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Asian Paints (APNT)
Consumer products
Paint industry in auto mode, for now. Sustaining good industry demand (~20%)
despite price increases (~10%) was the key takeaway from our meeting with Akzo
Nobel India—confirming our long-standing view that discretionary element in consumer
purchase decision in decorative paints is reducing. The contours of the paint industry
are slowly changing. APNT needs to watch for (1) higher activation spends and spate of
new launches, (2) aggressive dealer acquisition activities by competition, and (3)
investments in distribution and capacities by competition, particularly Nippon Paints.
Meeting with Akzo Nobel—key takeaways
After a weak 2QFY11, 3QFY11E seems promising. Industry growth in October and November
2010 has been robust (>25%, in our view) likely due to (1) monsoon impact—shift in demand to
3Q from 2Q, and (2) Diwali was in 3Q this year versus 2Q last year (Please see our note on Asian
Paints dated September 7, 2010 “Earnings upgrade cycle likely coming to an end, for now”).
Supply of titanium dioxide is a concern. The supplies of titanium dioxide were unsteady over
the past few months as some existing capacities were scaled down and no new investments were
made by producers. Industry experts expect this situation to prevail over CY2011E as well. While
this should be a concern for the paints industry, there is pricing power to mitigate the impact of
inflation in TiO2
, in our view.
Increasing brand relevance. With increasing competitive intensity, brand equity is becoming
increasingly important. Consumer involvement in decision-making is increasing—ratio of
consumers and painters in decision making is 50:50 now (estimated at 70:30 ten years back).
Pricing power is clearly with the market leader APNT. We reiterate that competition (Akzo,
Berger, Kansai Nerolac) typically follows the benchmark set by the leader as pricing is not a major
decision-making factor for the consumer (and hence the ability to gain market shares by resorting
to undercutting is limited).
Contours of paint industry are slowly changing
` Entry of MNCs. There is growing interest among MNCs to scale-up in the Indian paint market.
We see increasing activity levels from Nippon, Sherwin Williams and Jotun. According to
industry sources, Nippon is planning to increase capacity to ~100,000 MT from 20,000 MT
currently. The new players, after prototyping their business plans in one market (example of
Nippon in South India), are likely to extend it to other contiguous markets.
` Competition in decoratives is increasing. With the economic downturn behind, paint
companies such as Kansai Nerolac and Nippon that have so far been focused on
automotive and industrial paints are increasingly shifting focus to decorative paints.
` Higher investments in distribution channels. With higher competitive intensity, paint
companies are trying to create demand at the painter level instead of just relying on the
dealer channel. New initiatives include (1) organizing workshops for painters, (2) reward
point system for painters, and (3) educate painters on benefits of the brand.
` Consumer mindset is changing for good. Painting is gradually shifting from being a
discretionary spend to a necessity. This is being triggered by (1) increase in home
ownership, (2) increase in salary levels and disposable income and (3) penetration-led
opportunity—of the 210 mn households in India, industry experts estimate that <20 mn
engage in painting/repainting activity.
Reiterate ADD; retain TP at Rs3,000
We reiterate our ADD rating as the underlying demand conditions for paints continue to be
good and competition is still rational (as evident by price increase to defend gross margins).
Our standalone EPS estimates are Rs86 and Rs103 for FY2011E and FY2012E, respectively.
We continue to believe that there is upside risk to our EPS estimates for FY2012-13E as
APNT could benefit from supply chain savings due to the new distribution centers which it is
building (apart from any potential benefits due to implementation of GST).
Key risks include higher-than-expected impact of raw material costs due to higher crude
prices, significant slowdown in construction and housing demand and inability of the
company to effect adequate price increases.
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