Asian Paints

Equity Research INDIA June 24, 2020 BSE Sensex: 35430 Asian Paints HOLD ICICI Securities Limited Maintained is the author and distributor of this report No surprises Rs1,684 APNT says, (1) rural markets are likely to outperform urban, (2) low value products

Q4FY20 result review (putty, primer and low end paints) will continue to grow at a faster pace than and earnings revision premium paints, (3) high probability of down-trading in FY2021, (4) it has invested more in strengthening its relationships with the trade via additional credit period, Paints schemes/discounts, free sanitization of shops and insurance for dealers and painters, (5) input deflation is likely to be passed on, (6) as consumers are Target price: Rs1,600 spending more time at home, they will invest in beautification of their houses

Earnings revision which is a long term positive trend for paint industry. While we continue to remain long term bulls on paint sector, we believe more comfort is required on valuations (%) FY21E FY22E Sales ↓ 1.7 ↓ 1.5 to turn more constructive. Retain HOLD. EBITDA ↑ 3.0 ↑ 0.4 EPS ↓ 6.0 ↓ 6.9  Strong growth in Jan-Feb’20: APNT’s volume growth was in double digits in Jan- Feb’20 but it was impacted by lockdown in Mar’20. The company has not changed Target price revision Rs1,600 from Rs1500 the prices of its products post 1% reduction in Dec’19. However, it has announced various trade schemes. The company reported volume growth of 11% in FY20. Shareholding pattern Sep Dec Mar  Segment-wise performance in FY20: Bottom-of-the-pyramid products (putty, ‘19 ‘19 ‘20 primer, and economy paints) posted double digit volume growth indicating market Promoters 52.8 52.8 52.8 Institutional share gains. The slowdown in auto sector impacted automotive paint sales. Home investors 27.5 27.4 27.0 improvement segment (kitchen and bath) were impacted by slowdown in real estate. MFs and other 5.2 5.0 4.5 Banks, FI’s, Insurance co 5.0 4.7 4.7  Smaller towns and rural regions to perform better: The smaller cities and rural FIIs 17.3 17.7 17.8 markets are relatively performing better than urban markets. Metros and tier-1 cities Others 19.7 19.8 20.2 account for 40-50% of revenues. There is recovery in all parts of India now and some Source: BSE of the metros such as Bengaluru and Hyderabad are also doing better. Due to Price chart lockdown in Chennai and Punjab, the revenue recovery is expected to be slower. 2,000 1,800  Focus on low value products to continue: The company will continue to focus 1,600 more on putty, primer and low end paints. It expects these segments to grow at 1,400 faster pace than premium paints. It also expects some down-trading in FY21.

1,200(Rs) 1,000  Additional investments in trade channels: The company extended the support to 800 the trade via (1) additional credit period, (2) additional schemes/ discounts, (3) 600 services like free sanitization of shops and face masks and (4) medical insurance for

the dealers, painters and contractors.

Jun-17 Jun-19 Jun-18 Jun-20

Dec-18 Dec-19 Dec-17  Maintain HOLD: We model sales and earnings CAGRs of 4%, and 2.3%

respectively, for FY20-FY22E. Retain HOLD with a DCF-based target price of Rs1,600 (Implied target P/E 54x FY22E, Earlier TP-Rs1,500).

Market Cap Rs1615bn/US$21.3bn Year to March (Cons) FY19 FY20P FY21E FY22E Research Analysts: Reuters/Bloomberg ASPN.BO/APNT IN Net Revenue (Rs mn) 193,415 202,113 181,826 218,438 Manoj Menon Shares Outstanding (mn) 959.2 Net Profit (Rs mn) 21,595 27,556 22,573 28,259 [email protected] 52-week Range (Rs) 1894/1321 Dil. EPS (Rs) 22.5 28.2 23.5 29.5 +91 22 6637 7209 Free Float (%) 47.2 % Chg YoY 9.7 25.1 (16.5) 25.2 Aniruddha Joshi [email protected] FII (%) 17.8 P/E (x) 74.8 59.8 71.6 57.2 +91 22 6637 7249 Daily Volume (US$'000) 51,684 CEPS (Rs) 27.1 36.6 32.0 38.9 Vismaya Agarwal, CFA Absolute Return 3m (%) 12.4 EV/EBITDA (x) 45.9 38.9 43.5 35.7 [email protected] +91 22 2277 7632 Absolute Return 12m (%) 22.5 Dividend Yield (%) 0.6 0.7 0.7 0.8 Sensex Return 3m (%) 36.7 RoCE (%) 21.3 24.3 19.1 21.9 Sensex Return 12m (%) (8.7) RoE (%) 24.2 27.8 21.7 24.7

Please refer to important disclosures at the end of this report

Asian Paints, June 24, 2020 ICICI Securities

Table 1: Q4FY20 consolidated financial performance Rs mn Q4FY20 Q4FY19 % YoY Q3FY20 % QoQ Net revenues 46,356 50,182 (7.6) 54,203 (14.5)

Raw materials 25,106 29,326 (14.4) 30,890 (18.7) % of sales 54.2% 58.4% -428 bps 57.0% -283 bps Employee costs 3,356 3,305 1.5 3,430 (2.2) % of sales 7.2% 6.6% 65 bps 6.3% 91 bps Other expenditure 9,298 8,713 6.7 7,989 16.4 % of sales 20.1% 17.4% 269 bps 14.7% 532 bps Total expenditure 37,760 41,344 (8.7) 42,309 (10.8)

EBITDA 8,596 8,838 (2.7) 11,894 (27.7) EBITDA margin (%) 18.5% 17.6% 93 bps 21.9% -340 bps Other income 558 572 (2.5) 698 (20.1) PBDIT 9,154 9,410 (2.7) 12,592 (27.3) Depreciation 1,945 1,795 8.4 1,971 (1.3) PBIT 7,209 7,615 (5.3) 10,621 (32.1) Interest 257 297 (13.6) 241 6.6 PBT 6,953 7,318 (5.0) 10,381 (33.0) Tax 2,190 2,517 (13.0) 2,776 (21.1) % of PBT 31% 34% (8.4) 27% 17.8 PAT before associates & MI 4,763 4,801 (0.8) 7,605 (37.4) Share of profit from assocates 40 59 (32.8) 192 (79.4) Minority interest 249 143 73.6 143 74.5 Extraordinary 170 - n.m. 330 (48.6) PAT 4,723 4,717 0.1 7,985 (40.8) Adj. PAT 4,554 4,717 (3.5) 7,654 (40.5) Source: Company data, I-Sec research

Table 2: Segmental performance (consolidated) Q4FY20 Q4FY19 % YoY Q3FY20 % QoQ Revenues (Rs mn) Paints 45,329 48,991 (7.5) 52,941 (14.4) Home improvement 1,027 1,191 (13.8) 1,261 (18.6) Total 46,356 50,182 (7.6) 54,203 (14.5) EBIT (Rs mn) Paints 8,070 7,999 0.9 11,054 (27.0) Home improvement (222) (138) 60.8 (168) 31.8 Total 7,848 7,861 (0.2) 10,885 (27.9) EBIT margin (%) YoY bps QoQ bps Paints 17.8 16.3 148 20.9 (307) Home improvement (21.6) (11.6) (1,002) (13.3) (826) Total 16.9 15.7 127 20.1 (315) Source: Company data, I-Sec research

Asian Paints, June 24, 2020 ICICI Securities

Table 3: Q4FY20 Standalone financial performance Rs mn Q4FY20 Q4FY19 % YoY Q3FY20 % QoQ Net revenues 38,790 42,353 (8.4) 46,569 (16.7)

Raw materials 20,560 24,128 (14.8) 26,099 (21.2) % of sales 53% 57% -396 bps 56% -304 bps Employee costs 2,372 2,430 (2.4) 2,475 (4.2) % of sales 6% 6% 38 bps 5% 80 bps Other expenditure 8,100 7,596 6.6 6,816 18.8 % of sales 21% 18% 295 bps 15% 624 bps Total expenditure 31,032 34,154 (9.1) 35,390 (12.3)

EBITDA 7,758 8,199 (5.4) 11,179 (30.6) EBITDA margin (%) 20.0% 19.4% 64 bps 24.0% -400 bps Other income 651 723 (9.9) 928 (29.8) PBDIT 8,410 8,922 (5.7) 12,107 (30.5) Depreciation 1,722 1,571 9.6 1,737 (0.9) PBIT 6,688 7,351 (9.0) 10,370 (35.5) Interest 193 227 (14.7) 196 (1.1) PBT 6,495 7,124 (8.8) 10,174 (36.2) Tax 1,642 2,343 (29.9) 2,585 (36.5) % of PBT 25% 33% (23.1) 25% (0.5) PAT 4,853 4,781 1.5 7,589 (36.1) Minority interest - - - - - Extraordinary items (313) - - 299 (204.5) PAT after MI 4,540 4,781 (5.0) 7,888 (42.4) Adj. PAT 4,853 4,781 1.5 7,589 (36.1) Source: Company data, I-Sec research

Table 4: Segmental performance (standalone) Q4FY20 Q4FY19 % YoY Q3FY20 % QoQ Revenues (Rs mn) Paints 38,283 41,764 (8.3) 45,979 (16.7) Home improvement 508 589 (13.9) 590 (14.0) Total 38,790 42,353 (8.4) 46,569 (16.7) EBIT (Rs mn) Paints 7,418 7,642 (2.9) 10,559 (29.7) Home improvement (73) (34) 116.4 (72) 0.4 Total 7,346 7,608 (3.5) 10,487 (30.0) EBIT margin (%) YoY bps QoQ bps Paints 19.4 18.3 108 23.0 (359) Home improvement (14.3) (5.7) (862) (12.3) (205) Total 18.9 18.0 97 22.5 (358) Source: Company data, I-Sec research

Asian Paints, June 24, 2020 ICICI Securities

Key operational highlights - Quarterly

Chart 1: Revenue growth (YoY) Chart 2: Gross margin

25% 48%

20% 46% 15% 44% 10% 42% 5% 40% 0%

-5% 38%

-10% 36%

1QFY17

4Q FY17 4Q FY18 3Q FY19 2Q 2Q FY17 2Q FY17 3Q FY18 1Q FY18 2Q FY18 4Q FY19 1Q FY19 3Q FY19 4Q FY20 1Q FY20 2Q FY20 3Q FY20 4Q

3Q FY17 3Q FY18 4Q 2Q FY17 2Q FY17 4Q FY18 1Q FY18 2Q FY18 3Q FY19 1Q FY19 2Q FY19 3Q FY19 4Q FY20 1Q FY20 2Q FY20 3Q FY20 4Q

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

Chart 3: EBITDA margin Chart 4: PAT growth (YoY)

25% 80% 70% 20% 60% 50% 40% 15% 30% 20% 10% 10% 0% 5% -10% -20%

0% -30%

1QFY17 1QFY17

2Q FY18 2Q FY20 2Q 2Q FY17 2Q FY17 3Q FY17 4Q FY18 1Q FY18 2Q FY18 3Q FY18 4Q FY19 1Q FY19 2Q FY19 3Q FY19 4Q FY20 1Q FY20 2Q FY20 3Q FY20 4Q FY17 2Q FY17 3Q FY17 4Q FY18 1Q FY18 3Q FY18 4Q FY19 1Q FY19 2Q FY19 3Q FY19 4Q FY20 1Q FY20 3Q FY20 4Q

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

Chart 5: Effective tax rate Chart 6: Staff cost and other expenditure as % of net sales

40.0% 30.0% 35.0% 25.0% 30.0% 20.0% 25.0% 20.0% 15.0% 15.0% 10.0% 10.0% 5.0% 5.0%

0.0% 0.0%

1QFY17 1QFY17

2Q FY19 2Q 2Q FY17 2Q FY17 3Q FY17 4Q FY18 1Q FY18 2Q FY18 3Q FY18 4Q FY19 1Q FY19 3Q FY19 4Q FY20 1Q FY20 2Q FY20 3Q FY20 4Q FY17 2Q FY17 3Q FY17 4Q FY18 1Q FY18 2Q FY18 3Q FY18 4Q FY19 1Q FY19 2Q FY19 3Q FY19 4Q FY20 1Q FY20 2Q FY20 3Q FY20 4Q

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

Asian Paints, June 24, 2020 ICICI Securities

Key operational highlights - Annual

Chart 7: Revenues and growth rates Chart 8: EBITDA margin

2,50,000 Revenues EBITDA margin Mean +1SD -1SD 22.0 2,00,000 21.0 20.0 1,50,000 19.0 18.0

17.0 (Rs mn) (Rs 1,00,000 (%) 16.0 15.0 50,000 14.0 13.0

- 12.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

FY14 FY17 FY10 FY11 FY12 FY13 FY15 FY16 FY18 FY19

FY21E FY20P FY22E

FY20P FY21E FY22E

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

Chart 9: PAT and growth rates Chart 10: RoE & RoCE

PAT RoE RoCE 30,000 70.0 25,000 60.0

20,000 50.0

15,000 40.0 (%)

(Rs mn) (Rs 30.0 10,000 20.0 5,000 10.0

- -

FY11 FY10 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

FY14 FY15 FY10 FY11 FY12 FY13 FY16 FY17 FY18 FY19

FY20P FY21E FY22E

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

Chart 11: Net working capital days Chart 12: Free cash-flow

Net working capital days FCF 50 25,000 45 40 20,000 35 30 15,000 25

20 mn) (Rs 10,000 15 10 5,000 5

- -

FY15 FY10 FY11 FY12 FY13 FY14 FY16 FY17 FY18 FY19

FY13 FY10 FY11 FY12 FY14 FY15 FY16 FY17 FY18 FY19

FY22E FY20P FY21E

FY20P FY21E FY22E

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

Asian Paints, June 24, 2020 ICICI Securities

Key raw material prices

Chart 13: Titanium di-oxide Chart 14: Crude oil

Titanium Dioxide (Rs/Kg) Crude oil (Rs/bbl)

350 8,000

300 7,000 6,000 250 5,000 200 4,000 150 3,000 100 2,000 50 1,000

0 0

Jul-11 Jul-18

Oct-09 Apr-13 Oct-16 Apr-20

Jun-14 Jan-15

Feb-12 Mar-16 Feb-19

Feb-19 Feb-12 Mar-16

Sep-19 Dec-10 Sep-12 Nov-13 Aug-15 Dec-17

Dec-10 Sep-12 Nov-13 Aug-15 Dec-17 Sep-19

May-10 May-17

May-17 May-10

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

Chart 15: Packaging material - PVC Chart 16: Packaging material - Tin

Plastic PVC Pest grade (Rs/Kg) Tin (Rs/Kg)

160 1,600 140 1,400 120 1,200 100 1,000 80 800 60 600 40 400 20 200

0 0

Jul-11 Jul-18 Jul-18 Jul-11

Oct-09 Apr-13 Oct-16 Apr-20 Oct-09 Apr-13 Oct-16 Apr-20

Jun-14 Jan-15 Jun-14 Jan-15

Feb-19 Feb-12 Mar-16 Feb-12 Mar-16 Feb-19

Dec-10 Nov-13 Dec-17 Dec-10 Nov-13 Dec-17

Aug-15 Sep-12 Aug-15 Sep-19 Sep-12 Sep-19

May-17 May-10 May-10 May-17

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

Asian Paints, June 24, 2020 ICICI Securities

Key highlights from Q4FY20 results and conference call  Asian Paints reported 7.6% revenue decline as the 2nd fortnight of March’20 was impacted by lockdown. There was double digit volume growth in Jan and Feb’20.  While there was decline in domestic revenues, international business performed better. The countries in Indian subcontinent performed in line with India whereas countries in Middle East performed better.  While the metros and tier-1 cities are more impacted due to coronavirus, there is relatively better off-take in smaller cities and rural areas. Metros and Tier-1 cities account for 40-50% of APNT’s revenues.  Though the company expects rural regions to perform better than urban regions in FY21, it expects the revenue mix will revert to pre covid levels in medium term.  There is improvement in revenues in June’20 compared to revenues in May’20.  The industrial coating business as well as automotive coating business was impacted due to slowdown in economy and automotive sector.  Home improvement categories i.e. Sleek (Kitchen) and Ess Ess (Bath) were impacted due to slowdown in real estate construction space.  The company expects as consumers are spending more time at home, they will value their houses more and it should lead to higher demand for paints.  The company believes there is improvement revenue off-take in most regions of India and expects faster recovery for Asian Paints compared to peers.  Among the metros, Mumbai, Delhi and Chennai are more affected but metros like Bengaluru and Hyderabad are doing relatively better.  The company expects the low end categories to continue to grow at faster rate and hence, the volume growth will continue to be higher than value growth.  India does not have culture of Do-it-yourself (DIY) paints. Also the painting activity in India also involves repair work too. Hence, there will be relatively slower recovery in India compared to countries where DIY paints are more used.  The company will incur capex on a need basis. It is going to assess the capex need on a quarterly basis.  Infrastructure and real estate accounts for less than 10% of revenues. As most of the projects are yet to commence, there is relatively slower recovery in this segment.  The company has initiated multiple schemes for the dealers such as extended credit, additional schemes/ discounts, free sanitization of their shops and insurance support for dealers, painters and contractors.  The company imports 8-10% of its raw materials from China. It has identified alternate sources to procure these products from other countries too.  The demand for paints can be postponed as it is discretionary in nature. While some demand (maintenance) may recover in near term, demand for some paints may recover after some time gap.

Asian Paints, June 24, 2020 ICICI Securities

Chart 17: 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-17 Jul-16 Jul-18

Apr-09

Jan-16 Jan-17 Jan-18 Jun-19 Jun-20

Mar-12 Mar-10 Mar-11

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, June 24, 2020 ICICI Securities

Financial summary (consolidated)

Table 5: Profit & loss statement Table 7: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY19 FY20P FY21E FY22E FY19 FY20P FY21E FY22E Net Revenues 193,415 202,113 181,826 218,438 Operating Cashflow 26,018 35,089 30,678 37,329 Operating Expenses 158,170 160,495 144,764 173,411 Working Capital EBITDA 35,245 41,618 37,062 45,027 Changes 104 (2,629) 2,138 (4,098) % margins 18.2% 20.6% 20.4% 20.6% Capital Commitments (13,601) (11,335) (9,500) (9,500) Depreciation & Free Cashflow 12,521 21,125 23,316 23,731 Amortisation 4,307 7,805 7,831 8,781 Cashflow from Gross Interest 510 1,023 1,342 1,342 Investing Activities (4,230) (868) (2,000) (2,000) Other Income 2,271 3,043 2,655 3,261 Issue of Share Capital - - - - Recurring PBT 32,699 35,833 30,544 38,165 Inc (Dec) in Borrowings 953 5,024 - - Less: Taxes 10,988 8,549 7,697 9,618 Dividend paid (12,127) (14,964) (14,964) (14,964) Less: Minority Interest 116 262 275 288 Change in Deferred Net Income (Reported) 21,595 27,023 22,573 28,259 Tax Liability 1,422 (1,127) - - Extraordinaries (Net) - (534) - - Chg. in Cash & Bank Recurring Net Income 21,595 27,556 22,573 28,259 balances 402 3,379 6,078 6,479 Source: Company data, I-Sec research Source: Company data, I-Sec research

Table 6: Balance sheet Table 8: Key ratios (Rs mn, year ending March 31) (Year ending March 31) FY19 FY20P FY21E FY22E FY19 FY20P FY21E FY22E Assets Per Share Data (Rs) Total Current Assets 70,028 70,676 70,446 88,310 EPS 22.5 28.2 23.5 29.5 of which cash & cash eqv. 4,449 7,828 13,907 20,386 Cash EPS 27.1 36.6 32.0 38.9 Total Current Liabilities & Dividend per share (DPS) 10.5 12.0 12.0 13.0 Provisions 45,949 40,589 36,419 43,706 Book Value per share (BV) 99.2 105.6 113.5 127.4 Net Current Assets 24,079 30,087 34,027 44,604 Investments 25,697 26,578 28,578 30,578 Growth (%) Net Fixed Assets 55,299 59,523 61,192 61,911 Net Sales 15.0 4.5 -10.0 20.1 Capital Work-in-Progress 2,097 1,402 1,402 1,402 EBITDA 10.2 18.1 -10.9 21.5 Goodwill 3,213 3,200 3,200 3,200 PAT 9.7 25.1 -16.5 25.2 Total Assets 110,384 120,791 128,400 141,695 Cash EPS 11.1 34.9 -12.6 21.7

Liabilities Valuation Ratios (x) Borrowings 6,160 11,184 11,184 11,184 P/E 74.8 59.8 71.6 57.2 Deferred Tax Liability 5,397 4,270 4,270 4,270 P/CEPS 62.1 46.0 52.7 43.3 Minority Interest 3,631 4,035 4,035 4,035 P/BV 17.0 15.9 14.8 13.2 Equity Share Capital 959 959 959 959 EV / EBITDA 45.9 38.9 43.5 35.7 Face Value per share (Rs) 1 1 1 1 EV / Sales 8.4 8.0 8.9 7.4 Reserves & Surplus* 94,238 100,342 107,951 121,247 Less: Misc. Exp. n.w.o. - - - - Operating Ratios Net Worth 95,197 101,302 108,911 122,206 Raw Material / Sales (%) 58.6 56.3 56.0 55.9 Total Liabilities 110,384 120,791 128,400 141,695 Employee cost / Sales (%) 6.6 6.8 7.0 6.9 Source: Company data, I-Sec research SG&A / Sales (%) 16.6 16.3 16.6 16.5 Other Income / PBT (%) 6.9 8.5 8.7 8.5 Effective Tax Rate (%) 33.6 23.9 25.2 25.2 Working Capital (days) 36.9 39.6 39.8 39.9 Inventory Turnover (days) 58.6 60.4 60.4 60.4 Receivables (days) 35.6 32.0 32.0 32.0 Payables (days) 76.0 67.6 67.6 67.6 Net D/E Ratio (x) 0.1 0.1 0.1 0.1

Profitability Ratios (%) Net Income Margins 11.2 13.5 12.6 13.1 RoACE 21.3 24.3 19.1 21.9 RoAE 24.2 27.8 21.7 24.7 Dividend Payout 46.4 45.7 54.6 43.7 Dividend Yield 0.6 0.7 0.7 0.8 EBITDA Margins 18.2 20.6 20.4 20.6 Source: Company data, I-Sec research

Asian Paints, June 24, 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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