Sunday, September 13, 2015

Paint your Imagination - Asian Paints

(How I identified stock for my personal investment)

As Ganesh Festival is around the corner, I decided to get our house renovated, repainted and redecorated  before arrival of Lord Ganesha. So, when I thought of repainting - first name that flashed in my mind was  ''Asian Paint''. This highlights strong brand recall that company has generated over the years.

In order to locate nearest dealer, I browsed through Asian paints website. I was amazed to see the range of products and services offered. So, instead of reaching out to nearest dealer, I decided to call and fix appointment with Asian Paints consultancy and painting team. 

The color consultancy team explained me application and uses of different products and guided us through color combination for different rooms that would provide positive, vibrant, and vivid atmosphere. They were equipped with virtual tool that showed how the final wall finish will look like

After deciding layout, design and color scheme, next day came the team of professional painter arrived. They completed the repainting with superior finish within the decided time frame. By giving task to Asian paints team, we not only has tension free repainting but also task was done in hassle free manner

Amazed by the work of team, I decided to study Asian Paints - 'the Company' from stock investment perspective. I read financial statements, Annual report, investor presentation, management interviews and other news articles.

Analysis
Asian Paints is operating in paint industry since 1945. The Company is market leader in decorative paints comprising of paints, varnish and enamel with 52-53% market share.

It has extended geographic reach and also added numerous product to its portfolio. Currently, it operates in 19 countries with customer in 65 countries. It has 26 manufacturing facilities across globe, with 8 plants functioning in India.  

Product
  • Decorative segment, it product ranges in 4 category - interior wall finishes, exterior wall finishes, Enamels and wood finishes. Over the years, it has introduced numbers of eco-friendly and health-friendly paints through continuous investment in R&D with 16 product launch in FY15 . The Company has expanded its offering from paints product to service by introducing Ezycolor home solutions and Ezycolor consultancy. Decorative segment contributes 81% of total revenue in 1QFY16.
  • Industrial segment caters to paints demand in auto (auto coating), infrastructure (road marking paints, floor coating), oil & gas sector and power plants. During FY15, Company launched 7 new products in industrial segment. Industrial segment accounts for 5% of total revenue in 1QFY16.
  • Now, the company is shifting from paints company to home d├ęcor company by adding modern kitchen space and bathroom fitting to its product portfolio. The Company entered into this segment through inorganic growth. It acquired stake in Sleek (Modern Kitchen space) and EssEss (bath fitting). Contributes around 1% of total revenue in 1QFY16
  • International operations includes sales to 19 countries over 5 region. It contributes 13% of overall revenue in 1QFY16, with highest contribution from Middle East and Asian countries. 
Demand Drivers
  • 85-90% of demand for Asian Paints comes from repainting, which is driven by high income level, festive and marriage days and lifestyle of people.
  • Higher disposable income will led to increase consumption which in turn will help the decorative segment.
  • Growth in housing sector will be led by increase in urbanization, changing aesthetic taste and development of smart cities.
  • In industrial segment, major paints demand comes from Automobile sector. This segment accounts for 25% of the paint industry's revenue. Growth in this segment is directly linked to demand for automobiles sector.
  • New projects in roads and ports will increase revenues of paint industry and drive the industrial segment
Pricing
  • Cost of production is dependent on price of crude and INR/USD exchange rate. 
  • Around 40 - 45% of raw material cost is directly or indirectly related to price of crude oil and its derivative - titanium dioxide. Lower crude prices and favorable INR/ USD movement reduces input cost.
  • Company increased its product price by 6.25% in FY14 to meet high cost of raw material. However, it was able to retaining its market share and improved volume growth. With favorable economic conditions, it reduced its product prices by 2% in FY15
Debt / Equity 
  • As of FY15, Asian Paints is almost debt free. It has reduced its debt / equity ratio from 6.6% in FY12 to 0.9% in FY15.
Network
  • It has strong brand equity, customer loyalty with robust 30,000 dealers’ network and 200 color ideas stores across the country. In India, it has increased its network of color world dealer by approx 10% each year.
Earnings and Performance
  • The company has registered yoy revenue growth of 11.5% in FY15, which is slightly lower than 5 year compound average growth rate (CAGR) of 12.6%. Lower sales growth in FY15 is attributable to subdued demand of paints on account of inflation.
  • It has maintained gross margin of over 40.0% during FY11- FY15 and average 5 year net profit over 11.5%.
  • Return on Equity (ROE) has been over 30% during FY11-15. Consistently, maintaining high ROE in mature industry along with low debt is commendable performance.
  • Asian paints has sufficient liquidity with its current asset 1.5x its current liability and quick ratio almost equal to quick liability.
  • Asian Paints has efficient working capital management in place. Its has average net sales to working capital of 10x. Further, it enjoys long duration credit period from its suppliers than its gives to its customer, thereby benefits from negative working capital. This highlights its bargaining power in industry and lowers the dependence on external funding.
  • Company has strong cash flow from operations. Its capital expenditure is financed mostly by operating cash flow.
Return to Shareholders

As on 31st Mar
FY15
FY14
FY13
FY12
FY11
5 Year CAGR
Mkt Price
811.3
548.0
491.7
324.2
252.6
26.3%
EPS
13.8
12.2
10.9
10.0
8.1
11.2%
Dividend Payout
44.2%
43.4%
42.2%
40.0%
39.5%

  • P/E ratio has increased from 31.2 in FY11 to 59.0 in FY15. High P/E ratio is supported by strong growth in revenue and earnings.
  • Equity price has increased 26.3% over FY 11-15, adjusted for stock split in FY13 of 10:1.
  • Company has been able to continuously improve its EPS, with 5 years CAGR of 11.2%
  • It has stable dividend payout policy, with payout of around 40% over 5 years
I had pleasure experience interacting with Asian paints team. Repainted rooms now looks bright and vibrant. I am eagerly waiting for arrival of Lord Ganesha to my home.

Stock valuation is not discussed as this is not a stock recommendation or an investment advice. Please do your research before investing