments
Interior Paints Exterior Paints Metal Finishes
Value for Money Tractor Acrylic Distemper Ace Emulsion Utsav Enamel
Tractor Emulsion Apex Exterior Emulsion
Tractor Sythetic Distemper
Premium Apcolite Premium Emulsion Apex Ultima Apcolite Premium Gloss Enamel
Apcolite Advanced Emulsion Apcolite Premium Satin Enamel
Premium Semi‐Gloss
Luxury Royale Glitter Apex Duracast Finetex
Royale Lustre Apex Duracast RoughTex
Royale Luxury Emulsion Apex Duracast CrossTex
Royale Shyne Apex Duracast PebbleTex
Apex Duracast SwirlTex
Apex Ultima Protek
Super Luxury Royale Aspira
Effective advertising
Advertising and sales promotion (A&P) activities play an important role in an oligopolistic
market, enabling players capture higher mind share by harping on the superiority of 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
outpace competitors in specific segments. Saif Ali Khan is the brand ambassador for certain
offerings (Asian Paints Royale, Royal Aspira) for interior walls. The company launched an ad
campaign for its high‐end emulsion for interiors Royal Aspira with Saif Ali Khan and Soha Ali
Khan. For exterior paints like Apex Ultima it relies more on conceptual eye‐catching ads than
on brand ambassadors (similar to Pidilite’s strategy). Asian Paints hired Rahul Dravid to re‐
launch the Apcolite brand. It recently launched an interesting ad for its exterior paint Apex
Asian Paints

Ultima Protek highlighting its superior anti‐ageing quality. The company, as part of product
promotion, also sponsored a television show Har Ghar Kuch Kehta Hai on Colors channel. It
was a 10‐part series featuring celebrities talking about their childhood memories and the
house where they spent their childhood.

Table 6: Ad spends as percentage of sales of paint companies
% of Revenue FY07 FY08 FY09 FY10 FY11 FY12 FY13
Asian Paints 3.9 4.8 4.6 4.8 4.5 4.1 4.6
Berger India 3.9 4.0 4.2 4.6 4.9 5.1 5.6
Akzo Nobel 5.6 6.6 7.3 9.2 9.2 5.3 5.0
Kansai Nerolac 3.1 3.2 3.4 4.0 3.8 3.8 3.6

Fig. 4: Rahul Dravid in a recent Asian Paints Apcolite advertisement

Source: Company
Consumer Goods

Margin Set to Paint Cheery Picture

Asian Paints enjoys higher EBITDA margin compared to other organised players like Berger,
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, wide product variety and a large dealer network help negotiate better terms
with dealers. Operating leverage also kicks in owing to a large scale.

However, the company’s margin fluctuates depending upon raw material prices (in turn
depends on INR movement). The other concern on margin is increase in power and diesel
prices.

In H2FY14, Asian Paints’ other expenses shot up due to higher transportation cost on
account of strike at the Sriperumbudur plant. Margin is likely to improve in FY15 given that
transportation cost will normalise (will not need to transport paints from other factories to
areas catered by the Sriperumbudur plant as the issue has been resolved; strike was called
off in April 2014 ).

We expect margin to improve due to: (i) stabilising INR; (ii) operating leverage due to pick
up in demand and enhanced capacity utilisation; and (iii) premiumisation.

Table 7: EBITDA margin profile of paint companies
(%) FY07 FY08 FY09 FY10 FY11 FY12 FY13
Asian Paints 15.1 16.4 13.2 19.8 18.3 16.2 16.5
Berger Paints 9.9 10.1 8.4 10.5 10.6 10.4 11.1
Kansai Nobel 14.0 14.1 11.5 15.5 13.6 13.0 11.8
Akzo Nobel 11.1 10.4 11.6 12.4 12.0 8.7 8.4

Stabilising INR to curb raw material prices
INR movement affects gross margins of paint companies as key raw materials—TiO2 and
monomers—are indirectly crude linked. With a stable government in power we expect INR
to strengthen as economic growth revives. The currency has already appreciated from
INR68/USD in August 2014 to INR59 now with CAD under control.

Asian Paints directly imports ~30% of total raw material (largely TiO2). If we take into
account crude‐linked raw materials, ~50% of total COGS get impacted by INR movement.
Many other raw materials are also linked to crude oil prices.

Crude oil prices are currently steady at USD108 per barrel. Assuming crude to be at these
levels, it is only currency fluctuation that will affect raw material costs. On a conservative
basis, if we assume that ~40% of total raw material is affected by currency movement (both
directly and indirectly) keeping all other variables constant, then 5% INR movement leads to
6.7% impact on standalone EPS. When INR appreciates, gross margin benefit flows for two
to three quarters as price cut is taken with a lag. Thus, any INR appreciation will pave way
for margin expansion in FY15.

Asian Paints

Table 8: Effect of appreciation and depreciation of INR on margins
INR mn FY14 Rupee depreciates by 5% Rupee appreciates by 5%
Revenues 104,188 104,188 104,188
Cost of goods sold
Raw material consumed 57,587 58,739 56,435
Indigenous @60% 34,552 34,552 34,552
Imported @40% 23,035 24,187 21,883
Purchase of stock in trade 2,566 2,566 2,566
Changes in inventory (753) (753) (753)
Total COGS 59,400 60,551 58,248
Gross profits 44,788 43,637 45,940
Staff expenses 4,824 4,824 4,824
Other expenses 22,191 22,191 22,191
Total expenses (Excluding COGS) 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
Other income 1,737 1,737 1,737
Finance cost 261 261 261
PBT 17,125 15,974 18,277
Tax 5,335 4,976 5,694
Core PAT 11,790 10,997 12,583
EPS 12.3 11.5 13.1
% change in EPS (6.7) 6.7
% of sales
Gross margins (%) 43.0 41.9 44.1
EBITDA margins (%) 17.1 16.0 18.2
EBITDA margin (decline)/expansion (bps) (111) 111

Chart 22: INR appreciating against USD
70.0
64.0
(INR per USD)
58.0
52.0
46.0
40.0
Feb‐12
Feb‐13
Feb‐14
Aug‐11
Aug‐12
Aug‐13
May‐11
Nov‐11
May‐12
Nov‐12
May‐13
Nov‐13
May‐14


Consumer Goods

Operating leverage on robust volumes, enhanced capacity utilisation
Operating leverage is a function of improvement in sales and effective fixed cost
rationalisation. Asian Paints has been able to sustain strong volume growth of ~11% YoY in
FY14 despite economic slowdown. We expect it to gain from urban recovery as it has
commissioned a manufacturing facility in Khandala (in February 2014 with installed capacity
of 300,000KL per annum) and enhanced capacity at Rohtak plant (from 150,000KL per
annum to 200,000KL per annum in Q1FY14). With such huge capacity in place and likely
volume growth boost from recovery in urban demand and revival in GDP growth, optimal
capacity utilisation will kick in operating leverage.

The company’s 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
transportation costs) and power & diesel cost inflation (Khandala plant was initially running
on DG sets further heightening power costs). These issues have been resolved—strike at
Sriperumbudur plant has been called off and power issue at the Khandala plant has been
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, but rapid volume surge will lead to scale benefit and thereby spur margin.

Chart 23: Other expenditure as percentage of sale
26.0
24.0
(% of sales)
22.0
20.0
18.0
16.0
Q1FY04
Q3FY04
Q1FY05
Q3FY05
Q1FY06
Q3FY06
Q1FY07
Q3FY07
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Q1FY12
Q3FY12
Q1FY13
Q3FY13
Q1FY14
Q3FY14


Table 9: Asian Paints—Capacity expansion
Area Capacity
Feb‐14 Khandala Industrial Area, Maharashtra 3,00,000 KL pa
Apr‐12 Rohtak, Haryana 50000 KL pa; extended and started
Feb‐12 Rohtak, Haryana 150000 KL pa; shutdown
Apr‐10 Rohtak, Haryana 1,50,000 KL pa
Feb‐07 Taloja, Maharashtra 14000 KL pa
Apr‐06 Baddi, Himachal Pradesh 1800 KL pa; shutdown

Asian Paints

Margin to get premiumisation boost
With increasing per capita income and improvement in aspirational levels, consumers are
looking for better quality and are more willing to uptrade. Most consumer companies are
tapping this opportunity and focusing on premiumising their portfolios.

This trend has been apparent in the paint industry as well with consumers upgrading from
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
technologically advanced and differentiated premium products, strong dealer network to be
able to cater to demand and its strong brand equity.
“We expect that with a new
government coming in, things As per an AC Nielsen report, the paint industry is witnessing premiumisation as contribution
would improve in terms of of exterior emulsions has increased to 20.3% in 2012 from 13.5% in 2008 and that of interior
investment climate and emulsions increased to 16.8% in from 12.3% over the same period. The share of lower‐end
subsequently, the protective distempers declined to 11.5% in 2012 from 12.9% in 2008.
coating business, in which we are
ranked first, will naturally begin We expect premiumisation trend to increase at a faster pace, particularly in urban areas,
growing at a fast pace.” with urban growth revival on the cards and the new government’s emphasis on building 100
new cities. Improvement in per capita income of urban population will also boost
– Abhijit Roy, MD, premiumisation.
Berger Paints
Asian Paints has a strong premium portfolio with Royale, Apcolite, Protek, etc., in its stable.
Recently, the company launched a super premium offering Royale Aspira (INR600 per litre)
and re‐launched Apcolite as Apcolite Advanced 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. We expect it to benefit from improvement in mix and see improvement in margin.

Water‐based paints to boost margin
There has been a steady shift towards the use of water‐based paints from oil‐based paints
not only because of the environmental advantages, but also because of ease of application.
Consumers prefer water‐based paints as they dry quickly, emit less odour and are easier to
clean (with water). Solvent‐based paints, on the other hand, contain high levels of Volatile
Organic Compound (VOC), take longer to dry and emit strong odour. This has led to strong
consumer inclination towards water‐based paints/emulsions as evident from their increased
contribution to overall paint demand. From a paint manufacturer’s perspective, water‐
based paints carry 5‐7% higher margin than oil‐based paints. This is the reason behind
higher focus of paint companies on water‐based paints. As per industry reports, the share of
water‐based paints in the decorative paints market is ~52%, while balance 48% is solvent
based. Companies offer water‐based enamels that give look and feel of oil‐based enamels.

Asian Paints has the highest revenue contribution from water‐based emulsion and
distempers (more than 50%). Also, the company is increasingly introducing more products in
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‐
based paints bodes well for margin improvement. Another trigger for margin improvement
is uptrading of consumers from distempers to emulsions.

Consumer Goods

Apart from many water‐based emulsions like Royale, Apex Ultima, Apex Weather Proof
emulsions etc., Asian Paints also has water‐based enamels under the Asian Paints Premium
Semi Gloss Enamel brand. It also has water based wood finishes. We expect revenue
contribution of water‐based paints to improve riding higher focus led by innovations and
aggressive marketing.

Chart 24: Share of emulsions increasing over the years for the industry
39.0
31.6
24.2
(%)
16.8
9.4
2.0
Primers,
Thinners
Distemper
Wood Fin
Cement Paint
Putty
Enamel
Ext Emulsion
Int Emulsion
2008 2012

Source: AC Nielsen, Edelweiss research
Asian Paints

Anticipated Industrial Paint Segment Revival a Boon

Industrial paints contribute ~7% to Asian Paints’ total revenue and the segment continues to
remain affected by slowdown in automotive and industrial paints sectors. The company 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 non‐auto industrial segment, Asian Paints participates
through a JV (AP PPG) that covers protective coatings, floor coatings, road marking paints
and powder coatings segments. With the business‐friendly BJP government coming into
power, growth in the industrial segment is likely to pick up phenomenally, particularly in the
infrastructure sector. This will drive performance of the industrial coatings sector as there
will be an increase in the public and private investments due to the new government
coming in.
“The demand for industrial paint is
going to be driven by the pick‐up in
the automobile industry and Real estate revival to spur industrial paint volumes
growth in infrastructure. While repainting contributes 85‐90% to Asian Paints’ overall demand, 10‐15% is dependent
Infrastructure is at the lowest level on new real estate development. Since the past six‐eight months, real estate prices in a few
in the country today, hence we see metros and tier‐I cities have been under pressure. However, owing to improved sentiments
a sustained growth in the industrial due to a stable government at the Centre, property prices are expected to stabilise and
paints business." volumes are set to improve. This was highlighted in a latest research report by the Edelweiss
real estate team, ‘Real Estate‐Rising on a strong foundation’, dated May 16, 2014. Any
‐ H M Bharuka, MD, improvement in inflation, high GDP growth as well as reduction in interest rates will drive
Kansai Nerolac consumer demand, which should benefit the real estate sector.

The real estate sector has been gearing up in anticipation of a recovery by strengthening its
operations and improving balance sheets. New launches by real estate developers have
picked up speed over the past few years. Because of the expected recovery in the entire real
estate sector, completion of these projects is expected to accelerate. When this pent up
supply hits markets, it should drive volumes of paint companies like Asian Paints. Also, many
real estate developers have lined up attractive project launch pipelines.

Consumer Goods

Table 10: Key launches by major real estate developers
launch area
key Immediate launches (msf) INR psf Total Value
DLF
DLF Camelias ‐ 3.55msf total project size 1.4 26,000 36,400
DLF Crest ‐ 2.66msf total project size 0.8 16,000 12,800
DLF Ultima ‐ 2.2msf project 0.8 9,000 7,200
Oberoi Realty
Oasis Worli 0.6 45,000 25,650
Oberoi Exotica, Mulund 3.2 12,000 38,400
Oberoi Exquisite III 2.2 16,500 36,300
Borivali land 4.5 15,000 67,500
Sobha Developers
Sobha Silicon Oasis 1.5 5,500 8,250
Sobha Valley View 0.7 6,000 4,200
Kanakapura road 0.7 5,000 3,500
Godrej Properties
Panvel township ‐ 3.5msf total project size 1.2 5,250 6,458
Chembur redevelopment 1.0 17,500 16,625
Ghatkopar redevelopment 0.2 15,000 2,850
Gurgaon, Sector 79 0.8 5,500 4,510
Gurgaon, Sector 88A 0.5 6,250 2,875
Mahindra Lifespace
Sector 59, Gurgaon 0.4 10,000 4,400
Andheri project 0.4 13,500 4,995
Bannerghatta, Bengaluru 0.5 6,500 3,185
Kolte‐Patil Developers
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
Brigade Enterprises
Brigade Northridge, Yelahanka Junction 0.4 4,850 1,940
Brigade Panorama, Mysore Road ‐ Highway 0.9 5,200 4,792
Meadows Phase 2 , Bangalore 0.9 3,500 3,080
Exotica ‐ Tower 2 0.7 4,750 3,420

Revival in auto sector to spur industrial paints
With ~24% market share, PPG AP is the second largest player in the automotive OEM paint
segment after Kansai Nerolac. The company’s revenue clocked 10.3% CAGR over FY09‐13
and it has been profit‐making since inception. However, performance of the automotive
segment was dented in FY13 and FY14 owing to slowdown in the automobile industry. Total
vehicle production fell by 0.3% YoY in FY13 and 7.4% in FY14. As a result of the economic
slowdown, many first‐time buyers have delayed their car purchases. For example, first time
buyers fell to 37% for Maruti Suzuki compared to ~50% a couple of years back.

Asian Paints

Table 11: Auto production data suggests demand has been low since past two years
FY11 FY12 FY13 FY14
Passenger cars 2,442,820 2,536,625 2,426,509 2,310,336
% growth 3.8 (4.3) (4.8)
Utility vehicles 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 passenger vehicles 2,973,660 3,146,071 3,231,360 3,065,816
% growth 5.8 2.7 (5.1)
Heavy Commercial Vehicles 345,597 384,801 279,626 221,564
% growth 11.3 (27.3) (20.8)
Light Commercial Vehicles 413,973 544,335 552,335 476,983
% growth 31.5 1.5 (13.6)
Total commercial vehicles 759,570 929,136 831,961 698,547
% growth 22.3 (10.5) (16.0)
Total vehicle production 3,733,230 4,075,207 4,063,321 3,764,363
% growth 9.2 (0.3) (7.4)
Source: SIAM, Edelweiss research

While urban auto demand has been soft, rural auto demand has been strong since the past
few years. Lackluster economic growth had impacted job creation, while wages had been
increasing in line with inflation. Thus, discretionary purchasing power, especially in urban
areas, had taken a hit.

Chart 25: Rural wages growing faster than national income

25.0
19.2
13.4
(%, yoy)
7.6
1.8
(4.0)
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Rural wages National Income

Source: CMIE, Edelweiss research

Consumer Goods

Management commentary on automotive segment in FY14
Q1FY14: Industrial and automotive segments remained under pressure due to tough
business conditions. These segments’ margins dipped QoQ.

Q2FY14: Industrial and automotive segments continued to remain under pressure.
Q3FY14: Demand continued to be weak in industrial segment. In the industrial space, non‐
automotive segment continued to face slowdown pressure. However, growth in the
automotive segment was decent in the refinishing space (OEMs continued to face sluggish
demand). Asian Paints raised prices in this portfolio to protect margin.

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
better operational efficiencies.

Historical analysis suggests that auto sector recovery is likely
Analysis of auto sector demand shows that in the past three recovery cycles of FY99, FY03
and FY09, when GDP growth recovered by ~200bps, auto demand surged by more than 20%
CAGR over two years post trough year. The primary demand drivers for the auto sector are
improvement in GDP, high liquidity and improvement in purchasing power. We expect GDP
growth to improve to 5.4%, 6.3% and 7.5% in FY15E, FY16E and FY17E, respectively, from
~4.5% in Q4FY14. Also, improved consumer sentiment due to a stable government should
drive job creation and wage hikes. Analysis by the Edelweiss auto sector research team in
the report ‘Automobiles ‐ Get Set, Go!!’ dated May 19, 2014 indicates current underlying
conditions are similar to earlier cycles, thereby infusing confidence of recovery in auto
demand along with GDP recovery.

Chart 26: Auto volume trend vs GDP recovery from FY98‐00 Chart 27: Auto volume trend vs GDP recovery from FY03‐05
FY98 ‐ 00 400
FY03 ‐ 05 40
400 40
FY03
GDP (bps over trough period)
340 34 340 GDP 6.8% 34
Vol. CAGR (% YoY)
Vol. CAGR (% YoY)
280 28 280 28
FY98
GDP 4.8%
220 22 220 22
160 16 160 16
100 10 100 10
PV 2W M&HCV GDP (LHS) PV 2W M&HCV

Source: Bloomberg, SIAM, Edelweiss research

Asian Paints

Chart 28: Auto volume trend vs GDP recovery from FY09‐11
400
FY09 ‐ 11 40.0
340 34.0
Vol. CAGR (% YoY)
280 28.0
220 22.0
FY09
GDP 6.7%
160 16.0
100 10.0
GDP (LHS) PV 2W M&HCV

Source: Bloomberg, Companies, Edelweiss research

Chart 29: Edelweiss estimate of ~280bps of recovery in GDP over FY14‐17E
10.5
9.0
GDP (% YoY)
7.5
6.0
4.5
3.0
FY15E
FY16E
FY17E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14


Consumer Goods

International Stroke: Betting Big on Africa

International operations contribute ~13% to Asian Paints’ overall consolidated sales. The
company’s international business is divided into four regions—Caribbean (Barbados,
Jamaica, Trinidad and Tobago), Middle East (Egypt, Oman, Bahrain and UAE), Asia
(Bangladesh, Nepal, Sri Lanka and Singapore) and South Pacific (Fiji, Solomon Islands,
Samoa, Tonga and Vanuatu). The largest contribution comes from Middle East, which
contributes 51%, followed by Asia with 27%, Caribbean with 14% and South Pacific with 8%.
Though international business contributes only 13% to overall revenue, it presents a huge
growth opportunity as the company is among the top three players in all international
markets (except in Singapore) in decorative paints.

In FY14, growth was commendable in the international business led by Bangladesh and
Nepal in Asia and UAE in the Middle East. Bangladesh presents a big FMCG opportunity with
many consumer companies trying to capture market share. Asian Paints is a distant No.2
player in Bangladesh with 14% market share and operates at low margin compared to the
leader, Berger Paints. The company’s capacity expansion in the region to 24,000KL per
annum will further help drive margin through operating leverage benefit. Middle East grew
only 14.5% YoY in FY14 as it has been bearing the brunt of political turmoil in Egypt and
Bahrain. We believe this slowdown is temporary and growth will return, particularly in Egypt
(most populous and second largest country in Arab world). Asian Paints is present in Egypt
through SCIB Paints. FY14 international business PBT grew 4.6% YoY. Excluding Egypt, PBT
growth would have been 16.2% YoY, indicating improvement in international business once
the political situation in Egypt improves.

Chart 30: International sales contribution by different geographies
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY08 FY09 FY10 FY11 FY12 FY13
Caribbean Middle East Asia South Pacific


Asian Paints

Table 12: International geographies—Sales growth (% YoY)
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Caribbean (1.4) 8.7 2.0 (3.0) 9.5 15.0 7.9
Middle East 22.6 45.8 15.0 (4.0) 12.1 26.0 14.5
Asia ‐ ‐ ‐ 20.0 31.0 21.0 21.0
South Asia 33.4 38.5 28.0 ‐ ‐ ‐ ‐
South East Asia 5.2 19.3 ‐ ‐ ‐ ‐ ‐
South Pacific (7.2) 13.2 7.0 4.0 20.9 25.0 16.3

Asian Paints is following the footsteps of other consumer companies like Godrej Consumers
and Marico and has marked its entry in Africa by acquiring 51% equity in Kadisco Chemical
Industry, Ethiopia. This acquisition will help the company enter other markets of Africa.
Africa is an immense opportunity for Asian Paints and with its scale and size, the company
can exploit this untapped market, which is growing at a fast pace (especially Nigeria).

Africa’s GDP is growing at more than 5% and it can be compared to the situation that
existed in India 10 years ago. Africa is well poised for growth with six of the 10 regions with
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, the paint sector is likely to post robust growth. Though North Africa is facing some
issues, sub Saharan Africa is growing well. Nigeria, which is growing at more than 7% (set to
become the largest economy in Africa), stands second to South Africa.

Table 13: Africa—Paint industry size
Region Paints and coating market size (USD mn)
North Africa 910
South Africa 603
East Africa 111
West Africa 258
Source: Frost & Sullivan, Edelweiss research

Most consumer companies, having realised Africa’s potential well in advance, have built
presence in the region.

Table 14: Africa’s contribution to consumer companies
Company Contribution from African region (%)
GCPL 12.0
Dabur 7.0
Marico (in South Africa) 9.0
Emami 1.0

Africa has a large population which is young, has good GDP growth potential and has a large
portion of unorganised market, making it a lucrative play for consumer companies.

Consumer Goods

Chart 31: Africa—Paint market in different geographies
420,000
336,000
(tonnes)
252,000
168,000
84,000
0
Morocco
South Africa
Algeria
Tunisia
Senegal
Egypt
Zambia
Nambia
2011 2016E

Source: IRL, Edelweiss research

Chart 32: Africa—Volume share of different geographies in paints
Zambia
Tunisia
1%
Senegal 10%
3% South Africa
23%
Nambia
1%
Morocco
16%
Algeria
21%
Egypt
25%

Source: IRL, Edelweiss research

Asian Paints

Home Improvement: The New Frontier

Asian Paints ventured into the home improvement segment by the acquisition of Sleek, a
modular kitchen brand. It recently entered into a binding agreement with Ess Ess Bathroom
Products (Ess Ess) to acquire its entire front‐end sales business including brands, network
“Home improvement is an aligned and sales infrastructure. ~10% of Asian Paints dealers are already selling bathroom fittings
business. The basic customer is the and this synergy effect will help them to increase the sales of Ess Ess products. Asian Paints
same–the homeowner. This is a will benefit by its entry into these aligned business as it will get the synergy of its vast dealer
large potential market that’s network which can also be used for the home improvement segment. Globally, Masco Corp
growing. Eventually, we want to be in US has successfully accomplished similar diversification into a home décor company from
in all areas of home improvement– a plumbing products company (details in Annexure I).
from furnishings to bathrooms.”
In the near future, in our view, the company may acquire tiles and sanitary ware companies
‐ K.B.S. Anand, MD and CEO, as these portfolios are necessary for it to be a market leader in the décor business and these
Asian Paints businesses can also get synergies from the its vast dealer network. With presence in paints,
water proofing, modular kitchens and bath fittings, Asian Paints aims to gain higher wallet
share of existing customers. With aspirations of being a complete home décor company,
Asian Paints may enter home furnishing and sanitary ware segments. As per PWC’s India
Home Furnishing Market Forecast and Opportunities, 2018, report the home furnishing
market is expected to post 8% CAGR over 2013‐18 riding higher per capita incomes and
increase in the number of working women.

Modular kitchen (Sleek)
In 2012, household consumption in India grew at 12%, leading to growth in the modular
kitchen market. The domestic modular kitchen market is at a nascent at INR21bn (in 2012)
with the potential to grow up to INR60bn by 2016. The market segment is largely
unorganised (70‐75%) and is mostly cornered by local and small players. Unorganised
players include carpenters who design kitchens based on requirements of customers.

Generally, end users in this segment are urban middle class and affluent households. Due to
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
this segment include Godrej Interio, Sleek, Hafele, Gilma, Haecker and Veneta Cucine.

In November 2013, Asian Paints entered this segment with the acquisition of 51% stake in
Sleek Group (for eight month in FY14 sales stood at INR793mn, 3.9% PBIT margin), a leading
player in modular kitchen segment with seven years of experience. The company has 30
showrooms and a network of 250 dealers. The acquisition was a strategic fit for Asian Paints
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
become a complete kitchen solutions provider. The company has tied up with the world’s
best modular kitchen companies like Grass (Austria), Lamp (Japan) Scilm (America), Sige,
Technoinoc and Airforce (Italy).

Consumer Goods

Chart 33: Modular kitchens—Organised and unorganised players’ share
Organized
Sector
30%
Unorganized
Sector
70%

Source: PWC, Edelweiss research
Chart 34: Modular kitchens—Market size
72.0
60.8
49.6
(INR bn)
38.4
27.2
16.0
2012 2016

Source: PWC, Edelweiss research

Wall papers (Nilaya)
Wall papers can be used to decorate interiors and ceilings of homes and offices. Wall papers
come in various styles and designs and can be easily applied (approximately 8 hours)
without any dampness and leakages and are easy to maintain. People use walls as a canvass
to express their imagination, thus making wall papers an attractive segment for the paint
industry. Digital printed wall coverings are the latest innovation in the industry. Wall papers
attract customers looking for convenience and time saving (fixing takes eight hours
compared to 10‐12 days for painting). People with breathing problems, skin problems or
odour allergies also prefer wall papers over painting. Asian Paints has entered this space
with Nilaya (launched in February 2014 at Taj Palace). However, a key issue with wall papers
is that they are not suitable for walls with leakage problems.

Asian Paints

Wall proofing (SmartCare)
Wall proofing is another solution provided by the paint industry. Dampness affects exterior
as well as interior walls and this problem is exacerbated during monsoon. Consumers expect
painting companies to provide a dampness solution along with painting. Initially, Asian
Paints directed consumers to unorganised players or other companies like Pidilite, which
provided water proofing solutions. However, recently it entered the construction chemicals
space under which it offers water proofing solutions—SmartCare products like damp block
(interior waterproofing solutions), damp proof (exterior waterproof coating) and crack seal
(crack filing compound).

Bathroom fittings (Ess Ess)
The Indian bathroom fittings market is approximately ~INR45bn, of which 15% belongs to
the premium segment. Indian brands like CERA, Jaguar and Hindustan Sanitaryware are
dominant players in the market. Rapid urbanisation is leading to higher standards of living,
which results in higher demand for super‐premium or luxury bathroom products.

Asian Paints has entered into a binding agreement with Ess Ess to acquire its entire front‐
end sales business including brands, network and sales infrastructure. Ess Ess is an
established player in the bath and wash business segments in India. It has more than 1,500
dealers in India and eight branch offices (Mumbai, Delhi, Ahmedabad, Bengaluru, Chennai,
Kerala, Kolkata and Secunderabad) and a factory Himachal Pradesh. It exports to the UK, Far
East and Middle East. This move by Asian Paints is in line with its strategy to be a one‐stop
solution in the home décor space. Ess Ess is a profitable entity. We expect Asian Paints to
utilise its paints distribution network to drive Ess Ess sales. We also expect it to drive
marketing of Ess Ess (currently low brand equity) and take it to the next level. This has been
the case with Sleek, which saw marked increase in advertising post acquisition.

Consumer Goods

GST Implementation: A Key Trigger

GST, which was to be implemented in April 2010, has not seen the light of the day as yet.
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
taxation like central excise, additional excise, value‐added tax, octroi and service tax that are
levied by the Centre and state governments and replace them by a uniform tax.

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 moved out of the factory and also during retail sales. GST will
abolish this cascading tax as under it tax will be levied at one point i.e., point of sale. Thus,
lower incidence of tax will lead to reduction in manufacturing cost, which will result in low
cost of production. It may also lead to lower prices, which will boost consumption. Lower
prices will also help Asian Paints wrest market share from unorganised players as consumers
of latter could shift towards organised players because of lower prices. ~35% of the paint
industry is unorganised and as it too will come under GST ambit, it will be a level playing
field with organised players like Asian Paints which have got high economies of scale.

Under the current regime, CST is levied on inter‐state sale of goods, but stock transfer
between factory and C&F agent/depot of the same entity is not liable for CST. To reduce the
CST liability many companies currently operate depots/C&F agents in all major states to
avoid CST. The result is increased number of depots and warehouses, which leads to cost
equal to 1‐2% of revenue towards maintenance of these facilities. With the introduction of
GST, CST will be phased out and companies need not bear these additional infrastructure
costs. A company can then have only four or five big warehouses from where it can supply
the goods to dealers without having to pay taxes for inter‐state sale of goods. Asian Paints,
which has around 110 depots, will have to evaluate whether the tax savings from reduction
of depots is higher than the increase in transportation cost because of this.

Asian Paints

Robust Growth Momentum; Reiterate ‘BUY’

Urban growth in India is set to revive with a stronger/ stable government coming to power,
which had, in its election manifesto, outlined a strong focus on urban growth recovery,
EPS likely to post 22% CAGR over infrastructure development, faster execution, development of 100 new cities, among other
FY14‐17E initiatives. We believe Asian Paints is well poised to reap benefits of this impending urban
recovery riding its strong market share, pricing power, brand strength and wide spread
dealer network (2x next player).

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 1.5‐2.0x GDP. We expect the company’s
volumes to clock 13% CAGR over FY14‐17E (~8% over FY12‐14) anchored by the recovery in
urban sentiments, GDP revival and toothless competition (global behemoths Akzo, Nippon,
Jotun failed to make headway in India). Additionally, low per capita paint consumption in
India (one fourth China’s) and reduction in repainting cycle (5 years now from 7 years a
decade ago) render the company the best play on paints.

Industrial segment growth, which has languished over the past few quarters, is likely to pick
up, especially in the automotive space (forms large part of non‐decorative segment), led by
likely improvement in discretionary spends and higher investments by the new government.
We expect distribution synergies between home décor segments and the existing paint
distribution network. Also, investments in home décor brands (Sleek, Ess Ess) will help these
businesses gain scale riding Asian Paints’ well entrenched brand equity.

Though Asian Paints is trading at close to its all time high 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 FY14‐17E and metamorphosis into a home
décor company, we expect valuations to remain rich. On account of strong performance
coupled with investment in new growth drivers (construction chemicals, wall paper, Sleek,
Ess Ess), we assign 31x to FY17E earnings (against 3 year average 1‐year forward PE of ~31x)
with two‐year target price of INR720. We maintain ‘BUY/Sector Outperformer’ rating.

Chart. 35: One year forward P/E band
650
35x
530
30x
410 25x
(INR)
20x
290
15x
170 10x
50
May-10
May-11
May-12
May-13
May-14
Nov-10
Nov-11
Nov-12
Nov-13
Consumer Goods

Annexure I

Global companies venturing into home improvement
Masco Corporation
Masco Corporation was founded in 1929 when Alex Manoogian started the first
commercially successful Masco screw product factory in the US. Though it began as a screw
manufacturing factory, today it is the world’s leading manufacturer of home improvement
and décor 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, Masco Corporation entered the cabinet manufacturing 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
margin did well for decorative business compared to the plumbing business.

Chart 1: Masco: Contribution from different businesses
100.0
80.0
60.0
(%)
40.0
20.0
0.0
CY 2000
CY 2001
CY 2002
CY 2003
CY 2004
CY 2005
CY 2006
CY 2007
CY 2008
CY 2009
CY 2010
CY 2011
CY 2012
CY 2013
Plumbing Products Revenues Decorative Products Revenues
Installation and Other Services Cabinets and Related Products
Other Specialty Products

Asian Paints is following in its footsteps. It started as a paint company and is now trying to
diversify into different businesses, but having synergies in distribution network. Its aims is to
be a market leader in home improvement and décor space and to make this dream come
true, it has acquired Sleek, a modular kitchen company, and Ess Ess, a bathroom fittings
company. Though it is a long journey for Asian Paints to achieve its dream, we believe that
the innovative path taken by it is an excellent strategic move. In the near future, in our view,
Asian Paints may acquire companies in segment like tiles and sanitary ware as these
portfolios are necessary for it to be a market leader in the décor business.

Asian Paints

Fig. 1: Asian Paints’ planned entry in home décor space
Sleek,
Modular
Kitchen
Business
ESS ESS,
Furnishing Bathroom
Company
Fitting
(likely)
Business
Asian
Paints
Sanitary
Glass ware
Company
Company
(?)
(likely)
Tiles
Company
(likely)

PPG Industries
The journey for Pittsburgh Plate Glass Company (PPG) started way back in 1883 when Capt.
John Ford and John Pitcam decided to establish a plate glass factory in Creighton, United
States. The company has rapidly expanded, serving clients throughout the world. Though it
started as a plate glass factory, it vertically integrated its portfolio with the construction of
an alkali plant in Barberton, Ohio, in 1899 which provided raw material for glass making. For
the first time in 1900s, PPG diversified its product range by moving into coatings business
with the acquisition of Wisconsin‐based Patton Paint Company. Though being a globally
famous glass company which focused continuously on product innovation and quality, today
it is also a leading global coating company. PPG’s excellent strategic plan to diversify into
different businesses, but via the same distribution channel, proved to be a good strategic fit
for the company.

Fig. 2: PPG Industries—Entry in diverse businesses
Introduced
DesignaColor Acquired
system, architectural
Founded Entered custom‐tinting coatings
plate glass optical consumer business of
factory business paints AkzoNobel
Diversifie Started its Acquired

d into fibres SigmaKalon
coating glass Group, a
business business worldwide
coatings
producer

Consumer Goods

Annexure II

El Nino and its impact on monsoon
Monsoon plays an important role in deciding the number of paint days available for any
household as exterior painting is not possible during monsoon. Q2FY14 witnessed a strong
and prolonged 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
from a near term perspective.
1883 1990 1940 1952 1970 2000 2013
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 below‐normal 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 short‐term impact in terms of food inflation, price rise etc.
Also, a below‐normal monsoon will have a larger impact on growth in rural areas compared
to urban areas, so the negative impact of low monsoon is largely shielded by revival in urban
demand. Though a good monsoon is always beneficial for the overall economy, which in
turn benefits companies as well, El Nino does not mean that the impact will be reversed.
Historically, in the past decade, El Nino has not impacted Asian Paints’ growth and volume
growth has remained in double digits despite drought or below‐normal monsoon.

Chart 2: Asian Paints—Volume growth in El Nino years
17.0
15.4
13.8
(%)
12.2
10.6
9.0
2004 2009 2012
El Nino years in last decade

Source: Skymet, Edelweiss research

Asian Paints

Annexure III

Competitors
Berger Paints
Berger Paints (Berger) is the second largest paint company in India after Asian Paints. The
company has a strong brand name with brands like Berger Easy Clean, Silk, Rangoli,
WeatherCoat etc. The company has a strong distribution network of ~16,500 dealers and
has ~12,000 tinting machines. As far as international operations are concerned, Berger has
presence in Russia where it has a production facility with a manufacturing unit in Krasnodar.
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
acquired the decorative business of Sherwin Williams India. Berger recently commissioned
its Hindupur plant (total capacity of 300,000Kl) in Andhra Pradesh and will increase its
capacity in a phased manner.

Kansai Nerolac
Kasai Nerolac is the third largest decorative paint company in India. The company has good
brand strength, particularly in the interior paints segment with brands like Nerolac
Impressions, Nerolac HD etc. It has high exposure to the industrial paints segment (~45%
contribution), which has resulted in the company’s subdued performance. The company has
taken significant initiatives to improve revenue from the decorative business. It recently
launched HD paints under Nerolac and was the first player to launch eco‐friendly Zero VOC,
low VOC, low odour range of decorative paints.

Akzo Nobel
Akzo Nobel, the world’s No.1 paint company, is trying to increase market share in India, but
has failed to do so. To achieve this, it has launched some innovative products and has also
increased production. It has started a new greenfield facility which commenced production
in 2013 and will supply a range of decorative paints. It is also planning to improve
distribution channels for the Dulux brand.

Jotun India
The Jotun Group, which began operations in 2005 in India, is one of the world’s largest paint
groups with 74 companies and 29 production facilities. Its first production plant was opened
in Ranjangaoh, 50km outside Mumbai, which has a capacity of 40ML of paint. Currently, it is
not an immediate threat to other companies in the paints industry. Unlike other paint
industries, it uses the shop‐in‐shop concept through which it sells paints. However, in the
past few years, no advertising or promotion was done and hence the brand of Jotun India
has eroded in consumer’s mind.

Nippon India
Nippon India, another major competitor of Asian Paints, entered India in 2006 and is among
the leading paint manufacturers in Asia. In August 2013, it launched odourless paint Nippon
Paint Odour‐Less AirCare, which is the first paint product that uses carbon technology to
clean the air. Though it is continuously innovating and developing products, it has failed to
take away Asian Paints’ market share.

Consumer Goods

Company Description
Asian Paints is the largest paints company in India and figures among the top 10 players in
the world. The company has 25 manufacturing plants in 17 countries, serving consumers in
65 countries globally. The decorative segment accounts for almost 70% of the overall paints
market. Paints sales in domestic and international markets contributed 81% and 13%,
respectively, to the company’s consolidated revenue; chemical sales accounted for the
balance. Among Asian Paints’ international businesses, while the Middle East contributes
the lion’s share at 51% to revenue, the Caribbean contributes 14%. Asia and South Pacific
contribute 27% and 8%, respectively.

Investment Theme
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% of decorative demand, is on account of good demand in rural and small towns. Further,
expected growth in construction activity over the next five years creates opportunity for
fresh painting. Though Asian Paints is expected to grow ahead of the market on account of
its pricing strategy at the lower end, higher growth in premium products, brand equity and
distribution strength, moderation in real estate and auto segments can act as barrier.

Key Risks
A slowdown in the economy is the biggest risk for the paints industry, as about 75% of
demand for decorative paints arises from repainting, which, in turn, depends heavily on the
country’s economic condition.

A rise in crude oil price and rupee depreciation could hurt the company’s margin as crude
derivatives account for majority of Asian Paints’ input costs.
Asian Paints

Financial Statements
Key Assumption Income statement (INR mn)
Yearto March FY13 FY14 FY15E FY16E FY17E Year to March FY13 FY14 FY15E FY16E FY17E
Macro Assumptions Net revenues 109,386 127,148 150,344 178,301 213,695
GDP(Y‐o‐Y %) 5.0 4.8 5.4 6.3 7.5
Cost of materials 64,130 73,407 86,601 102,521 122,750
Inflation (Avg) 7.4 6.2 5.5 6.0 6.0
Gross profit 45,256 53,741 63,742 75,780 90,945
Repo rate (exit rate) 7.50 8.0 7.8 7.3 6.5
USD/INR (Avg) 54.5 60.5 58.0 56.0 55.0 Employee costs 6,236 7,597 9,113 10,803 13,051
Ad & sales costs 5,227 6,547 7,764 9,208 11,050
Company Others 16,474 19,618 22,949 27,133 32,011
Sales assumptions 0.1 0.1 1.1 2.1 3.1 EBITDA 17,320 19,979 23,916 28,636 34,832
Volume growth ‐ 4.5 11.0 11.0 13.0 15.0 Depreciation 1,546 2,457 2,509 2,867 3,224
standalone
EBIT 15,774 17,522 21,407 25,770 31,608
Pricing change ‐ standalone 10.4 6.0 6.0 6.0 6.0
Other income 1,145 1,342 1,615 1,842 2,216
Subsidiary net sales growth 19.9 13.9 19.9 18.4 16.4
EBIT incl. other income 16,919 18,865 23,023 27,612 33,824
Cost assumptions 0.1 0.1 1.1 2.1 3.1
Net interest charges 367 422 435 389 346
Titanium Dioxide (as % of 32.3 31.1 31.1 32.2 33.2
COGS) PBT 16,552 18,442 22,588 27,223 33,478
Crude Linked RM (as % of 17.3 19.1 20.1 21.0 22.0 Provision for taxation 4,957 5,715 7,002 8,439 10,378
COGS) Core PAT 11,595 12,727 15,585 18,784 23,100
Packing Material (as % of 14.9 14.3 14.4 14.3 14.2 Extraordinary item ‐ (100) (280) ‐ ‐
COGS) Minority (456) (440) (545) (657) (809)
COGS as % of sales (Consol) 58.6 57.7 57.6 57.5 57.4
Adjusted PAT 11,139 12,188 14,760 18,126 22,292
COGS as % of sales 57.9 58.0 56.4 56.3 55.8
Eshares outstanding (mn) 959 959 959 959 959
(standalone)
EPS (INR) basic 11.6 12.8 15.7 18.9 23.2
Staff costs as % of sales 5.7 6.0 6.1 6.1 6.1
(Consol) Diluted shares (mn) 959.2 959.2 959.2 959.2 959.2
Staff costs as % of sales 4.8 5.3 5.4 5.4 5.4 EPS (INR) fully diluted 11.6 12.7 15.4 18.9 23.2
(standalone) CEPS (INR) 13.7 15.8 18.9 22.6 27.4
A&P as % of sales (Consol) 4.8 5.1 5.2 5.2 5.2 DPS 4.6 5.3 6.5 7.9 9.8
A&P as % of sales 4.8 5.3 5.4 5.4 5.4 Dividend payout ratio (%) 39.6 41.7 42.0 42.0 42.0
(Domestic)
Tax rate 29.9 31.0 31.0 31.0 31.0
Financial assumptions 0.1 0.1 1.1 2.1 3.1

Tax rate (Consol) 29.9 31.0 31.0 31.0 31.0 Common size metrics (%)
Debtor days 29 32 32 32 32 Year to March FY13 FY14 FY15E FY16E FY17E
Inventory days 98 103 103 103 103
Cost of materials 58.6 57.7 57.6 57.5 57.4
Payable days 77 87 88 88 88
Employee costs 5.7 6.0 6.1 6.1 6.1
Cash conversion cycle 50 48 47 47 47
(days) Advertising & sales costs 4.8 5.1 5.2 5.2 5.2
Depreciation as % of gross 5.6 7.0 6.5 6.5 6.5 Other general expenditure 15.1 15.4 15.3 15.2 15.0
block EBITDA margin 15.8 15.7 15.9 16.1 16.3
Capex 7230 2,000 5,500 5,500 5,500 EBIT margin 14.4 13.8 14.2 14.5 14.8
Dividend as % of net profit 39.6 41.7 42.0 42.0 42.0 Net profit margin 10.2 9.7 10.0 10.2 10.4
Growth metrics (%)
Year to March FY13 FY14 FY15E FY16E FY17E
Revenues 13.6 16.2 18.2 18.6 19.9
EBITDA 14.8 15.4 19.7 19.7 21.6
PBT 13.8 11.4 22.5 20.5 23.0
Net profit 12.7 9.4 21.1 22.8 23.0
EPS 12.7 9.4 21.1 22.8 23.0
Consumer Goods
Balance sheet Cash flow metric
As on 31st March FY13 FY14E FY15E FY16E FY17E Year to March FY13 FY14E FY15E FY16E FY17E
Share capital 959 959 959 959 959 Operating cash flow 10,989 14,954 16,138 18,934 22,735
Reserves 32,884 39,124 46,631 55,850 67,187 Financing cash flow (6,007) (6,320) (8,168) (9,497) (11,500)
Shareholders' funds 33,843 40,083 47,590 56,809 68,146 Investing cash flow (7,970) (2,808) (5,700) (5,700) (5,700)
Minority interest 1,608 2,047 2,593 3,250 4,059 Change in cash (2,989) 5,826 2,270 3,738 5,536
Borrowings 2,510 2,660 2,460 2,260 2,060 Capex (7,230) (2,000) (5,500) (5,500) (5,500)
Deferred tax liability 1,544 1,544 1,544 1,544 1,544 Dividends paid (5,155) (5,948) (7,253) (8,907) (10,954)
Sources of funds 39,504 46,334 54,186 63,862 75,808
Total net fixed assets 24,560 24,911 28,102 30,935 33,411 Ratios
Goodwill on consolidation 442 442 442 442 442 Year to March FY13 FY14E FY15E FY16E FY17E
Non current investments 1,501 1,501 1,501 1,501 1,501 ROAE (%) 36.3 33.0 33.7 34.7 35.7
Current investments 1,306 1,306 1,306 1,306 1,306 ROACE (%) 47.6 43.7 45.1 45.8 47.2
Cash and cash equivalents 7,520 13,346 15,616 19,353 24,889 Debtor days 29 32 32 32 32
Inventories 18,303 20,699 24,438 28,931 34,639 Inventory days 98 103 103 103 103
Sundry debtors 9,809 11,102 13,181 15,632 18,735 Payable days 77 87 88 88 88
Loans & advances 3,211 3,211 3,211 3,211 3,211 Cash conversn cycle (days) 50 48 47 47 47
Other assets 1,215 1,215 1,215 1,215 1,215 Current ratio 1.5 1.6 1.7 1.8 1.9
Total c. assets (ex cash) 32,538 36,227 42,045 48,988 57,800 Debt/EBITDA 0.1 0.1 0.1 0.1 0.1
Trade payable 14,416 17,453 20,879 24,717 29,595 Debt/Equity 0.1 0.1 0.1 0.0 0.0
Other c. liabilities & prov 13,946 13,946 13,946 13,946 13,946 Adjusted debt/equity 0.1 0.1 0.1 0.0 0.0
Total c.liabilities & prov 28,362 31,399 34,826 38,664 43,541 Interest coverage (x) 46.2 44.7 52.9 70.9 97.9
Net current assets (ex cash) 4,176 4,828 7,219 10,325 14,259
Uses of funds 39,504 46,334 54,186 63,862 75,808 Operating ratios
BV (INR) 35 41.8 49.6 59.2 71.0 Year to March FY13 FY14E FY15E FY16E FY17E
Total asset turnover 3.0 3.0 3.0 3.0 3.1
Free cash flow (INR mn) Fixed asset turnover 6.0 5.4 6.0 6.4 7.1
Year to March FY13 FY14E FY15E FY16E FY17E Equity turnover 3.6 3.4 3.4 3.4 3.4
Net profit 11,139 12,188 14,760 18,126 22,292
Add: Non cash charge 2,369 3,418 3,770 3,913 4,378 Valuation parameters
Depreciation 1,546 2,457 2,509 2,867 3,224 Year to March FY13 FY14E FY15E FY16E FY17E
Others 823 961 1,261 1,047 1,154 Diluted EPS (INR) 11.6 12.7 15.4 18.9 23.2
Gross cash flow 13,508 15,606 18,530 22,039 26,670 Y‐o‐Y growth (%) 12.7 9.4 21.1 22.8 23.0
Less:Changes in WC 2,519 652 2,392 3,105 3,934 CEPS (INR) 13.7 15.8 18.9 22.6 27.4
Cash from operations 10,989 14,954 16,138 18,934 22,735 Diluted P/E (x) 43.8 39.8 33.1 26.9 21.9
Less: Capex 7,230 2,000 5,500 5,500 5,500 Price/BV (x) 14.4 12.1 10.3 8.6 7.2
Free cash flow 3,759 12,954 10,638 13,434 17,235 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
Dividend yield (%) 0.9 1.0 1.3 1.6 1.9
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)
Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
Asian Paints 8,236 33.1 27.1 19.9 16.6 33.5 34.4
Akzo Nobel India Ltd 795 24.4 23.7 17.5 15.2 18.4 21.1
Berger Paints India Ltd 1,419 32.5 27.6 18.8 15.8 23.9 26.1
Hindustan Unilever 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
Kansai Nerolac Paints Ltd 1,243 29.2 23.9 16.9 14.1 16.0 17.7
Pidilite Industries 2,683 28.6 23.0 19.0 15.1 26.1 27.3
United Spirits 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
Asian Paints

Additional Data
Directors Data
Ashwin Choksi Non‐executive Chairman Ashwin Dani Non‐executive Vice Chairman
Abhay Vakil Non‐executive Director K.B.S. Anand MD & CEO
Mahendra Choksi Non‐executive Director Amar Vakil Non‐executive Director
Mrs Ina Dani Non‐executive Director Ms. Tarjani Vakil Non‐Executive Independent Director
Dipankar Basu Non‐Executive Independent Director Deepak Satwalekar Non‐Executive Independent Director
R. A. Shah Non‐Executive Independent Director S. Sivaram Non‐Executive Independent Director
Mahendra Shah Non‐Executive Independent Director S. Ramadorai Non‐Executive Independent Director

M. K. Sharma Non‐Executive Independent Director

Auditors ‐ Shah & Co‐ Chareted Accountants, B S R & Associates ‐ Charted Accountants
*as per last annual report

Top 10 holdings
Perc. Holding Perc. Holding
Life Insurance Corp Of India 6.41 Smiti Holding & Trading Co 5.64
Isis Holding & Trading 5.51 Geetanjali Trading & Inv 5.14
Ojasvi Trading Pvt Ltd 4.90 Elcid Investments Limited 2.95
Oppenheimerfunds Incorporated 2.32 Sudhanava Inv & Trading 1.99
Rupen Investment & Indus 1.95 Satyadharma Invst & Trdg 1.91
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
07 Feb 2014 Suprasad Investments and Trading Company Private Limited Buy 30000.00
02 Dec 2013 Sudhanva Investments And Trading Pvt. Ltd. Sell 116500.00
*in last one year
RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Asian Paints BUY SO M Bajaj Corp HOLD SU H
Colgate HOLD SP M Dabur BUY SO M
Emami BUY SP H GlaxoSmithKline Consumer HOLD SP M
Healthcare
Godrej Consumer BUY SP H Hindustan Unilever REDUCE SU L
ITC BUY SO L Marico BUY SO M
Nestle Ltd HOLD SU L Pidilite Industries BUY SP M
United Spirits BUY SP H
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Asian Paints
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206
Nischal Maheshwari Co‐Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Consumer Goods
Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline
Consumer Healthcare, United Spirits

Recent Research
Date Company Title Price (INR) Recos
29‐May‐14 Pidilite Volumes robust; VAM singes 309 Buy

Industries margins;
Result Update
26‐May‐14 Colgate Margins bounce back; 1369 Hold
Palmolive volumes resilient;
Result Update
23‐May‐14 ITC Margins surprise; Budget 2014 343 Buy
awaited; Result Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 133 40 16 190 Buy appreciate more than 15% over a 12‐month period
* 1 stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 126 55 9
Consumer Goods
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Asian Paints
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COMPANY UPDATE

Boom in Expansion of Increased

GDP Forecasted Volume Growth Actual Volume Growth

Rice minimum support price (INR) Rice buffer stocks Rice buffer requirement norms

2,350 (Kg/Hectare) 1,120

Asian Paints Berger Kansai Akzo Shalimar

340 34 340 GDP 6.8% 34

Caribbean Middle East Asia South Pacific

Diversifie Started its Acquired

Financial assumptions 0.1 0.1 1.1 2.1 3.1

Company Absolute Relative Relative Company Absolute Relative Relative

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206

Nischal Maheshwari Co‐Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476

Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499

Date Company Title Price (INR) Recos

29‐May‐14 Pidilite Volumes robust; VAM singes 309 Buy

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