Asian Paints

Equity Research INDIA February 27, 2020 BSE Sensex: 39746 Asian Paints HOLD ICICI Securities Limited Maintained is the author and distributor of this report Profit pool leader behaving like a challenger – Part III Rs1,844 Company update Drawing parallels between Cement and Paint sector

Paints Analyzing financials of major cement companies pre and post Competition Commission (CCI) order, we note (1) post CCI order price hikes tended lower and Target price: Rs1,800 (2) EBITDA margins of major cement companies corrected 300-600bps post CCI order and settled at lower levels. While there may be other reasons such as economic slowdown and lower capacity utilization, we believe CCI order on Shareholding pattern Jun Sep Dec cement companies may have curbed their pricing power. Drawing parallel for paint ‘19 ‘19 ‘19 industry, we believe Asian Paints’s ability to raise market shares via (excessive) Promoters 52.8 52.8 52.8 aggression in trade may reduce. We continue to believe that investigation by CCI Institutional investors 25.6 27.5 27.4 potentially triggers a 'change in strategy' (less aggression) by APNT. We keenly MFs and other 5.0 5.2 5.0 watch its strategy in trade. Reitetrate HOLD. Read “Profit pool leader behaving like Banks, FI’s, Insurance co 3.9 5.0 4.7 a challenger – Part I and Part II”. FIIs 16.7 17.3 17.7 Others 21.6 19.7 19.8  CCI order on cement industry: In Jun’12, The Competition Commission of India

Source: BSE (CCI) held ten cement companies and cement industry body guilty of violating the Competition Act 2002 for acting in concert to fix cement prices as well as limit and Price chart control the production and supply in the market. The complaint was filed by Builders 2,000 Association of India. (CCI order link) 1,800 1,600  Observations on EBITDA margin post CCI order: The EBITDA margins of major 1,400 cement companies corrected 300-600bps post CY12/FY13 and it has settled at lower 1,200(Rs) levels. While economic slow-down, lower capacity utilization, weakness in real estate 1,000 market and commodity deflation would have also contributed to margin decline, we 800

believe CCI order would have also impacted pricing power of cement companies.

Feb-19 Feb-17 Feb-18 Feb-20

Aug-17 Aug-19 Aug-18  Drawing parallels between cement and Paint sector: While CCI order on cement

companies was regarding cement prices, the order on APNT is related to (excessive) aggression in trade to gain/protect market shares. We believe change in strategy (if

any) by Asian Paints post CCI order may hurt its ability to gain market shares.  Change in strategy is more crucial than just the penalty: Consensus likely believe that the singular outcome of CCI order is a monetary penalty, in our view. While penalty may impact the FY21/FY22 earnings, we are more concerned about the change in strategy as it will have impact on APNT’s terminal value and not just short-term NAV impact.  Retain HOLD: We maintain our estimates and model sales, EBITDA and earnings CAGR of 13.4%, 17.8% and 22.7% respectively, for FY19-FY22E. Retain HOLD with

a DCF -based target price of Rs1,800 valuing the stock at 44x FY22E.

Market Cap Rs1768bn/US$24.7bn Year to March (Cons) FY19 FY20E FY21E FY22E Research Analysts: Reuters/Bloomberg ASPN.BO/APNT IN Net Revenue (Rs mn) 193,415 215,633 246,627 282,096 Manoj Menon Shares Outstanding (mn) 959.2 Net Profit (Rs mn) 21,595 28,835 34,288 39,936 [email protected] 52-week Range (Rs) 1917/1291 Dil. EPS (Rs) 22.5 30.1 35.7 41.6 +91 22 6637 7209 Free Float (%) 47.2 % Chg YoY 9.7 33.5 18.9 16.5 Aniruddha Joshi [email protected] FII (%) 17.7 P/E (x) 81.9 61.3 51.6 44.3 +91 22 6637 7249 Daily Volume (US$'000) 33,273 CEPS (Rs) 27.1 35.5 41.6 48.1 Vismaya Agarwal, CFA Absolute Return 3m (%) 7.5 EV/EBITDA (x) 50.2 41.9 35.3 30.2 [email protected] +91 22 2277 7632 Absolute Return 12m (%) 31.2 Dividend Yield (%) 0.6 0.7 0.7 0.7 Sensex Return 3m (%) (3.1) RoCE (%) 21.3 25.0 25.9 25.9 Sensex Return 12m (%) 10.7 RoE (%) 24.2 28.3 28.9 28.4

Please refer to important disclosures at the end of this report

Asian Paints, February 27, 2020 ICICI Securities

Analysing the impact of CCI order on cement companies

In Jun’12, The Competition Commission of India (CCI) held ten cement companies and cement industry body guilty of violating the Competition Act 2002 for acting in concert to fix cement prices as well as limit and control the production and supply in the market. The complaint was filed by filed by Builders Association of India.

In Jul-18, even NCLAT upheld the same CCI order. Companies have challenged the order and have appealed in Supreme Court which has asked companies to deposit 10% of penalty. Final outcome is still pending.

Table 1: Timeline of the CCI order and future court proceedings Timelines Particulars CCI imposed penalty on 10 cement companies and industry for alleged regulating prices and Jun-12 supply. Cement companies challenged the order before the Competition Appellate Tribunal (CAT). Dec-15 CAT set aside earlier CCI order and asked them to pass fresh order. CCI passed fresh order holding cement companies guilty yet again. This is challenged by Aug-16 companies before the National Company Law Appellate Tribunal (NCLAT). NCLAT dismissed company’s appeal stating they don’t find any merit. Cement companies have Jul-18 challenged the order in Supreme Court. Supreme Court (SC) admitted the company's civil appeal and has also granted stay against the Oct-18 order/ judgment of CCI/ NCLAT and asked companies to deposit 10% of penalty amount. Companies have deposited the money and waiting for the final order. Source: Company, I-Sec research

Penalty levied by CCI on cement companies: CCI imposed penalty of Rs63bn which is equivalent to 50% of past two years (FY10 and FY11) net profits of these companies and also passed ‘cease and desist order’.

Table 2: Penalty levied by CCI on cement companies CCI Penalty 90% to be paid Impact Company (Rsmn) (Rsmn) (Rs/share) % of Mcap JPA 13,236 11,912 NCLT; part acquired by UTCEM UTCEM 11,755 10,579 37 1% ACEM 11,639 10,475 5 3% ACC 11,476 10,328 55 4% Lafarge 4,900 4,410 Unlisted Century 2,740 2,466 Acquired by UTCEM TRCL 2,586 2,328 10 1% ICEM 1,875 1,687 5 6% Binani 1,673 1,506 Acquired by UTCEM JKCE 1,285 1,157 15 1% Total 63,166 56,849 Source: Company, I-Sec research

Cement price hikes pre & post CCI order: Cement prices had grown at CAGR of 6.2% over FY10-13 whereas it has grown at CAGR of just 0.3% over FY13-16 (1% over FY13-19). While we do note that the cost push inflation and other economic factors would have a bearing on price hikes, we note the price hikes were lower post CCI order.

Asian Paints, February 27, 2020 ICICI Securities

Chart 1: Cement price trends pre and post CCI order

Cement prices (Rs/bag)

320 310 300 290 280 270 260 250 240 230 220 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Source: Company, I-Sec research

EBITDA margin of the cement companies pre & post CCI order: The CCI issued the order on cement companies in July’12. We note the EBITDA margins of cement companies have corrected sharply post FY13.

Though many factors would have influenced EBITDA margins post FY12, we believe the CCI order would also have a bearing on the ‘reduction in pricing power’ of the cement companies.

Table 3: EBITDA margin of cement companies pre and post CCI order Pre CCI order Post CCI order EBITDA margin (%) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 UTCEM 32.5 19.5 21.8 22.7 18.6 18.2 19.1 20.5 19.6 18.2 ACC 30.4 21.9 18.8 19.3 14.6 12.9 12.0 12.7 14.1 14.3 ACEM 26.8 25.0 23.1 25.4 17.4 19.3 16.2 18.2 18.1 16.7 Source: Company, I-Sec research

Asian Paints, February 27, 2020 ICICI Securities

Drawing parallels for Asian Paints

While CCI order on cement sector was regarding the cement prices, the CCI order on Asian Paints is regarding its (excessive) aggression in the trade.

With its established moats such as (brands, large portfolio, established distribution and tinting machines), Asian Paints has expanded its market share (value) from 44% in FY08 to 53.6% in FY19. Government initiatives to formalize the economy have also helped large players such as Asian Paints to gain market shares.

With entry of new players, Asian Paints has increased its aggression in trade and is focusing on gaining market shares even in low priced paints / putty & primers. We believe CCI order may have some impact on Asian paints aggression in trade and hence its ability to gain market shares.

Chart 2: Steady improvement in market shares (value) of Asian Paints

Asian Paints

49 (%)

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY16 FY17 FY18 FY19

Source: Company, I-Sec research

Asian Paints, February 27, 2020 ICICI Securities

Valuations

We maintain our estimates and model sales, EBITDA and earnings CAGRs of 13.4%, 17.8% and 22.7% respectively, for FY19-FY22E. Retain HOLD with a DCF-based target price of Rs1,800 valuing the stock at 44x FY22E.

Chart 3: Mean PE and Standard deviations

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

40 (x) 30 20 10

Jul-16 Jul-17 Jul-18

Apr-09

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

Mar-10 Mar-11 Mar-12

Feb-13 Feb-14 Feb-15

Sep-09 Sep-10 Sep-11 Aug-12 Aug-13 Aug-14 Aug-15 Dec-18 Dec-19

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.

Asian Paints, February 27, 2020 ICICI Securities

Financial summary (consolidated)

Table 4: Profit & loss statement Table 7: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E Net Revenues 193,415 215,633 246,627 282,096 Operating Cashflow 26,018 34,024 39,923 46,144 Operating Expenses 158,170 173,465 196,938 224,465 Working Capital EBITDA 35,245 42,168 49,689 57,632 Changes 104 (3,005) (3,571) (3,950) % margins 18.2% 19.6% 20.1% 20.4% Capital Commitments (13,602) (9,500) (9,500) (9,500) Depreciation & Free Cashflow 12,520 21,519 26,851 32,694 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 38,939 46,169 53,706 Inc (Dec) in Borrowings 953 - - - Less: Taxes 10,988 10,018 11,830 13,757 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 28,835 34,288 39,936 Tax Liability 1,422 - - - Extraordinaries (Net) - - - - Chg. in Cash & Bank Recurring Net Income 21,595 28,835 34,288 39,936 balances 402 4,470 9,836 15,718 Source: Company data, I-Sec research Source: Company data, I-Sec research

Table 5: Balance sheet Table 8: 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 82,030 102,375 130,119 EPS 22.5 30.1 35.7 41.6 of which cash & cash eqv. 4,449 8,918 18,754 34,472 Cash EPS 27.1 35.5 41.6 48.1 Total Current Liabilities & Dividend per share (DPS) 10.5 13.0 13.0 13.0 Provisions 45,949 50,477 57,414 65,489 Book Value per share (BV) 99.2 113.7 133.9 159.9 Net Current Assets 24,079 31,554 44,961 64,629 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 11.5 14.4 14.4 Capital Work-in-Progress 2,097 2,097 2,097 2,097 EBITDA 10.2 19.6 17.8 16.0 Goodwill 3,213 3,213 3,213 3,213 PAT 9.7 33.5 18.9 16.5 Total Assets 110,385 124,256 143,580 168,553 Cash EPS 11.1 30.8 17.3 15.6

Liabilities Valuation Ratios (x) Borrowings 6,160 6,160 6,160 6,160 P/E 81.9 61.3 51.6 44.3 Deferred Tax Liability 5,397 5,397 5,397 5,397 P/CEPS 68.0 52.0 44.3 38.3 Minority Interest 3,631 3,631 3,631 3,631 P/BV 18.6 16.2 13.8 11.5 Equity Share Capital 959 959 959 959 EV / EBITDA 50.2 41.9 35.3 30.2 Face Value per share (Rs) 1 1 1 1 EV / Sales 9.2 8.2 7.1 6.2 Reserves & Surplus* 94,238 108,109 127,434 152,407 Less: Misc. Exp. n.w.o. - - - - Operating Ratios Net Worth 95,197 109,069 128,393 153,366 Raw Material / Sales (%) 58.6 57.0 56.4 56.1 Total Liabilities 110,384 124,256 143,580 168,553 Employee cost / Sales (%) 6.6 6.7 6.7 6.7 Source: Company data, I-Sec research SG&A / Sales (%) 16.6 16.8 16.8 16.8 Other Income / PBT (%) 6.9 6.2 5.7 5.3 Table 6: Quarterly trends Effective Tax Rate (%) 33.6 25.7 25.6 25.6 Working Capital (days) 36.9 38.1 38.6 38.8 (Rs mn, year ending March 31) Inventory Turnover (days) 58.6 58.6 58.6 58.6 Mar-19 Jun-19 Sep-19 Dec-19 Receivables (days) 35.6 35.6 35.6 35.6 Net revenues 50,182 51,306 50,507 54,203 Payables (days) 76.0 76.0 76.0 76.0 % growth (YoY) 11.7 16.6 9.4 3.0 Net D/E Ratio (x) 0.1 0.1 0.0 0.0 EBITDA 8,838 11,563 9,548 11,894 Margin (%) 17.6 22.5 18.9 21.9 Profitability Ratios (%) Other income 572 736 1,052 698 Net Income Margins 11.2 13.4 13.9 14.2 Extraordinaries (Net) - - 45 330 RoACE 21.3 25.0 25.9 25.9 Adj. Net profit 4,717 6,554 8,230 7,654 RoAE 24.2 28.3 28.9 28.4 Source: Company data, I-Sec research Dividend Payout 46.4 43.1 36.3 31.2 Dividend Yield 0.6 0.7 0.7 0.7 EBITDA Margins 18.2 19.6 20.1 20.4 Source: Company data, I-Sec research

Asian Paints, February 27, 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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