As market tumbles, Asian Paints Limited should be a good bet

As business activities should improve and construction activities should resurge, demand conditions should see some improvement. Unforeseen circumstances due to COVID-19 pandemic should be taken care by the company’s sufficient liquidity resources. Global presence and distribution strength have supported in past and should continue to act as growth enablers.

About Asian Paints Limited

Asian Paints Limited manufactures a wide range of paints for decorative and industrial use and offers end-to-end painting and designing services, colour and decor consultancy, waterproofing solutions, etc. In Industrial coatings space, this company operates through 2 strategic 50:50 JVs with PPG Inc., USA. First JV - PPG Asian Paints Pvt Ltd, services requirements of Indian automotive coatings market. It manufactures packaging and marine coatings. Second JV - Asian Paints PPG Pvt Ltd, takes care of protective, industrial powder and light industrial coatings markets in India. Some products include paints, chemicals, wall coverings, textures painting aid, waterproofing solutions, etc.

Growth Enablers of Asian Paints Limited

• Improvement in Market Conditions: Normalization was seen across activities as increase in cases of COVID-19 was at a much lower rate and market conditions should continue to improve. There was a rebound in demand conditions. Demand conditions exhibited strong recovery across business segments, and this recovery was spread over most regions in FY22.  Decorative business made 84.9% of total group revenues. FY22 kicked off with onset of second wave of COVID, derailing sequential recovery of previous quarters when demand across urban and rural markets seemed to be returning from COVID lows. The company focused on servicing network as much as possible. Business saw quick recovery after second wave due to constant efforts to raise customer value proposition across product categories and price points. Overall, decorative business delivered exceptional performance, registering a volume growth of 31% and an equally strong value growth of 36%, reinforcing market leadership. 

• Decorative Paints Business in India: In a tough operating environment in FY20, Asian paints was one of the fastest growing companies in sector and it has delivered good growth across product segments and geographies. Growth in volumes will be much higher than value growth, given its increased focus on upgradation emulsions, waterproofing and putty segment where there were significant gains. Growth was seen not only because of mainstream product categories but was visible in newer product categories of waterproofing, adhesives and tools.
• Favourable Industry Dynamics: Domestic paint industry consisting of decorative and industrial paint segment has been pegged at INR50,000 crores. Decorative paint segment comprises categories such as exterior wall paints, interior wall paints, wood finishes, enamels, undercoats such as primers, putties, etc. and constitutes more than 75% of paint market. Industrial paint segment comprises automotive coatings, marine coatings, packaging coatings, powder coatings, protective coatings, floor coatings and other general industrial coatings. Industrial paint segment accounts for balance 25% of paint market. Demand outlook will depend to a large extent on way normalcy gets restored in Indian economy. In general, demand for paint mirrors overall GDP growth in an economy. Hence, when overall demand in an economy sees an improvement, demand conditions for paint industry should see some improvement.
• Financial Stability: The company is in comfortable liquidity position, meaning it has sufficient resources. Implementation of stringent cost control measures to conserve cash should help in addressing any evolving situation due to pandemic. The company is in constant touch with its key vendors and is working with them to mutually partner each other so that business can be propelled.
• Improved Momentum: Demand conditions should be strong as recovery in consumer sentiments should provide impetus. Roll-out of Covid vaccination program should be able to bring improvement in domestic demand. The company plans to work on cost optimization and it is planning to take up only business critical spends, across all its businesses.
• Performance of Industrial Business in India: PPG-AP is first 50:50 JV of Asian Paints with PPG Industries Inc., USA. It manufactures automotive Original Equipment Manufacturer, refinish, marine, packaging and certain industrial coatings and is 2^nd largest supplier in India. Slowdown in economy, decreased spending, BS-VI compliance and COVID-19 impacted builds. PPG-AP saw double-digit growth in sales due to volume growth in most segments. Further, it was able to see price increases with its key automotive customers, though with a considerable lag, that helped revenue growth to an extent. Delay in closure of price increases, that was needed to offset inflation impact, impacted business profitability. However, innovation, efficiency and other cost optimisation efforts supported in minimising adverse impact on profitability.

Asian Paints amongst Top Performers in Past Decade

Domestic investors continuously hunt for stocks having potential to deliver multi-bagger returns. Not all stocks have this much potential to deliver, and it’s not an easy task to pick such stocks. When we are talking about stocks generating multi-bagger returns, one name we cannot afford to miss is Asian Paints. Asian Paints has capitalised on overall demand conditions for paint industry in India and it should continue to do so given its market position. Stock of Asian Paints has delivered a return of ~1578.31% over FY10-FY20. This means if an investor would have invested INR1,00,000 on 4^th January 2010, that investment would have become INR16,78,313.91 on December 30^th 2020. The company’s global presence, manufacturing scale and distribution strength have all helped it achieve this strong performance over past decade. 

Strong Market Position Should Continue to Lend Support

Asian Paints is having a total market cap of ~INR2,47,56,894.96 lakhs with free float market cap of INR1,16,32,134.05 lakhs. Over 5 years to FY20, it has compounded its revenues at ~9.5% and EBITDA at ~13.9% on a standalone basis. The company clearly occupies a position of market leader and it should continue to maintain this position given its diversified operations and good demand conditions. With fear of COVID-19 behind and business activities getting back on path, trading conditions should improve and construction activities should resurge.

Asian Paints Limited has seen strong revenue growth of 21% in 4Q22 at consolidated levels as all its businesses grew in double digits. The company was able to compound its market capitalisation at 28.0% since Apr 2002 from ₹2,125 crores to INR295,428 crores as on Mar 2022. It has seen consistent support and trust of its shareholders. In return, the company has maintained solid dividend pay-out ratio, with average dividend pay-out coming at 55.7% of its earnings over previous 5 years. This shows that the company is committed to share wealth generated with its shareholders.

In upcoming years, the company expects cost optimisation to deliver sustainable profits and continues to focus on efficient asset utilisation and management of working capital. The company should work on effective capital allocation for future growth, which should lead to sustained return on investment. 

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Comments

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  Naval Goel

  20 June, 2022, 2:26 pm
  At these valuations, i don't think it is a good bet. It still needs to go down 30% for it to look attractive. It does not deserve such high P/E given the fact that growth has not been that great in the last few years and also there is huge competition coming up in the form of aditya birla entry in paints. I would look at investing in it at less than 50 p/e which is closer to where it used to trade historically.
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    TheAsianInvestor

    21 June, 2022, 11:00 pm
    I feel that street has punished Asian Paints a lot. With Grasim announcing a large capex, short-term disruption was expected. It won’t be easy for them to replace Asian Paints due to its brand presence and distribution. Asian Paints has a 42% market share, far ahead of second-largest player, Berger Paints, which has 12% share. I believe that Grasim needs to spend more on brand development. Though competition can intensify, but Asian Paints’ market dominance can beat it. Its revenues are 3.5x than that of Berger and ~4x than that of Nerolac. At its best, Grasim can leverage its dealer network of subsidiary, UltraTech's Birla White putty brand. But its gonna need time to make brand image. Decorative segment is categorised by pull nature. Grasim’s entry can impact position of smaller players. Asian Paints’ position is secured due to high barriers. This company’s non-paint businesses are profitable too. Examples include: waterproofing and home decor businesses. 75% of decorative paint business is organised, and Asian Paints has 53-54% share. History has suggested that new players find it difficult to gain scalability. Asian Paints has announced an average 2% increase in prices across their portfolio. This measure was not adopted by other renowned players despite higher input prices. By delaying hikes, Asian Paints has gained some share.
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