With rising disposable income, there has been a shift in consumer preference from economical to high quality and value for money products and services. This is true even for housing sector. With rise in demand for modern housing, Builders and real estate developers are trying to attract buyers by providing premium houses with modern amenities at an affordable price.
With this shift in consumer mindset, decorative paints have now become a necessity and not just a discretionary spending. As a result, Indian paint industry gets to cater the second largest emerging market in the world after China.
Asian Paints was established in 1942, during World War 2. Company is engaged in business of manufacturing selling and distribution of variety of paint. With sales of Rs 15,534 crores and market share of whopping 54%, Asian paints lead the market in its segment. Company has strong brand recognition and supply chain, it has presence in multiple geographies, making it a strong global player.
Product Segments and their revenue contribution:
Asian Paints has 5 major categories of products which are as follows:
Enamels are used to coat wood and metal coats. Enamels are glossy and durable paints used on woods to enhance their look and shelf life, they are also easy to clean and maintain the life of products for a long time. Enamels contribute almost 50% to the revenue of Asian Paints.
Distempers are easy to apply, economical, but premium looking interior wall paints that provide a beautiful finish to walls. These paints are economical but popular choice in India. Distemper contribute almost 19% to the total revenue of the company. The most famous brand name in this segment is Tractor distemper.
Interior emulsions are acrylic wall paints used for painting interior walls. These are mid range interior paints that give walls a matte finish giving them a long life. Over the years, emulsions have evolved and now provide stain resistance to the interior walls. Interior Emulsions contribute 17% to the total revenue of the company.
Exterior emulsions are used on the outer walls of buildings and are highly resistant to harsh weather conditions. These paints last long, protecting the exterior walls while maintaining their beauty. Exterior Emulsion contribute 12% to the total revenue of the company.
Wood finishers are used to coat wood and furniture, which gives it a glossy finish and enhances the life, while protecting it against weather. Wood finishers contribute about 2% of the total revenue of the company.
Company has moved beyond its growth phase and is now a strong dividend paying stock.
Financials tell you about the history of a business, and future plans give you an idea of where the business is headed. So here is my analysis of Asian Paints’ financials and their future expansion and diversification plans.
Note: On 30 July 2013, Asian Paints went under stock split, where it changed the face value of its share from Rs. 10 to Rs. 1. All per share financial data have been adjusted to post split levels.
Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.
In the past decade, Asian paints Basic EPS went up from Rs. 28.36 per share in 2007, to Rs. 166.5 in 2016, a growth of 19.33% CAGR. In the past 5 years, company has seen Basic EPS growth of 10.75% CAGR.
Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.
Asian Paints’ EPS (Cash) has seen a healthy growth from 33.1 in 2007 to 191.4 in 2016, a CAGR of 19.22%. In the past 5 years company has seen a cash EPS growth of 11.7% CAGR.
Revenue from operations/Share:
Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.
Company’s Revenue from Operations on per share is growing steadily. In the past decade, company has seen Operating revenue growth per share from Rs. 307 in 2007 to Rs. 1318 in 2016.Growth of 15.69% CAGR. In the past 5 years, company has registered a growth of 9.69% CAGR.
Net Profit Margin:
Net profit margin is expressed in percentage and is a key ratio used to compare profitability of two or more companies working in the same sector or industry.Net profit margin is a measure of how much percentage of total sales remain with company as profit after all the expenses are paid.
Company has improved its net profit margins in the past decade, from 9.21% in 2007, to 12.63% in 2016. This was possible because of company’s effective marketing strategy with focus on selling premium, high margin products and strong brand recognition.
Return on capital employed or ROCE as it is sometimes called, is a measure of how efficiently the capital of a company is being used to generate profits. In other words, ROCE shows how much profits company has generated for the total capital employed in the business. ROCE is expressed in percentage terms, for example a company with ROCE of 20% means that out of every one hundred rupees of capital employed, company made a profit of Rupees 20.
Company has successfully maintained high ROCE (Return on Capital Employed) in the past decade despite severe competition in the market. Company’s ROCE has been around healthy 30% for the past decade
Debt to Equity:
Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is a indication that majority of company is financed by loans and other debt (such as debentures and bonds).
Asian paints has been a debt free company for the past 5 years. Its debt to equity ratio is 0.01 in 2016 which means, only 1% of total capital invested in the company is debt and rest is financed either by equity or from company’s internal sources.
Dividend payout ratio and Dividend per share:
The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.
Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.
Asian Paints has been a consistent dividend paying stock for the past ten years. Asian paints pays roughly 40% of its net profit as dividends. In the year 2013, Asian Paints face value changed from Rs. 10 per share to Rs. 1 per share. If we adjust its dividend per share data to its previous rates, then Company pays a dividend of Rs. 75 per share, currently, its dividend per share in 2016 was Rs. 7.5 per share.
Future Expansion plans:
Company’s revenue comes from manufacturing, selling and distributing paints. This poses a business risk for the company, in case the price of raw material rises significantly. To de-risk its business, company is diversifying to other related categories.
Asian Paints entered the modern kitchen space after acquiring a 51 per cent stake in Sleek Group for about Rs 120 crore in August 2013. Sleek is in the business of manufacturing, selling and distribution of modular kitchens as well as kitchen components including wire baskets, cabinets, appliances, and accessories. It will use its existing paints dealers for the kitchen business.
In May 2014, Asian paints inked an agreement with Ess Ess Bathroom Products to acquire the entire front-end sales business, including brands, network and sales infrastructure, as part of the paint maker’s strategy to tap the bathroom fittings and décor market. The business in the above mentioned categories is marginal now, but company believes, it will be a significant revenue contributor in the near future.
Company has recently acquired Causeway Paints of Sri Lanka to expand its business. Asian Paints subsidiary Berger International has fully acquired Sri lankan company Causeway Paints in an all cash deal of Rs. 387 crores.
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What makes Asian paints a great investment:
- Strong business and market leadership with highest market share of 54%.
- Strong and consistent financial growth for the past 10 years
- Brand recognition and customer loyalty
- Availability of wide variety of products in various categories and price segments.
- Strong distribution network
- Repaint job being major revenue contributor, about 70% of revenue to the company is generated by repaint job. Gives repeated revenue to the company.
- Business diversification in relative categories, such as bath fittings and modular kitchen, de-risking company’s exposure to a single source of revenue, providing multiple sources of income generation for the company.
- Company is also working on capacity expansion of its existing emulsion business. Emulsions are high margin products, which will help Asian Paints improve its profit margins.