Equity Research INDIA

January 4, 2020
BSE Sensex: 41627
Asian Paints HOLD
ICICI Securities Limited Maintained
is the author and
distributor of this report
Profit pool leader behaving like a challenger Rs1,751
We highlight a distinctive trend in paints industry – Asian Paints - the profit pool
Company update market leader (volume, value and profit share of 51%, 58% and 64%) is behaving
like a challenger. This is evidenced, in our view, by (1) frequent price cuts (mostly
Paints in enamels), (2) near-all-time-high trade discounts and (3) launch of ‘cheap’
emulsion (premium segment) at the price of distemper (mid segment). Historically,
Target price: Rs1,800 decorative paints has been a high-entry-barrier business (top-4 players have 98%
market share) and the (relative) success of newer players like Indigo Paints,
Shareholding pattern Nippon Paints has potentially triggered these actions from APNT, in our view.
Mar Jun Sep Importantly, we reckon APNT will be watching closely the ramp-up by the recent
‘19 ‘19 ‘19
Promoters 52.8 52.8 52.8 entrant JSW Paints. In summary, APNT’s actions potentially limit ability of other
Institutional paint companies to outperform. Retain HOLD rating on Asian Paints, Akzo Nobel,
investors 25.8 25.6 27.5
MFs and other 4.2 5.0 5.2 Berger and ADD on Kansai Nerolac.
Banks, FI’s,
Insurance co 5.0 3.9 5.0  Market leader with share of 51% volumes, 58% value & 64% EBITDA: APNT has
FIIs 16.6 16.7 17.3 strengthened its market leadership in volumes, value as well as profitability over
Others 21.4 21.6 19.7
Source: BSE
FY2006-2019. It has reported volume CAGR of 12.5% over FY06-19 whereas
industry has grown at CAGR of 11.9% over FY06-19. Its EBITDA share stood at 64%
Price chart in FY19 compared to 53% in FY06.
2,000
1,800
 Higher industry profit pool likely increased competitive activity over FY06-19:
1,600
While APNT has gained volumes; it has also improved its profitability over FY06-19.
1,400 Its EBITDA margin expanded to 18.2% in FY19 from 13% in FY06. We believe
(Rs)

1,200 higher profitability has invited more players to enter paint industry such as 1) Indigo
1,000 Paints, 2) Nippon and 3) JSW Paints.
800
600
 Launch of Tractor Sparc emulsion brand to counter higher competitive
pressure: We believe launch of Tractor Sparc has two objectives 1) Uptrade
Jul-19
Jan-17
Jul-17

Jul-18
Jan-18

Jan-19

Jan-20

consumers from distempers (mid-segment) and arrest downtrading in emulsions (if

any) and 2) Signal the competition. Tractor Sparc is a likely message to recent and
prospective entrants in paint industry that APNT will protect market shares even if it
costs profitability.
 Channel check feedback: While the success of Tractor Sparc will be known only in
due course (it’s launched recently), our channel checks suggest muted product
acceptance currently.
 Retain HOLD on APNT: We maintain our estimates and model sales, EBITDA and
earnings CAGR of 14.8%, 17.5% and 22.5% respectively, for FY19-FY22E. Retain
HOLD with a DCF-based target price of Rs1,800 valuing the stock at 47x Sept’ 21E.

Market Cap Rs1718bn/US$24bn Year to March (Cons) FY19 FY20E FY21E FY22E
Research Analysts: Reuters/Bloomberg ASPN.BO/APNT IN Net Revenue (Rs mn) 193,415 222,113 255,095 293,005
Manoj Menon Shares Outstanding (mn) 959.2 Net Profit (Rs mn) 21,595 28,731 33,966 39,665
manoj.menon@icicisecurities.com 52-week Range (Rs) 1827/1304 Dil. EPS (Rs) 22.5 30.0 35.4 41.4
+91 22 6637 7209
Free Float (%) 47.2 % Chg YoY 9.7 33.0 18.2 16.8
Aniruddha Joshi
anirudda.joshi@icicisecurities.com FII (%) 17.3 P/E (x) 77.8 58.5 49.4 42.3
+91 22 6637 7249 Daily Volume (US$'000) 32,745 CEPS (Rs) 27.1 35.4 41.3 47.8
Vismaya Agarwal, CFA Absolute Return 3m (%) 0.3 EV/EBITDA (x) 47.7 39.9 33.9 28.9
vismaya.agarwal@icicisecurities.com
+91 22 2277 7632 Absolute Return 12m (%) 27.1 Dividend Yield (%) 0.6 0.7 0.7 0.7
Sensex Return 3m (%) 8.9 RoCE (%) 21.3 24.9 25.8 25.8
Sensex Return 12m (%) 18.1 RoE (%) 24.2 28.2 28.7 28.3

Please refer to important disclosures at the end of this report

Asian Paints, January 4, 2020 ICICI Securities

Profit pool leader behaving like a challenger

Revenue pool dominated by Asian Paints…: Asian Paints dominates the paints
market in India with market share of 58% (value) in FY19. Its market share (value) has
steadily expanded from 51% in FY06 to 58% in FY19. We believe the steady growth in
market shares is attributable to 1) distribution expansion and focus on tinting
machines, 2) steady launches across price points and 3) investments in brand
building.

Chart 1: Market shares in paint industry (Volume) Chart 2: Market shares in paint industry (Value)

APNT Berger Kansai Akzo APNT Berger Kansai Akzo

100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
FY11

FY17

FY11

FY17
FY06
FY07
FY08
FY09
FY10

FY12
FY13
FY14
FY15
FY16

FY18
FY19

FY06
FY07
FY08
FY09
FY10

FY12
FY13
FY14
FY15
FY16

FY18
FY19
Source: Company, I-Sec research Source: Company, I-Sec research

… as well as EBITDA pool: While the revenue market share of Asian Paints has
expanded from 51% in FY06 to 58% in FY19, we note the share of EBITDA has
moved upwards to 64% in FY19 from 53% in FY06. The steady increase in EBITDA
margin (ahead of peers) is attributable to 1) higher scale of operations and 2)
premiumisation.

Chart 3: EBITDA share of incumbents in paint industry

APNT Berger Kansai Akzo

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY16
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY17

FY18

FY19

Source: Company, I-Sec research

2
Asian Paints, January 4, 2020 ICICI Securities
Launch of Tractor Sparc: Asian Paints introduced Tractor Sparc in Q2FY20 at
Rs80/ltr. We note the launch is expected to result in 1) Facilitate up-trading for
consumers using distempers, 2) Arrest down-trading (if any) with slowdown in
economy and 3) to give a message to the competition that Asian Paints is keen on
volume growth and protecting its market shares.

Chart 4: Tractor Sparc Economy emulsion

Source: Company, I-Sec research

Realizations across variants: The prices of distempers are c.Rs60/Ltr whereas the
prices of emulsions are above Rs100/Ltr. Asian Paints had a gap in its portfolio at
price point of Rs70-80/Ltr. With launch of Tractor Sparc, the company has bridged the
gap in the portfolio.

Chart 5: Tractor Sparc has bridged the gap between distempers and emulsions
120

100
100

80
80
(Rs/ltr)

60
60

40

20

-
Distempers Tractor Sparc Other Emulsions
Source: Company, I-Sec research

3
Asian Paints, January 4, 2020 ICICI Securities
Increase in competitive pressures: The competitive intensity has increased in past
five years with JSW paints and Indigo paints entering the market. We believe regional
players like Kamdhenu paints are also aggressive and are gaining market shares.
There is also competitive pressure in putty segment with cement companies raising
promotions/discounts to gain market shares.

Table 1: Increase in competitive pressure

New players Regions
JSW paints Tamil Nadu
Indigo paints South India
Nippon South India
Kamdhenu Paints North India
Source: Company, I-Sec research

Channel checks feedback: We spoke to multiple dealers across India to understand

success of Tractor Sparc. The channel partners indicate the product has muted
acceptance due to:

 There are no additional commissions and discounts,

 There is no scheme to support the brand,
 There is negligible media support to create ‘pull’ from the consumers.
 Also the dealer’s effective commission reduces by selling product with lower retail
price.

4
Asian Paints, January 4, 2020 ICICI Securities

Valuations
We maintain our estimates and model sales, EBITDA and earnings CAGR of 14.8%,
17.5% and 22.5% respectively, for FY19-FY22E. Retain HOLD with a DCF-based
target price of Rs1,800 valuing the stock at 47x Sept’ 21E.

Chart 6: Mean PE and Standard deviations

80 APNT P/E -1 Std Dev. Mean +1 Std Dev.

70
60
50
40
(x)

30
20
10
0

Feb-13

Feb-14

Feb-15

Jan-16

Jan-17

Jan-18

Jun-19
Jul-16

Jul-17

Jul-18

Dec-19
Sep-09

Sep-10

Sep-11
Mar-12
Aug-12

Aug-13

Aug-14

Aug-15

Dec-18
Apr-09

Mar-10

Mar-11

Source: Bloomberg and I-Sec research

Risks
 Volatility in raw material prices is a major risk to our estimates. Input cost
increases led by high crude prices and a weak INR could put pressure on the
margins in the short term due to lag in price action.
 Significant increase in competitive pressures.

5
Asian Paints, January 4, 2020 ICICI Securities

Financial summary (consolidated)

Table 2: Profit & loss statement Table 5: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E
Net Revenues 193,415 222,113 255,095 293,005 Operating Cashflow 26,018 33,920 39,601 45,873
Operating Expenses 158,170 180,109 205,863 235,767 Working Capital
EBITDA 35,245 42,004 49,232 57,237 Changes 104 (3,237) (3,596) (4,070)
% margins 18.2% 18.9% 19.3% 19.5% Capital Commitments (13,602) (9,500) (9,500) (9,500)
Depreciation & Free Cashflow 12,520 21,183 26,506 32,303
Amortisation 4,307 5,103 5,583 6,195 Cashflow from
Gross Interest 510 554 554 554 Investing Activities (4,230) (2,000) (2,000) (2,000)
Other Income 2,271 2,428 2,618 2,824 Issue of Share Capital 1,865 (86) (51) (13)
Recurring PBT 32,699 38,775 45,712 53,312 Inc (Dec) in Borrowings 953 - - -
Less: Taxes 10,988 9,958 11,694 13,635 Dividend paid (12,127) (14,964) (14,964) (14,964)
Less: Minority Interest 116 86 51 13 Change in Deferred
Net Income (Reported) 21,595 28,731 33,966 39,665 Tax Liability 1,422 - - -
Extraordinaries (Net) - - - - Chg. in Cash & Bank
Recurring Net Income 21,595 28,731 33,966 39,665 balances 402 4,134 9,491 15,326
Source: Company data, I-Sec research Source: Company data, I-Sec research

Table 3: Balance sheet Table 6: Key ratios

(Rs mn, year ending March 31) (Year ending March 31)
FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E
Assets Per Share Data (Rs)
Total Current Assets 70,028 83,891 104,565 132,745 EPS 22.5 30.0 35.4 41.4
of which cash & cash eqv. 4,449 8,582 18,073 33,399 Cash EPS 27.1 35.4 41.3 47.8
Total Current Liabilities & Dividend per share (DPS) 10.5 13.0 13.0 13.0
Provisions 45,949 52,442 60,029 68,813 Book Value per share (BV) 99.2 113.6 133.4 159.2
Net Current Assets 24,079 31,449 44,535 63,932
Investments 25,697 27,697 29,697 31,697 Growth (%)
Net Fixed Assets 55,299 59,696 63,613 66,917 Net Sales 15.0 14.8 14.8 14.9
Capital Work-in-Progress 2,097 2,097 2,097 2,097 EBITDA 10.2 19.2 17.2 16.3
Goodwill 3,213 3,213 3,213 3,213 PAT 9.7 33.0 18.2 16.8
Total Assets 110,385 124,152 143,154 167,856 Cash EPS 11.1 30.4 16.7 15.8

Liabilities Valuation Ratios (x)

Borrowings 6,160 6,160 6,160 6,160 P/E 77.8 58.5 49.4 42.3
Deferred Tax Liability 5,397 5,397 5,397 5,397 P/CEPS 64.6 49.5 42.4 36.6
Minority Interest 3,631 3,631 3,631 3,631 P/BV 17.6 15.4 13.1 11.0
Equity Share Capital 959 959 959 959 EV / EBITDA 47.7 39.9 33.9 28.9
Face Value per share (Rs) 1 1 1 1 EV / Sales 8.7 7.6 6.5 5.6
Reserves & Surplus* 94,238 108,005 127,008 151,709
Less: Misc. Exp. n.w.o. - - - - Operating Ratios
Net Worth 95,197 108,964 127,967 152,668 Raw Material / Sales (%) 58.6 58.0 57.6 57.4
Total Liabilities 110,385 124,152 143,154 167,856 Employee cost / Sales (%) 6.6 6.5 6.4 6.4
Source: Company data, I-Sec research SG&A / Sales (%) 16.6 16.7 16.7 16.7
Other Income / PBT (%) 6.9 6.3 5.7 5.3
Table 4: Quarterly trends Effective Tax Rate (%) 33.6 25.7 25.6 25.6
Working Capital (days) 36.9 37.4 37.7 37.8
(Rs mn, year ending March 31) Inventory Turnover (days) 58.6 58.6 58.6 58.6
Dec-18 Mar-19 Jun-19 Sep-19 Receivables (days) 35.6 35.6 35.6 35.6
Net revenues 52,940 50,182 51,306 50,507 Payables (days) 76.0 76.0 76.0 76.0
% growth (YoY) 24.1 11.7 16.6 9.4 Net D/E Ratio (x) 0.1 0.1 0.0 0.0
EBITDA 10,430 8,838 11,563 9.548
Margin (%) 19.7 17.6 22.5 18.9 Profitability Ratios (%)
Other income 452 572 736 1,052 Net Income Margins 11.2 13.0 13.3 13.5
Extraordinaries (Net) - - - 45 RoACE 21.3 24.9 25.8 25.8
Adj. Net profit 6,356 4,717 6,554 8,230 RoAE 24.2 28.2 28.7 28.3
Source: Company data, I-Sec research Dividend Payout 46.4 43.3 36.7 31.4
Dividend Yield 0.6 0.7 0.7 0.7
EBITDA Margins 18.2 18.9 19.3 19.5
Source: Company data, I-Sec research

6
 Asian Paints, January 4, 2020 ICICI Securities

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BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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