Colour coordinated

POUND WISE

Consistent domestic growth and consolidation in international markets paint a bright picture for Asian Paints.

India's largest, and Asia's third largest paint company, Asian Paints has been recording phenomenal growth both in the domestic market and abroad.

The market leader in the high growth-high volume decorative paints segment in India, Asian Paints is also set to have a stronger grip on the automotive and industrial paints sector.

Excellent growth in the housing, automotive and white goods segment owing to consistent growth in the country's GDP has led to a promising point, where the paint industry is set to perform well in the current financial year as it did in the previous year. Analysts estimate that this industry has been growing at a rate of 13 to 15 per cent annually.

Scoring a home run
Decorative, industrial and automotive paints are the main segments for paint companies.

In terms of operating margins too, decorative paints contribute more than the other segments. The decorative paints segment registers the highest growth, at about 15 per cent annually.

Asian Paints is an undisputable leader in the decorative paints segment with approximately 45 per cent market share. The company has increased the prices of its decorative products by about 3 per cent in a couple of price hikes effected in 2006, following the rise in oil prices which pushed up the cost of raw materials.

"These price hikes have been comfortably digested by the markets in the wake of high demand resulting in strong volume growth for the company," says Nirjhar Handa of Pioneer Intermediaries.

Thanks to Asian Paints' innovative approaches to marketing, the sector appears to be yielding even more. Value added services like Colour World Systems installed at more than 8,000 dealerships, Home Solutions- a paint consultant and contractor to home-owners and Royale Play special finishes for interior walls are made available in over 10 cities across India.

"Other companies have not shown as much enthusiasm in such initiatives because of their scepticism over the quality of service provided by the paint contractors, even though the concept has been working well for Asian Paints," says an analyst.

Another key driver of growth has been the exterior emulsions market, a part of the decorative paints segment.

"The growth in exterior emulsions market remained close to 30 per cent annually, as evident from the growth of ICI (India) Ltd which grew at almost 25 per cent in H1FY07, deriving a large part of its revenues from the segment," according to Sumeet Budhraja of Edelweiss Capital.

To gain from this segment, Asian Paints has brands like Apex and Ace exterior emulsions achieving more than half the share of the market with over the past few years. 
 

A SHADE BETTER
Financials (Rs crore)	Asian  Paints*	Kansai  Nerolac	Berger  Paints	ICI  (India)
Net sales	2578.25	1106.36	1078.37	922.07
% change (y-o-y)	20.77	17.06	15.84	8.76
Operating profit	431.93	236.62	118.00	130.28
OPM (%)	16.75	21.39	10.94	14.13
% change (bps)	9.00	64.00	296.00	175.00
Net profit	216.43	141.56	94.23	57.61
NPM (%)	8.39	12.80	8.74	6.25
% change (bps)	-89.00	-25.00	230.00	119.00
EPS (Rs)	26.11	55.49	3.74	14.10
CMP (Rs)	748.10	795.00	46.30	435.80
P/E (x)	28.65	14.33	12.40	30.90
Figures are for a trailing 12 month period ending September 2006 * Consolidated bps- basis points

A smoother drive?
Industrial and automotive paints grew about 9-10 per cent in 2006, as there was a remarkable growth in automobile sales, mainly passenger cars.

Although Kansai Nerolac leads the pack with almost half of the market share, Asian Paints which has a JV with PPG of the US has made significant in-roads in the automotive paints segment and has a stronghold on refinish paint markets.

Kansai Nerolac is a stronger player in the automotive and industrial paints segment because of the Japanese origins of the parent Kansai since a majority of the auto makers in India have Japanese collaborators or parents, says an analyst.

Kansai Nerolac has supply tie-ups with car and 2-wheeler majors such as Maruti Suzuki, Hero Honda, Bajaj and TVS. Asian Paints on the other hand has clients such as Hyundai and General Motors.

The segment looks promising but poses a significant margin crunch for paint companies because of the continuing price reduction drives of all the auto makers, each individual consumer being a bulk volume purchaser from the paint maker.

Painting the world
Internationally, Asian Paints has about 30 manufacturing facilities in 22 countries with a strong presence in the Middle East, Caribbean and South Pacific.

The company claims to be the largest paint company in ten overseas markets. The coming year does not seem to bring in any new market entry plans for the company, since Asian Paints is focusing more on the domestic front.

"Instead, the company has pulled out of a few slow growing smaller markets such as Mauritius, Malta, Myanmar and Philippines where it does not hold a majority share in the market while consolidating its position in the existing markets," says Pioneer's Handa.

At present, revenues from international operations contribute to a shade less than 20 per cent of the total revenues.

Valuations
At Rs 749, the stock trades at approximately 28 times estimated FY07 earnings and 23 times FY08 earnings.

The stock is valued expensive according to analysts, the reason for which is explained by Budhraja is that "the realisation of Asian Paints on a per litre basis (calculated as annual net sales revenues/annual volume) is about 15-25 per cent higher as compared to other players with a similar product mix in the industry".