Equity Research INDIA January 4, 2020 BSE Sensex: 41627 Asian Paints HOLD ICICI Securities Limited Maintained is the author and distributor of this report Profit pool leader behaving like a challenger Rs1,751 We highlight a distinctive trend in paints industry – Asian Paints - the profit pool

Company update market leader (volume, value and profit share of 51%, 58% and 64%) is behaving like a challenger. This is evidenced, in our view, by (1) frequent price cuts (mostly Paints in enamels), (2) near-all-time-high trade discounts and (3) launch of ‘cheap’ emulsion (premium segment) at the price of distemper (mid segment). Historically, Target price: Rs1,800 decorative paints has been a high-entry-barrier business (top-4 players have 98%

market share) and the (relative) success of newer players like Indigo Paints, Shareholding pattern Nippon Paints has potentially triggered these actions from APNT, in our view. Mar Jun Sep Importantly, we reckon APNT will be watching closely the ramp-up by the recent ‘19 ‘19 ‘19 Promoters 52.8 52.8 52.8 entrant JSW Paints. In summary, APNT’s actions potentially limit ability of other Institutional paint companies to outperform. Retain HOLD rating on Asian Paints, Akzo Nobel, investors 25.8 25.6 27.5 MFs and other 4.2 5.0 5.2 Berger and ADD on Kansai Nerolac. Banks, FI’s, Insurance co 5.0 3.9 5.0  Market leader with share of 51% volumes, 58% value & 64% EBITDA: APNT has FIIs 16.6 16.7 17.3 strengthened its market leadership in volumes, value as well as profitability over Others 21.4 21.6 19.7

Source: BSE FY2006-2019. It has reported volume CAGR of 12.5% over FY06-19 whereas industry has grown at CAGR of 11.9% over FY06-19. Its EBITDA share stood at 64% Price chart in FY19 compared to 53% in FY06. 2,000  Higher industry profit pool likely increased competitive activity over FY06-19: 1,800 1,600 While APNT has gained volumes; it has also improved its profitability over FY06-19. 1,400 Its EBITDA margin expanded to 18.2% in FY19 from 13% in FY06. We believe

1,200(Rs) higher profitability has invited more players to enter paint industry such as 1) Indigo 1,000 Paints, 2) Nippon and 3) JSW Paints. 800 600  Launch of Tractor Sparc emulsion brand to counter higher competitive

pressure: We believe launch of Tractor Sparc has two objectives 1) Uptrade

Jul-19 Jul-18

Jul-17 consumers from distempers (mid-segment) and arrest downtrading in emulsions (if

Jan-17 Jan-19 Jan-20 Jan-18 any) and 2) Signal the competition. Tractor Sparc is a likely message to recent and prospective entrants in paint industry that APNT will protect market shares even if it costs profitability.  Channel check feedback: While the success of Tractor Sparc will be known only in due course (it’s launched recently), our channel checks suggest muted product acceptance currently.

 Retain HOLD on APNT: We maintain our estimates and model sales, EBITDA and earnings CAGR of 14.8%, 17.5% and 22.5% respectively, for FY19-FY22E. Retain HOLD with a DCF-based target price of Rs1,800 valuing the stock at 47x Sept’ 21E.

Market Cap Rs1718bn/US$24bn Year to March (Cons) FY19 FY20E FY21E FY22E Research Analysts: Reuters/Bloomberg ASPN.BO/APNT IN Net Revenue (Rs mn) 193,415 222,113 255,095 293,005 Manoj Menon Shares Outstanding (mn) 959.2 Net Profit (Rs mn) 21,595 28,731 33,966 39,665 [email protected] 52-week Range (Rs) 1827/1304 Dil. EPS (Rs) 22.5 30.0 35.4 41.4 +91 22 6637 7209 Free Float (%) 47.2 % Chg YoY 9.7 33.0 18.2 16.8 Aniruddha Joshi [email protected] FII (%) 17.3 P/E (x) 77.8 58.5 49.4 42.3 +91 22 6637 7249 Daily Volume (US$'000) 32,745 CEPS (Rs) 27.1 35.4 41.3 47.8 Vismaya Agarwal, CFA Absolute Return 3m (%) 0.3 EV/EBITDA (x) 47.7 39.9 33.9 28.9 [email protected] +91 22 2277 7632 Absolute Return 12m (%) 27.1 Dividend Yield (%) 0.6 0.7 0.7 0.7 Sensex Return 3m (%) 8.9 RoCE (%) 21.3 24.9 25.8 25.8 Sensex Return 12m (%) 18.1 RoE (%) 24.2 28.2 28.7 28.3

Please refer to important disclosures at the end of this report

Asian Paints, January 4, 2020 ICICI Securities

Profit pool leader behaving like a challenger

Revenue pool dominated by Asian Paints…: Asian Paints dominates the paints market in India with market share of 58% (value) in FY19. Its market share (value) has steadily expanded from 51% in FY06 to 58% in FY19. We believe the steady growth in market shares is attributable to 1) distribution expansion and focus on tinting machines, 2) steady launches across price points and 3) investments in brand building.

Chart 1: Market shares in paint industry (Volume) Chart 2: Market shares in paint industry (Value)

APNT Berger Kansai Akzo APNT Berger Kansai Akzo

100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10%

0% 0%

FY11 FY17 FY11 FY17 FY06 FY07 FY08 FY09 FY10 FY12 FY13 FY14 FY15 FY16 FY18 FY19 FY06 FY07 FY08 FY09 FY10 FY12 FY13 FY14 FY15 FY16 FY18 FY19

Source: Company, I-Sec research Source: Company, I-Sec research

… as well as EBITDA pool: While the revenue market share of Asian Paints has expanded from 51% in FY06 to 58% in FY19, we note the share of EBITDA has moved upwards to 64% in FY19 from 53% in FY06. The steady increase in EBITDA margin (ahead of peers) is attributable to 1) higher scale of operations and 2) premiumisation.

Chart 3: EBITDA share of incumbents in paint industry

APNT Berger Kansai Akzo

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

0%

FY16 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY17 FY18 FY19

Source: Company, I-Sec research

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Asian Paints, January 4, 2020 ICICI Securities

Launch of Tractor Sparc: Asian Paints introduced Tractor Sparc in Q2FY20 at Rs80/ltr. We note the launch is expected to result in 1) Facilitate up-trading for consumers using distempers, 2) Arrest down-trading (if any) with slowdown in economy and 3) to give a message to the competition that Asian Paints is keen on volume growth and protecting its market shares.

Chart 4: Tractor Sparc Economy emulsion

Source: Company, I-Sec research

Realizations across variants: The prices of distempers are c.Rs60/Ltr whereas the prices of emulsions are above Rs100/Ltr. Asian Paints had a gap in its portfolio at price point of Rs70-80/Ltr. With launch of Tractor Sparc, the company has bridged the gap in the portfolio.

Chart 5: Tractor Sparc has bridged the gap between distempers and emulsions

120

100 100

80 80

60

60 (Rs/ltr)

40

20

- Distempers Tractor Sparc Other Emulsions

Source: Company, I-Sec research

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Asian Paints, January 4, 2020 ICICI Securities

Increase in competitive pressures: The competitive intensity has increased in past five years with JSW paints and Indigo paints entering the market. We believe regional players like Kamdhenu paints are also aggressive and are gaining market shares. There is also competitive pressure in putty segment with cement companies raising promotions/discounts to gain market shares.

Table 1: Increase in competitive pressure New players Regions JSW paints Tamil Nadu Indigo paints South India Nippon South India Kamdhenu Paints North India Source: Company, I-Sec research

Channel checks feedback: We spoke to multiple dealers across India to understand success of Tractor Sparc. The channel partners indicate the product has muted acceptance due to:

 There are no additional commissions and discounts,  There is no scheme to support the brand,  There is negligible media support to create ‘pull’ from the consumers.  Also the dealer’s effective commission reduces by selling product with lower retail price.

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Asian Paints, January 4, 2020 ICICI Securities

Valuations

We maintain our estimates and model sales, EBITDA and earnings CAGR of 14.8%, 17.5% and 22.5% respectively, for FY19-FY22E. Retain HOLD with a DCF-based target price of Rs1,800 valuing the stock at 47x Sept’ 21E.

Chart 6: Mean PE and Standard deviations

80 APNT P/E -1 Std Dev. Mean +1 Std Dev. 70 60 50

40 (x) 30 20 10

0

Jul-16 Jul-17 Jul-18

Apr-09

Jan-16 Jan-17 Jan-18 Jun-19

Mar-12 Mar-10 Mar-11

Feb-13 Feb-14 Feb-15

Dec-19 Sep-10 Sep-11 Aug-12 Aug-13 Aug-14 Aug-15 Dec-18 Sep-09 Source: Bloomberg and I-Sec research

Risks

 Volatility in raw material prices is a major risk to our estimates. Input cost increases led by high crude prices and a weak INR could put pressure on the margins in the short term due to lag in price action.  Significant increase in competitive pressures.

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Asian Paints, January 4, 2020 ICICI Securities

Financial summary (consolidated)

Table 2: Profit & loss statement Table 5: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E Net Revenues 193,415 222,113 255,095 293,005 Operating Cashflow 26,018 33,920 39,601 45,873 Operating Expenses 158,170 180,109 205,863 235,767 Working Capital EBITDA 35,245 42,004 49,232 57,237 Changes 104 (3,237) (3,596) (4,070) % margins 18.2% 18.9% 19.3% 19.5% Capital Commitments (13,602) (9,500) (9,500) (9,500) Depreciation & Free Cashflow 12,520 21,183 26,506 32,303 Amortisation 4,307 5,103 5,583 6,195 Cashflow from Gross Interest 510 554 554 554 Investing Activities (4,230) (2,000) (2,000) (2,000) Other Income 2,271 2,428 2,618 2,824 Issue of Share Capital 1,865 (86) (51) (13) Recurring PBT 32,699 38,775 45,712 53,312 Inc (Dec) in Borrowings 953 - - - Less: Taxes 10,988 9,958 11,694 13,635 Dividend paid (12,127) (14,964) (14,964) (14,964) Less: Minority Interest 116 86 51 13 Change in Deferred Net Income (Reported) 21,595 28,731 33,966 39,665 Tax Liability 1,422 - - - Extraordinaries (Net) - - - - Chg. in Cash & Bank Recurring Net Income 21,595 28,731 33,966 39,665 balances 402 4,134 9,491 15,326 Source: Company data, I-Sec research Source: Company data, I-Sec research

Table 3: Balance sheet Table 6: Key ratios (Rs mn, year ending March 31) (Year ending March 31) FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E Assets Per Share Data (Rs) Total Current Assets 70,028 83,891 104,565 132,745 EPS 22.5 30.0 35.4 41.4 of which cash & cash eqv. 4,449 8,582 18,073 33,399 Cash EPS 27.1 35.4 41.3 47.8 Total Current Liabilities & Dividend per share (DPS) 10.5 13.0 13.0 13.0 Provisions 45,949 52,442 60,029 68,813 Book Value per share (BV) 99.2 113.6 133.4 159.2 Net Current Assets 24,079 31,449 44,535 63,932 Investments 25,697 27,697 29,697 31,697 Growth (%) Net Fixed Assets 55,299 59,696 63,613 66,917 Net Sales 15.0 14.8 14.8 14.9 Capital Work-in-Progress 2,097 2,097 2,097 2,097 EBITDA 10.2 19.2 17.2 16.3 Goodwill 3,213 3,213 3,213 3,213 PAT 9.7 33.0 18.2 16.8 Total Assets 110,385 124,152 143,154 167,856 Cash EPS 11.1 30.4 16.7 15.8

Liabilities Valuation Ratios (x) Borrowings 6,160 6,160 6,160 6,160 P/E 77.8 58.5 49.4 42.3 Deferred Tax Liability 5,397 5,397 5,397 5,397 P/CEPS 64.6 49.5 42.4 36.6 Minority Interest 3,631 3,631 3,631 3,631 P/BV 17.6 15.4 13.1 11.0 Equity Share Capital 959 959 959 959 EV / EBITDA 47.7 39.9 33.9 28.9 Face Value per share (Rs) 1 1 1 1 EV / Sales 8.7 7.6 6.5 5.6 Reserves & Surplus* 94,238 108,005 127,008 151,709 Less: Misc. Exp. n.w.o. - - - - Operating Ratios Net Worth 95,197 108,964 127,967 152,668 Raw Material / Sales (%) 58.6 58.0 57.6 57.4 Total Liabilities 110,385 124,152 143,154 167,856 Employee cost / Sales (%) 6.6 6.5 6.4 6.4 Source: Company data, I-Sec research SG&A / Sales (%) 16.6 16.7 16.7 16.7 Other Income / PBT (%) 6.9 6.3 5.7 5.3 Table 4: Quarterly trends Effective Tax Rate (%) 33.6 25.7 25.6 25.6 Working Capital (days) 36.9 37.4 37.7 37.8 (Rs mn, year ending March 31) Inventory Turnover (days) 58.6 58.6 58.6 58.6 Dec-18 Mar-19 Jun-19 Sep-19 Receivables (days) 35.6 35.6 35.6 35.6 Net revenues 52,940 50,182 51,306 50,507 Payables (days) 76.0 76.0 76.0 76.0 % growth (YoY) 24.1 11.7 16.6 9.4 Net D/E Ratio (x) 0.1 0.1 0.0 0.0 EBITDA 10,430 8,838 11,563 9.548 Margin (%) 19.7 17.6 22.5 18.9 Profitability Ratios (%) Other income 452 572 736 1,052 Net Income Margins 11.2 13.0 13.3 13.5 Extraordinaries (Net) - - - 45 RoACE 21.3 24.9 25.8 25.8 Adj. Net profit 6,356 4,717 6,554 8,230 RoAE 24.2 28.2 28.7 28.3 Source: Company data, I-Sec research Dividend Payout 46.4 43.3 36.7 31.4 Dividend Yield 0.6 0.7 0.7 0.7 EBITDA Margins 18.2 18.9 19.3 19.5 Source: Company data, I-Sec research

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Asian Paints, January 4, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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