ASIAN PAINTS

How the paints giant has managed to outperform competition consistently in the Indian Decorative Paint industry.

CONTENTS
1. Executive Summary 2

2. The Paint Industry in India 3

3. The Decorative Paints industry: Industry Forces .. 5

4. Value Chain analysis for Asian Paints Decorative Paints business unit 8

5. Conclusion.14

6. Bibliography..16

7. Exhibits.17

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Executive Summary
Asian Paints Ltd (APL), the largest paint company in India since 1968 is a large business house with Strategic Business Units in the product range of Industrial Paints, Decorative Paints, the backward integrated Chemicals range and its International Business Unit.

The firm is known as a leader in the Decorative Paints industry and has been successfully dominating this market segment because of its consistent efforts along the value chain for differentiation and increasing gross margins. The firm, in-spite of operating in an unattractive industry, has been able to pioneer landmark innovations in the industry such as introduction of Dealer Tinting system (DTS), launch of Home Solutions, a one-stop painting service for homes and product innovations such as Royale Play, Kids world, to name a few.

All these strategic initiatives, combined with the companys efforts to increase operational efficiency through the use of state-of-the-art IT systems and use of highly automated manufacturing facilities, have helped the company gain a competitive edge with respect to its competitors.

This report presents the what-and-how of Asian Paints continual dominance of the Decorative Paints market segment, and ends with an indication of where the firm might be headed in the future.

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Paint Industry in India

Paint is a mixture of emulsions consisting of pigments suspended in a liquid medium for use as decorative or protective coatings. There is a large variety of paints used domestically as well as in industries (See Exhibit 3).

The Indian paints sector has been valued at Rs 210 Bn, having grown by 15% in FY10. However, this market is very fragmented and regional players dominate the local market space. The good news however is that the per capita consumption of paints in India stands at 0.5 kg/annum. When compared with the corresponding figures for China (1.6kg/ annum) and developed economies (up to 22kg/ annum), it clearly demonstrates the potential of the Indian market that still remains to be captured.2 Thus, this shows the enormous potential for the paints industry in India.

The unorganized sector controls around 35% of the paint market, with the organized sector accounting for the balance. In the unorganized segment, there are about 2,000 units having small and medium sized paints manufacturing plants. The 65% share of the organized segment is shared between the top players like Asian Paints (30%), Kansai Nerolac (20%), Berger Paints (19%) and ICI (12%). 2

Major segments in Decoratives include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc (See Exhibit 3). Decorative paints account for over 75% of the overall paint market in India.2 Asian Paints is the market leader in this segment.

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Demand for decorative paints arises from household painting; architectural and other display purposes and the drivers of demand are high disposable income, urbanization and standard of living. Demand in the festive season (September-December) is significant, as compared to other periods. This segment is price sensitive and is a higher margin business as compared to industrial segment, which includes automotive paints and other paints used for protective purposes.

About Asian Paints Ltd (APL)

Asian Paints is Indias largest paint company and Asias third largest paint company, with a turnover of Rs 77 billion. The group has an enviable reputation in the corporate world for professionalism, fast track growth, and building shareholder equity (See Exhibit 1). APL operates in 17 countries and has 23 paint manufacturing facilities in the world servicing consumers in over 65 countries.1

The company has come a long way since its small beginnings in 1942. Four friends who were willing to take on the worlds biggest, most famous paint companies operating in India at that time set it up as a partnership firm. Over the course of 25 years, Asian Paints became a corporate force and India's leading paint company. Driven by its strong consumer-focus and innovative spirit, the company has been the market leader in paints since 1968. Today it is double the size of any other paint company in India.1

Asian Paints manufactures a wide range of paints for Decorative and Industrial use through three strategic business units Decorative Business Unit (DBU) for decorative paints, Growth Business Unit (GBU) for Industrial paints and International Business Unit (IBU) for international

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operations. The company is present in the automotive paint sector via a 50:50 joint venture with PPG Industries, USA.

In Decorative paints, Asian Paints is present in all the four segments viz. Interior Wall Finishes, Exterior Wall Finishes, Enamels and Wood Finishes (see Exhibit 3)

The Decorative paint industry in India: Industry Forces

Threat of new Entrants

High

High Power of Suppliers Competitive Rivalry (High)

High Power of Buyers

High

Availability of Substitutes

Threat of New Entrants

Small unorganized players pose a huge threat to established nationalized paint companies. Because of the non capital intensive nature of manufacturing, these players enter and exit the market easily. Because of their efficient local distribution and low prices, they grab attention of the middle class people, who are a majority in India.

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Power of Suppliers

The number of raw materials required to manufacture paint is high (300-400). For most of these materials, major chemical companies such as Dow Chemicals, DuPont, BASF and Clariant are the major suppliers to paint companies. The volumes provided by the paint industry form a relatively small fraction of the production at the suppliers. Therefore the bargaining power of suppliers is high.

Power of Buyers

The paint industry in India is competitive with multinational layers (Asian Paints, Akzo Nobel, Kansai Nerolac etc.), national players (Shalimar Paints, Rajdoot paints, Maharani paints etc.) and local unorganized players. This gives the buyer a number of options to choose from, thus increasing their bargaining power.

Availability of Substitutes

Traditional painting methods such as lime wash are substitutes for decorative paint especially for low income groups of the market mainly in villages and small towns. The ease of availability and low prices of such substitutes makes it a strong force against the attractiveness of this industry.

Competitive Rivalry

The competitive rivalry is high because of the large number of players in the market. Some of the major competitors in the market are

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1. KANSAI NEROLAC PAINTS LTD (KNPL) - (formerly known as Goodlass Nerolac Paints Ltd) is the largest industrial paint and second largest decorative paint company in India. It is a subsidiary of Kansai Nerolac paints, Japan. It is engaged in the decorative, industrial, automotive and powder coating business. Kansai Nerolac has been a cherished name in millions of households across the length and breadth of India.4 The company manufactures a diversified range of products for every surface and sells its decorative paints under the brand name Nerolac

2. AKZO NOBEL- This is a Dutch multinational and worlds largest paint company. In India, the company operates through recently acquired ICIs brand Dulux. It is the fourth largest player in the Decorative paints space in India.5

3. BERGER PAINTS INDIA LTD- This is an Indian paint company which operates chiefly in India headquartered in Kolkata. It has come a long way since its inception in the year 1923. Indias third largest decorative paint player, Berger Paints services the market through a distribution network of 82 stock points and 12,000 dealers.6 The company sells its decorative paints under the brand name Berger.

The above analysis of industry forces shows that the paint industry in India is not very lucrative. It is truly a marvel that APL has been a consistent exceptional performer in this industry. We aim to uncover the reasons for the success of APL in such unfavorable conditions.

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Porter s Value Chain Analysis for Asian Paints Ltd. Decorative Business Unit
The value chain diagram shown below highlights some of the key aspects of Asian Paints initiatives aligned with their overall strategy of Differentiation and increasing profit margins.

Firm Infrastructure Professional Management one of the first companies in India to hire fresh management graduates from premier Indian Business schools.

Human Resource Management Performance focused management system, Job descriptions designed to allow people to take more risks and hence innovate, strong L&D Technology Development In house development of all products, focus on Product and manufacturing process innovation
3-5 new products every year, a product for every price segment

Procurement Operational efficiency through IT solutions, Vertical Integration into chemicals like Penta Erythritol and Pthalic
Anhydride

High Margins

Inbound Logistics
Efficiency in distribution of more than 300 raw materials through integrated IT solutions,

Operations
Operational efficiency through IT solutions, focus on problem solving and quality control methods such as RCA, LEAN and FMEA at the factory level

Outbound Logistics
Largest distribution network among paint companies in India with over 22000 dealers, highly automated Distribution Centers

Sales and Marketing

Dealer Tinting system (DTS) introduction, strong brand equity.

Service
Customer Centricity, Retail and other initiatives

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The value chain model illustrates the breadth of activities undertaken by Asian Paints Ltd (APL) to gain competitive advantage. Below are the key activities and how they were able to make the desired impact:

Firm Infrastructure

APL was one of the first companies in India to hire fresh management graduates from premier Indian management institutes. This far sightedness of the founders of the company helped the company to build strong internal business processes, which helped the company gain competitive advantage by gaining operational efficiency in all processes, eventually leading to lower cost and higher margins for their products.

Human Resource Management

APL believes their employees to be their greatest assets. Hence, the company makes every effort to maintain an open and performance focused culture among its employees. The top management visits every company location across the world for an Open House with the employees of that location once every year. Also, the employee appraisal system is designed to be strictly performance based, thus allowing a culture of innovation in the company.

Apart from this, the company has a strong Learning and Development (L&D) focus with an excellent Training program, employee development program and succession planning program. The company also finances employees higher education, if they wish to do it part time while working.

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Technology Development

The Technology development department at APL employs more than 200 scientists and performs the following functions

a) Development of new products and improvement of existing products in coordination with the Marketing function.

b) New raw material vendor development in coordination with the Supply chain function.

c) Supports the Manufacturing function in process cycle time reduction and improves products by alternate/breakthrough processes.7

Hence, APL gains a competitive edge by in house development of all products and frequent innovation in products and processes, thus leading to differentiation from the competitors. The recent shift of the Technology development team in a state-of-the-art facility in Navi Mumbai shows the companys emphasis on this function and hence its strategic importance.

The company releases 3-5 new products every year and has a product in each price range for each category. This ensures a sustained product differentiation.

Information Technology Infrastructure at APL

APL has been a pioneer in the use of IT in Supply Chain Management in India. It has harnessed the powers of SAPs Enterprise Resource Planning (ERP) systems to integrate all its plants, regional distribution centers, outside processing centers and branches in India. All the company's paint plants in India, 350 raw material and intermediate goods suppliers, 140 packing material vendors, 6 regional distribution centers and 72 depots are integrated.3
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The company has also implemented i2s Supply Chain Management (SCM) system, which helps it in demand forecasting, deriving optimal plant, depot and SKU combinations, streamlining vendor relationships, reducing procurement costs and scheduling production processes for individual factories.3

The supply chain runs through a wide spectrum of functions right from materials planning to procurement to primary distribution. IT has played a pivotal role in improving operational efficiencies and creating agile procurement, production and delivery systems. It has also enhanced the flexibility of operations, lowered output time and reduced delivery costs, while improving customer-servicing levels and profitability.

The company was the first to implement SAPs ERP system in India and remains the only Indian company to integrate i2s SCM system with SAPs ERP system.3 All these measures have allowed APL to reduce finished goods inventory from 56 days to 30 days, to achieve 87-90% service levels for SKU sales at the location level and dramatically improved the debt-to-asset ratio of the company.8 Hence, leading to increased operational efficiency and service levels to customers, in turn leading to lower cost, higher margins and higher brand equity.

Operations

Apart from efficiencies derived from state-of-the-art IT system, APL has always invested in technology to improve operational efficiencies and working conditions for employees in their manufacturing locations. Some of the examples are

1) Automated Storage and retrieval system (ASRS) in all paint manufacturing facilities in India for storing and retrieving of finished goods for dispatch from the factory. This led to an increase

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of the dispatch efficiency by 30% across all the plants and decreased the manpower requirement for manual loading and unloading of trucks.

2) Adoption of energy efficient Swiss milling technology in two of their plants to decrease power consumption by 20% and increase throughput by 50% by employing the same manpower, again leading to an increase in operational efficiency.

3) APL has recently commissioned the largest and the most automated paint manufacturing facility in Asia and another such facility is scheduled to be commissioned in 2013. Such moves would further add to the economies of scale advantage of APL.

Outbound Logistics

One of APLs greatest strengths is its strong dealer network consisting of 22000 dealers across India, which is more than double the number of dealers of the next largest competitor.9 This provides it unparalleled superiority over competition in terms of market reach.

Sales and Marketing

APL was the first company in India to launch the dealer tinting system (DTS) under the brand Color World. This introduction of tinting machines at dealer locations and the subsequent movement towards DTS products resulted in

1. Expansion of color portfolio of APL, which now offers thousands of shades to its customers while manufacturing only a few dozen. A linear combination of the basic colors could be used to create any new shade. This improved customer loyalty by providing them with more choices and the freedom to choose on-site.

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2. Reduction in inventory at the dealer location because of the reduction in the number of SKUs. This move, thus, helped APL in gaining Dealer loyalty, which in turn caused the comparatively higher number of dealers as opposed to competition.

Apart from this, APL has built strong brand equity over the course of time by consistent advertising campaigns and service initiatives such as Paint Calculator, Ask Aparna etc. APLs brand equity allows it to offer lower trade discounts in a trade dominated industry leading to higher gross margins, which are relatively insulated even in difficult demand situations.

Service

Apart from this, APL has launched a number of retail initiatives and innovative concepts in the Indian paint industry such as setting up of Signature Store in Mumbai where consumers are educated about colors and how they can change homes, Home Solutions (painting solutions Service), Kids World (painting solutions for kids room), and Color Next (Prediction of Color Trends through in-depth research), just to name a few. All these initiatives have helped APL increase its brand equity and gain customer loyalty, which would be an asset in the long term for the company.

All these initiatives and efforts have resulted in exceptional year on year financial performance of the company (See Exhibit 3 for details of financial performance of APL as compared to its major competitors in the Indian Decorative paint market)

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Conclusion:
The key question that we wanted to address through this report was

Why Asian Paints has been the market leader in the Decorative paints segment in India from 1968 till date despite increasing competition from national as well as international players?

Through this report we have established that

APL has gained a competitive advantage in the Indian decorative paints industry by consistent efforts along the companys value chain for differentiation and higher margins.

These efforts have resulted in a continuous increase in revenues, net income and EPS for the company. Although the industry has grown consistently, major competitors such as Kansai Nerolac, Akzo Nobel and Berger have not been able to capitalize to the same extent as APL has because of the initiatives APL has taken to differentiate itself from competition (See Exhibit 4 for financial performance of APL as compared to its competitors).

In sum, the distinctive position of APL can be attributed to four factors, as shown in the figure below

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High Brand Equity

High Share of distribution resulting from a large dealer network

APL s sustained competitive advantage

Product, Retail and Service Innovations

Economies of scale resulting from Operational efficiencies

(This year) we persisted with our mission of building strengths and capabilities for the future which will help us achieve long term market growth to further consolidate our leadership position. The focus continues to be on initiatives to increase customer satisfaction, improving our product mix, expanding the dealer network and enhancing our manufacturing and supply chain capabilities Chairmans Letter, Annual Report 2010-11 - Ashwin Chokshi, Chairman, APL

The above statement shows the consistency in the strategy of the company and the coherence of this strategy with the analysis we have done for understanding the companys strategy.

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Bibliography:
1

http://www.asianpaints.com/corporate_information/company.aspx http://www.equitymaster.com/research-it/sector-info/paint/ http://www.asianpaints.com/corporate_information/supply_chain.aspx http://en.wikipedia.org/wiki/Kansai_Nerolac_Paints http://en.wikipedia.org/wiki/Akzo_Nobel http://en.wikipedia.org/wiki/Berger_Paints_India http://www.asianpaints.com/corporate_information/research_development.aspx Case Study on Asian Paints by JDA (The Supply Chain Company) - 2010 Pg 1 Report on Consumer Monopolies by Motilal Oswal December 2009 - Pg8

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Exhibits
Exhibit 1: Accolades for Asian Paints Ltd.

1. Ranked among the 200 Best Small Companies in the World by Forbes Global magazine, USA in 2002 and 2003 and amongst the top 200 Under a Billion Firms of Asian in 2005.

2. Awarded the "Sword of Honor" by the British Safety Council for all the paint plants in India. This award is considered as the pinnacle of achievement in safety across the world.

3. Received the Ernst & Young "Entrepreneur of the Year - Manufacturing" award in 2003.

4. The Asset - one of Asia's leading financial magazines ranked Asian Paints amongst the leading Indian companies in Corporate Governance in 2002 and 2005.

Exhibit 2: Major Raw Materials and Suppliers for APL

Raw Material Titanium Dioxide (Rutile Grade) Pigments Extenders Mineral Turpentine Oil Additives

Major Suppliers DuPont Clariant, Dow Chemicals KMM HPCL, BPCL Dow Chemicals, BASF

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Exhibit 3: Types of Paint and APLs presence in each segment

Type Interior Wall finishes

Use Domestic

Segment Decorative

APL Tractor Emulsion, Premium Emulsion, Royale Luxury Emulsion

Exterior Wall finishes Wood Finishes Primers Enamels Automotive Paints

Domestic Domestic Domestic Domestic Auto industry

Decorative Decorative Decorative Decorative Industrial

ACE, APEX, APEX Ultima TouchWood, Melamyne DCP, Utsav PGE, Utsav Enamel, Satin Enamel APL operates through a 50:50 JV with PPG Industries, USA

Protective Coatings Floor Coatings Road Markings Powder Coatings

Industry Industry Road signage Industry

Industrial Industrial Industrial Industrial

Growth Business unit of APL Growth Business unit of APL Growth Business unit of APL Growth Business unit of APL

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Exhibit 4: Financial Performance APL

Please note that due to unavailability of SBU specific data, we have taken sales figures and net income figures for the entire company. Since decorative paints form 75% of the industry value, the aggregate data can be assumed to be a fair representation of the decorative paints segment.

Total Income - last 10 years - major players (INR Crores)

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Asian Paints Berger Paints Kansai Nerolac Akzo Noble (ICI)

EBITDA - Last 10 years - major players (INR Crores)

1,400 1,200 1,000 800 600 400 200 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Asian Paints Berger Paints Kansai Nerolac Akzo Noble (ICI)

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Earnings per share (INR)

90 80 70 60 50 40 30 20 10 Mar '02 Mar '03 Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11

FY 01-02 FY 02-03 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY 10-11

EPS (INR) 18 22 15 18 20 28 39 38 81 81

FY 06-07 Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio 6.88 14.03 8.27 9.87 3.6 41.16 0.14 30.56 21.7 1.09 0.6 0.14 0.08

FY 07-08

FY 08-09

FY 09-10

FY 10-11

0.99 0.47 0.08 0.07

1.13 0.59 0.06 0.06

0.89 0.38 0.04 0.04

0.93 0.34 0.03 0.03

69.73 0.08 46.09 32.13

55.04 0.06 39.57 27.37

74.27 0.04 56.68 44.73

74.05 0.03 75.34 54.22

8.03 14.74 8.03 3.97 3.7

9.8 16.02 9.8 4.18 4.02

7.95 16.71 7.95 4.68 3.4

7.08 18.93 7.08 4.25 3.33

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Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times

3.81 32.72 45.08 20.24

3.97 43.11 42.67 1.8

4.18 33.13 31.72 10.97

4.68 42.69 42.38 -11.29

4.25 48.61 44.6 -6.53

58.68 17.96 17.23 0.81

55.71 21.04 17.98 0.67

58.55 19.49 17.27 0.64

55.26 20.74 17.51 0.64

57.71 23.86 17.08 0.66

52.36 44.87 46.82 54.53 0.34

50.84 45.53 49.34 54.61 0.18

54.19 46.81 47 54.09 0.15

39.03 36.19 54.64 58.43 0.09

46.06 41.05 53.54 58.63 0.07

Exhibit 5: Paint manufacturing locations in India Decorative Business Unit, APL

Location Bhandup, Mumbai Ankleshwar, Gujarat Patancheru, Hyderabad Kasna, Noida Sriperumbudur, Chennai Rohtak, Haryana Pune, Maharashtra

Capacity (kilo liters of paint) 30,000 100,000 80,000 80,000 120,000 150,000 250,000

Start of operation 1965 1981 1987 1992 2006 2010 2013 (expected)

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