Asian Paints to Show its True Colours In The Near Future
Asian Paints has at its disposal stateof-the-art manufacturing and logistics infrastructure that facilitates seamless operations.
The greenfield operations in Indonesia and the recently acquired business of Causeway Paints in Sri Lanka expanded the company’s global footprint.
Asian Paints (AP) is India’s foremost and Asia’s third largest paint company. It also ranks amongst the top ten decorative coating companies in the world. Its product portfolio includes paints for decorative, automotive and industrial use, as well as solutions for waterproofing, wall coverings, adhesives and painting tools. With over 52,000 retail outlets in India, operations set up in 16 countries and 25 paint manufacturing facilities servicing consumers in over 60 countries, the company enjoys a vast presence.
Industry overview
The introduction of GST and demonetisation challenged the Indian economy and companies had to scramble to transition their operations to the new tax regime. A major dampener was the strained credit environment because of mounting NPAs with banks and a series of credit defaults that shook the market. Moreover, high inflation, unavailability of forex and political uncertainty because of the imminent elections impaired some of the company’s markets. As a result, the sector witnessed weak capital investment due to modest capacity utilisation, thereby stagnating fresh outlays. Consequently, the international operations of the company fared poorly and reported lower profitability than in FY17. The adverse market conditions in the southern parts of India impacted growth; however, the company was able to take advantage of the opportunities in the eastern and northern markets.
On a positive note, the demand for decorative and industrial paints is on the rise globally. Home owners are developing an inclination towards home décor, which has augmented the requirement for interior designers and painting contractors. The government’s focus on creating infrastructure in rural areas will bolster volume growth. A dominant trend prevalent in the paint industry termed hyper-segmentation provides personalised home décor solutions. To service these unique needs of modern consumers, well-established paint players are launching multiple variants of new and existing products.
Growth and revenue drivers
AP’s waterproofing product range has attracted attention in a short span of time. The greenfield operations in Indonesia and the recently acquired business of Causeway Paints in Sri Lanka expanded the company’s global footprint. AP has emerged as the market leader in Sri Lanka. The construction of a new plant in Bangladesh is underway as land acquisition was finalised. In a recalibration of its international strategy, the company divested its operations from the low-growth Caribbean markets to protect and preserve value. The proceeds were directed towards repayment of borrowings. The company is seeking opportunities in emerging markets like Asia and Africa. In addition to its largest single-location paint manufacturing capacities at Rohtak and Khandala, it is setting up new fullyautomated paint manufacturing facilities at Mysuru and Vishakhapatnam in South India, which will require an investment of Rs 2,300 crore and Rs 1,785 crore, respectively. It plans to start the Vizag plant by Q4FY19. Moreover, the company is also seeking statutory approvals for expanding its paint production capacity and enhancing its resin and emulsion capacity. Asian Paints has established itself as a chief wood décor company by installing new wood palette tinting machines that are capable of tinting numerous colours in PU products. It forayed into the adhesives segment in 2016-2017 and has now expanded its presence to scores of new stores with its polyvinyl acetate range.
Core competencies
Asian Paints has at its disposal state-ofthe-art manufacturing and logistics infrastructure that facilitates seamless operations. It has been consistently expanding these facilities and incorporating superior efficiencies into its existing networks. Its R&D facilities employ over 200 scientists that support the company's strategy by facilitating technology development, sustainable new products and value re-engineering for productivity enhancement and cost optimisation.
Challenges
The prices of raw materials, particularly crude-based, rose sharply as the Indian rupee depreciated and monetary conditions tightened. This resulted in price hikes and impaired the demand for coatings in the domestic market. Increasing labour costs are driving painting contractors towards adopting mechanised painting – a trend that is likely to take-off in the near future. The company is exposed to currency risk as it operates in multiple geographies, most of which are crucial for the import of its raw materials. With the Mysuru and Vizag plants expected to start in Q4FY19, AP’s operating expenses are likely to remain under pressure in the upcoming quarters.
Financial Performance
The total income from operations stood at Rs 4639.05 crore in Q2FY19 versus Rs 4274.18 crore in Q2FY18, registering an increase of 8.53 per cent. Its EBITDA fell to Rs 784.15 crore in Q2FY19 from Rs 801.13 crore in Q2FY18, posting a drop of 2.11 per cent. Consequently, the net profit dropped to Rs 506.00 crore in Q2FY19 from Rs 526.19 crore in Q2FY18, thereby falling 3.83 per cent. The total income from operations rose to Rs 4639.05 crore in Q2FY19 from Rs 4398.59 crore in Q1FY19, posting an increase of 5.46 per cent. The EBITDA stood at Rs 784.15 crore in Q2FY19 versus Rs 874.44 crore in Q1FY19, thereby plummeting 10.33 per cent. Consequently, the net period dipped to Rs 506.00 crore in Q2FY19 from Rs 571.31 crore in Q1FY19, thereby registering a fall of 11.43 per cent.
On the consolidated annual front, the total revenue rose to Rs 17,262.23 crore in FY18 from Rs 16,856.55 crore in FY17, posting a growth of 2.40 per cent. Its EBITDA increased to Rs 3,418.23 crore in FY18 from Rs 3,248.85 crore in FY17, registering an increase of 5.21 per cent. Profit after tax stood at Rs 2,097.52 crore in FY18 in comparison to Rs 2,016.25 crore in FY17, posting a modest climb of 4.03 per cent.
During FY2017-2018, the company paid dividend of Rs 834.50 crore. AP’s consolidated GPM dwindled by 139 bps YoY and 334 bps QoQ. This was partly because the company was hesitant to raise prices further for fear of inviting anti-profiteering provisions. Its EPS increased to Rs 21.26 in FY18 from Rs 20.22 in FY17, thereby rising 5.14 per cent.
Performance Overview
Although Asian Paints delivered double-digit volume growth (12-13 per cent) in Q2FY19, the quality of volume growth was sub-standard. Overall, the company’s profitability suffered a hit on account of lethargic sales and intense raw material inflation in most markets. The inability to pass on these expenses in the form of higher prices to consumers called for rigorous cost control measures to curb the impact. AP’s retailer channel was slow in taking off at the start of the year; however, growth returned owing to an early Diwali.
The architectural coatings business performed well and witnessed marginal growth in the market share. Both the home improvement and industrial coatings segments were severely hampered during the first half of the year on account of GST implementation and rising input costs. However, these segments started picking up during H2FY19. Furthermore, the company strived to gain recognition in health and hygiene coatings by successfully launching a number of differentiated and unique projects like Royale Atmos, Ultima Duralife, Tractor Shyne Emulsion and Royale Healthshield – all of which resulted in greater market share. These new launches in the Royale range in conjunction with new sheen variants across emulsion paints propelled growth in the core interior emulsions segment.
The waterproofing and adhesives segments witnessed significant growth in painting tools and implements. The volume growth in Q2FY19 was driven by rising sales of distempers and putty, increased stocking up of inventory by dealers ahead of Diwali, and a shift in demand from the unorganised to the organised sector. The kitchen components segment demonstrated positive growth owing to high growth in hardware and accessories and expansion of network. Although the price hike in the industrial paints segment was insufficient to counter the ramifications of input-cost pressures, it still delivered a good performance.
Contrarily, the international business witnessed a drop in sales owing to choppy economic and political conditions worldwide. The unavailability of forex, relentless rainfall, and reduction in fuel subsidies contributed to the slowdown. The currencies of most of the countries in which the company operates deteriorated versus the US dollar and the Indian rupee, thereby intensifying the profitability situation in rupee terms. A weak economy and highly deflated currency in Egypt and the severe foreign exchange crisis in Ethiopia were proof of this. Sri Lanka and Dubai too produced dismal results due to rainfall and intensifying competition, respectively. In contrast, Nepal, Oman and Bahrain demonstrated an exceptional performance.
Conclusion and Recommendation
Despite producing a mediocre quarterly financial performance, Asian Paints witnessed an increase in market share, particularly in the wake of East India’s exceptional performance. Therefore, even though the company has showcased a negative financial trend, its prospects in the future may improve.
The company hiked price by 2.35 per cent with effect from October 1, 2018 for the domestic decorative paints business. Further price hikes are anticipated in the short term to mitigate inflationary pressure, based on the demand scenario. Rebates were offered to the trade channel to liquidate high-priced inventory in the aftermath of GST rate reduction to 18 per cent from 28 per cent. This is expected to enhance the competitiveness and speed up the process of premiumisation of the organised paint sector.
Even with input cost inflation, decorative paints are expected to have healthy demand in the medium-term. While the North, West and East regions have consistently delivered good performances, the South region has begun to witness initial signs of marketshare advances. Rising disposable incomes and improving lifestyles have resulted in consumers willingly forking out money for home improvement and interior décor, which bodes well for the company’s revenue prospects. Overall, the propensity to invest in housing is ever increasing. By virtue of these factors, we recommend our reader-investors to HOLD this stock