Fundamental Analysis of Asian Paints

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In this article, we will discuss the Fundamental Analysis of Asian Paints. We will discuss its business model, company financials also we will study its valuations, How did Asian Paints get to where it is today, An Overview of Asian Paints, Its major operating segments, and Future Growth Prospects.

Today we will be discussing the fundamentals of a company that has been a market leader in its industry for over 50 years. And has still managed to maintain a robust growth engine with a 10-year sales CAGR of 11% and a 10-year profit CAGR of 14%. It has transformed the home décor space in India and is now an international paints player.

History of Asian Paints

Asian Paints was started in a garage in Mumbai in 1942 by 4 friends Champaklal Choksey, Chimanlal Choksi, Suryakant Dani, and Arvind Vakil.
Due to a temporary ban on the import of paints that had cornered the market for a few international players and Shalimar Paints.
So Asian Paints could expand quickly.
In the next 25 years, the company established itself as the biggest player in the Indian paints industry and has been the market leader ever since.
Over the years, the company made many innovations including a washable distemper in 1950.
It was a balance between the cheap dry distemper that peeled easily and the more expensive plastic emulsions.
It marketed its new Tractor Distemper with the slogan “Don’t lose your temper, use Tractor Distemper”.
The company also made a masterstroke of hiring the famed cartoonist RK Laxman to create the company mascot Gattu –
A simple boy with a paint bucket, which was a big hit with the masses.
It launched many influential ad campaigns including focusing on festive occasions in the 1980s with their tag line “Har Ghar Kuch Kehta Hai”.
I am sure that you also remember this ad.
In the 90s, its ads were focused on how to use its products to make home exteriors timeless.
In the 2000s, it was focused on the customized color selection with the “Mera Wala Blue” campaign.
The latest one is focusing again on home exteriors with the “Lamination Wala Exterior Paint” slogan.

Also Read: Praj Industries Stock Fundamental Analysis & Fundamental Analysis of Deepak Nitrite

Fundamental Analysis of Asian Paints are as follows:

Business Model of Asian Paints | Company’s Overview

Asian Paints is now a company with more than Rs 21000 Cr in yearly sales.
Asian Paints now operates in 15 countries with over 26 manufacturing plants while servicing customers in over 60 countries.
It is the 3rd largest paints company in Asia and the 9th largest in the world.
Its main corporate brands and their operating geographies are

Asian Paints in India, Bangladesh, Nepal & Indonesia.
Asian Paints Causeway in Sri Lanka.
SCIB Paints in Egypt.
Asian Paints Berger in UAE, Bahrain, Oman, and Qatar.
Apco Coatings in Fiji, Solomon Islands, and Vanuatu.
Kadisco Asian Paints in Ethiopia.
Taubmans in Fiji and Samoa.

It has home décor products like paints, waterproofing, wall coverings, adhesives, sanitary ware, furnishings, lightings, etc.
It also offers many services like home painting, interior design, projects, and sanitization services.
It also manufactures industrial coatings through 2 joint ventures with PPG USA for the automotive coatings and industrial coatings.
Domestic Decorative Coatings: 83.9% of revenue Industrial Coatings: 2.3% of revenue.
International Operations: 11.5% of revenue Home Improvement: 2.3% of revenue.
In Business segments, let’s first talk about Decorative Business.
Asian Paints has a share of over 50% in the domestic paints industry.
In the decorative paints space which accounts for 80-85% of the overall industry, Asian Paints has around 60% share of this market.
Asian Paints has a wide distribution network with over 70,000 dealers across India.
Under this segment, the company has also launched Safe Painting services in response to the COVID-19 pandemic.
It developed a platform called ‘Beautiful Homes with Asian Paints’ acting as 1 stop solutions shop for customers to plan perfect home décor.
The company has 18 such stores in India currently.
Also, these stores offer décor products like furniture, furnishing, decorative lighting, customized tiles, kitchens, wardrobes, baths, and sanitaryware.
It offers over 2200 shades of colors in its offerings in this segment.
The interior paints are sold under the Royale and Tractor brands while the exterior paints are sold under the Apex, Apex Ultima, and Ace brands.
The metal finish products are sold under the Apcolite brand, and the wood finish products are sold under the Woodtech brand.
The adhesive products are sold under the Loctite and Trugrip brands while the waterproofing products are sold under the Smartcare brand.
The company sells its wall coverings under the Nilaya brand.
It includes many designer collections including a premium range by the famed clothing designer Sabyasachi Mukherjee.

International Operations

Asia remains the earner for Asian Paints from International operations.
The company is one of the top 3 players in the paints industry in every market it operates in.
It is focusing on maintaining its core strengths from the Indian market and offering differentiated products for different categories.
The company’s international units are also focusing on establishing themselves in the waterproofing category.

Home Improvement Business

In-Home Improvement Business there are different type of segments are as follows:

Kitchen Segment

Asian Paints forayed into this industry by acquiring a 51% stake in Sleek International in FY14 and completing a 100% acquisition in FY18.
The company offers kitchen components and modular kitchen solutions under the ‘Sleek by Asian Paints’ brand.
The kitchen business sells kitchen products like kitchen hardware, kitchen accessories, and kitchen appliances in a B2B mechanism.
In the modular solutions business, Sleek does projects involving design-to-execution of full kitchens.
Sleek is the largest modular kitchens brand in India and it is present in Mumbai, Pune, Delhi, and many cities in South India.
It is expected to have a lot of potential for market capture in this industry at 15000 crores.

Bath Fittings

In Bath Fittings, Asian Paints entered this industry by acquiring the front-end business of Ess Ess in FY15.
Ess Ess makes chrome-plated faucets and bathroom accessories.
The company has also expanded into sanitary ware and bath products and bathroom planning solutions.
It is also making new products in the touch-free category with hands-free faucets, flushing systems, and others.
The services under this category are offered under the Bathsense and Royale brands.

Industrial Business

In Industrial Business, Asian Paints operates 2 Joint Ventures with PPG Industries USA.
Its 50:50 JV PPG Asian Paints makes and sells paints and coatings for auto OEMs, refinishing, packaging, and marine segments.
The other JV of Asian Paints PPG serves the non-auto segment like infrastructure, oil and gas, power plants, and white goods sectors.
Offering protective coatings, floor coatings, road markings, and powder coatings.

Company Financials of Asian Paints

The market cap of Asian Paints is 299,548 crores.
In the last year, it has generated 43.3% returns.
5 years sales Var is 8.76% with an operating margin of 18.8%.
The net profit margin is 14.7% and Debt to equity is 0.11.
ROE is 27.3% and trading at a 92 PE ratio.

Future Growth Propects of Asian Paints

Despite being the market leader for over 50 years, Asian Paints has been going strong with its innovation, strong marketing & distribution abilities.
The company is constantly introducing new concepts in its core segment of decorative paints and wall coverings.
It is leveraging its strong brand image & establishing itself in adjacent categories like Kitchen, Bath, Furnishings, Furniture, and Lighting.
New markets especially modular kitchen and bathroom categories, organized markets are fragmented.
With small competitors, the company wants to expand itself.
The company’s legacy paint products and new products.
Like waterproofing, adhesives, and home furnishings are boosting due to the demand for home and infrastructure construction.
Rapid urbanization Rising per capita income.
Large working-age population Govt programs promoting home buying and construction.
Large scale infrastructure spending.
So the increasing trend in demand for home demand and infrastructure construction is expected to sustain.
Asian Paints is mainly operating in the emerging economies of Asia, the Middle East, and Africa.
Similar factors are also present in international operations.
Asian Paints looks are looking to recreate its India journey in many of its international operating regions.
And capturing fast-rising subsegments of home construction and décor while maintaining its strong hand in the paints space in India.

Positives and Negatives

Positives and Negatives of Asian paints are as follows:

Positives

Positives of Asian paints which may impact you as an investor.
First of all, the manufacturing units of Asian Paints are spread across the country.
As you can see, the manufacturing units of Asian Paints are located in North India, Central India, and South India.
This helps them a lot in transportation Because paint is in demand everywhere, and transportation costs are saved, which enables them to sell their products at a slightly cheaper rate than others, with more profit.
Every business reaches saturation at some point. When that happens, they will have to innovate, come up with new products so that the company can move ahead.
Likewise, in the paint industry, almost all of the sector has now reached saturation.
To survive this, Asian Paints has started diversifying into the home improvement sector.
So investors should be careful how it grows.
If it grows, then it is good news. But if it doesn’t, then Asian Paints will have to find new ways to expand.
The third positive point about Asian Paints is its distribution network.
You may be surprised to hear that the distribution network of Asian Paints is widespread.

How does this help them?

Whenever they launch a new product, they can take it to the customers directly and get feedback easily.
Accordingly, they can either change the product or push it.
In the entire article, we spoke about painting a new house but we didn’t talk about painting an existing house. This is called repainting.
Repainting also generates a lot of revenue In the painting industry.
Because data indicate that in India, per capita use of paint 1.3kg paint/year.
It has increased to 3.5kg per capita.
Speaking of the world average, the world average is 5 kg.
So there are still chances of demand increasing.

Negatives are as follows:

Because for an investor, having the right information is important.
And it becomes the right information when we talk about both positives and negatives.
The first negative point is from the Automobile sector as we have discussed in several videos, the automobile sector is down these days And it impacts the paint industry too.
As I said, industrial paint is important, and if vehicles are not in demand, then the demand for paint is also low.
Sales will be affected, hence profit will be affected.
So investors have to be careful to watch how Asian Paints are performing in the industrial sector.
The second point is about material cost.
As I told you, 50% of the manufacturing cost of Asian Paints is spent on raw materials.
The raw material, crude oil, is important.
Whenever something is imported, The prices remain volatile.
Like in the case of Crude. So the price of crude goes at 100 dollars per barrel and sometimes at 40 dollars or 50 dollars per article.
So the investors tend to worry that if the price of crude oil fluctuates it may negatively impact the profits and margin of Asian Paints.
The third point is about the P/E ratio. As we saw, the P/E ratio of Asian Paints is higher.
So I think it is slightly more expensive than its peers. And finally, The paint industry is a lucrative industry Because of which new players are entering the business.
For example, JSW suddenly entered the paint industry.
We will see how it competes with Asian Paints, how Asian Paints perform. If bigger competitors come into the industry.

Conclusion

Overall if we conclude Fundamental Analysis of Asian Paints has an excellent business and its management, strong competitive advantage, and good financial and bright growth prospect which makes it a fundamentally good company.

It is currently available at a fair valuation due to correction in the market. What is your take on the fundamental analysis of Asian Paints have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.

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History of Asian Paints