Friday, July 31, 2015

Asian Paints - Annual Report Analysis - Part 1

Asian Paints is market leader in decorative paints comprising of paints, varnish and enamel with 52-53% market share. It has strong brand equity, customer loyalty with robust 30,000 dealers’ network across the country. Expanding from paints product to service by introducing Ezycolor home solutions and Ezycolor consultancy. Over the years, it has introduced numbers of eco-friendly and health-friendly paints through continuous investment in R&D

Key highlights from MD&A
  • During FY15, the Company acquired EssEss Bathroom Product (P) Ltd with effect from Jun 01, 2014
  • Capacity to double to 400,000 KL per annum at Rohtak plant in Haryana. Expansion is expected to be completed by 2016
  • Modernization activities at 2 plants - Ankleshwar in Gujarat and in Kansa in Uttar Pradesh
  • Set up manufacturing unit at Visakhapatam in Andhra Pradesh with annual capacity of 400,000 KL per annum. Investment of Rs. 1,750 croress over the period of 12 years. 
  • To provide complete home decor solution - acquired stake in Sleek (Modern Kitchen space) and EssEss (bath fitting) 
  • During FY15, Company launched 16 new products in decorative segment and 7 in industrial segment 
Asian Paints Business
Financing Business
  • Company has strong cash flow from operations. Its capital expenditure is financed mostly by operating cash flow.
  • Asian Paints has debt to equity ratio is less than 1%
  • With dividend payout of around 40%, it invests balance 60% of its earnings. This is deployed to acquire new companies and also to meet capex requirement
  • Over period of FY11-15, ROE has fallen from 39.2% in FY11 to 31.3% in FY15. 
Earnings Growth
  •  Asian paints is able to showcase consistent growth in its revenue and earnings.
  • 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 crude oil and its  derivative - titanium dioxide. Lower crude prices and favourable INR/ USD movement reduces input cost.
  • Consistent improvement in its revenue and net profitability over past 5 years.  Revenue CAGR (5 year) - 12.6% and EPS CAGR (5 year)
  •  High growth in earnings is reflected in its EPS growth
  • 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
Business Expansion (On Consolidation level)
  • The Company is operating in paint industry since 1945. Since incorporation it has acquired numerous companies in paint industry within India and abroad. It has extended geographic reach and also added to its product 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. 
  • In India, its is able to increase its network of color world dealer by approx 10% each year. Currently, it has over 30,000 color world dealers and 200 color ideas stores
  • In decorative segment, it product ranges in 4 category - interior wall finishes, exterior wall finishes, Enamels and wood finishes.
  • 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. It has also introduced number of services to meet customer demand. 
Factors that drives Paints Industry 
  • Increase in GDP will increase income level, thereby higher disposable income will led to increase consumption which in turn will help the decorative segment.
  • 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.
  • Growth in housing sector will be led by increase in urbanization, changing aesthetic taste and development of smart cities.
  • Increase disposable income, improved spending power and long festive season  
  • 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. 
  • Demand from public infrastructure like roads, ports is also expected to increase demand for paints