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Asian Paints (APNT)
Consumer products
All is not well. We present takeaways from discussions with key paint industry players
– (1) signs of downtrading in select markets – primarily Tier III towns and rural areas,
(2) possible margin contraction if raw material cost does not correct, (3) strong capex
plans and (4) increasing sector-level adspends (with celebrities) and high competitive
activity, fight for share-of-shelf and market share. 2QFY12 volumes for Asian Paints
could potentially look better due to low base. APNT stock trades at highest-ever relative
P/E versus BSE-30 index since 1993. SELL.
Demand slowdown in pockets + likely margin pressure in the near term
Our discussions with key industry players suggest that demand conditions in the paint industry are
facing slowdown in pockets – primarily in smaller towns and rural areas where consumers are
downtrading. However for the long term, they remain confident on the demand scenario and are
stepping up capacities (industry capacity is expected to double by FY2014E). Tio2, the key input,
continues to remain inflationary and may impact margins in the near term.
Demand conditions. The industry has taken about 8% price hike in FY2012E on the back of
14% price hike in FY2011. While demand conditions in the repainting market have not seen
any lack of pull from the dealers in the metros, there are signs of downtrading in smaller towns
and rural areas.
In our view, this has likely led players like Akzo Nobel, who are otherwise focused on the premium
paint segment, to launch (1) a mass-end product – ICI Magik, this month and (2) Promise, a midtier
exterior paint, early this year. Further, in our view, there is likely slowdown in fresh painting
demand due to significant delay in completion of projects (on an average >50%) across the
country, likely on account of rising interest rates, funding constraints for real estate players etc.
Cost structure. Titanium dioxide (Tio2), mineral turpentine oil (MTO) and other crude-linked
raw materials are key inputs for the paint industry. While crude has corrected from its earlier
high, Tio2 continues to remain inflationary (industry could get hit due to Rupee depreciation as
well). Akzo Nobel expects Tio2 to correct marginally from the current peak level. Tio2 forms
~20-30% of raw material costs for the industry.
In our view, given the steep price hikes already taken coupled with the overall inflationary
scenario, scope for further price hikes is limited. Akzo Nobel expects margins to decline by ~2% if
input cost does not correct. We highlight APNT’s comment post 1QFY12 results – “Input cost rose
sharply necessitating price increases aggregating to 8% till now. The impact of these increases on
demand will need to be gauged.”
Competitive landscape
Akzo Nobel has market share of ~10% and is targeting share gain of 1-2% every year. It
is primarily present in metros, reaches 6,000 outlets (50% of its dealers are in metros) and
is targeting 9,000 outlets over the next few years. It has also set up Dulux Decorative
CentreS which are exclusive shops for Akzo Nobel products. Adspends will remain at
~9% of sales (4% in FY2006).
Berger has launched two new exterior and interior emulsions and has stepped up its
dealer service quality. It aims to match industry in terms of volume growth and
outperform in terms of mix improvement (Berger is primarily a mid- and mass-end player).
Kansai Nerolac has stepped up focus on the decorative segment and has increased its
adspends by ~100 bps over the last couple of years. It is aggressively marketing its brand
‘Impressions Eco Clean’ on the ‘healthy’ paint platform.
In addition to the above, new entrants Nippon, Sherwin Williams, Jotun are also
increasing their dealer network and expanding geographical presence.
Capex. Players are in the process of enhancing their capacity, an indication of good demand
conditions in the long term.
Asian Paints is in the process of setting up a plant in Khandala. The construction is in
progress with Phase I to be commissioned in 4QFY13 with a capacity of 3,00,000 KL. The
capex for Phase I, including cost of land, would be about Rs10 bn.
Akzo Nobel has capacity of 100 mn liters currently. It is in the process of enhancing
capacity at its Hyderabad plant and that would add another 30 mn liters. It is also setting
up a plant in Gwalior which will commence operations in 2013 and has a capacity of 50
mn liters.
Berger has planned capex of Rs1.6 bn over the next 2-3 years in Andhra Pradesh for
setting up a plant with capacity of 160,000 MT.
Retain SELL on Asian Paints; expensive valuations and near-term earnings risk
could provide better entry points
We retain SELL on Asian Paints with a target price of Rs2,900. The stock is trading at its
highest-ever relative P/E versus BSE-30 index since 1993. Moreover, our worries about
APNT’s FY2012E performance are intact, (1) uncertainty in international operations,
particularly Middle East and Egypt operations, (2) input cost inflation is not entirely a passthrough
in FY2012E, in our view and (3) likely moderation in decoratives paint demand, auto
and industry may not provide buffer. We have modeled a 20 bps decline in EBITDA margin
to 17.9% in FY2012E, largely on account of gross margin pressure offset to some extent by
savings in SG&A (positive effects of operating leverage).
We remain bullish on the medium-term (2-3 years) prospects of paint industry. However, we
believe expensive valuations and near-term earnings risk could provide better entry points.
We maintain earnings estimates; our standalone EPS estimates are Rs94.6 and Rs111.4. We
continue to value the international business at 6X EV/EBITDA. Key risks include higher-thanexpected
demand conditions and significant correction in input costs providing opportunity
for APNT to improve margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asian Paints (APNT)
Consumer products
All is not well. We present takeaways from discussions with key paint industry players
– (1) signs of downtrading in select markets – primarily Tier III towns and rural areas,
(2) possible margin contraction if raw material cost does not correct, (3) strong capex
plans and (4) increasing sector-level adspends (with celebrities) and high competitive
activity, fight for share-of-shelf and market share. 2QFY12 volumes for Asian Paints
could potentially look better due to low base. APNT stock trades at highest-ever relative
P/E versus BSE-30 index since 1993. SELL.
Demand slowdown in pockets + likely margin pressure in the near term
Our discussions with key industry players suggest that demand conditions in the paint industry are
facing slowdown in pockets – primarily in smaller towns and rural areas where consumers are
downtrading. However for the long term, they remain confident on the demand scenario and are
stepping up capacities (industry capacity is expected to double by FY2014E). Tio2, the key input,
continues to remain inflationary and may impact margins in the near term.
Demand conditions. The industry has taken about 8% price hike in FY2012E on the back of
14% price hike in FY2011. While demand conditions in the repainting market have not seen
any lack of pull from the dealers in the metros, there are signs of downtrading in smaller towns
and rural areas.
In our view, this has likely led players like Akzo Nobel, who are otherwise focused on the premium
paint segment, to launch (1) a mass-end product – ICI Magik, this month and (2) Promise, a midtier
exterior paint, early this year. Further, in our view, there is likely slowdown in fresh painting
demand due to significant delay in completion of projects (on an average >50%) across the
country, likely on account of rising interest rates, funding constraints for real estate players etc.
Cost structure. Titanium dioxide (Tio2), mineral turpentine oil (MTO) and other crude-linked
raw materials are key inputs for the paint industry. While crude has corrected from its earlier
high, Tio2 continues to remain inflationary (industry could get hit due to Rupee depreciation as
well). Akzo Nobel expects Tio2 to correct marginally from the current peak level. Tio2 forms
~20-30% of raw material costs for the industry.
In our view, given the steep price hikes already taken coupled with the overall inflationary
scenario, scope for further price hikes is limited. Akzo Nobel expects margins to decline by ~2% if
input cost does not correct. We highlight APNT’s comment post 1QFY12 results – “Input cost rose
sharply necessitating price increases aggregating to 8% till now. The impact of these increases on
demand will need to be gauged.”
Competitive landscape
Akzo Nobel has market share of ~10% and is targeting share gain of 1-2% every year. It
is primarily present in metros, reaches 6,000 outlets (50% of its dealers are in metros) and
is targeting 9,000 outlets over the next few years. It has also set up Dulux Decorative
CentreS which are exclusive shops for Akzo Nobel products. Adspends will remain at
~9% of sales (4% in FY2006).
Berger has launched two new exterior and interior emulsions and has stepped up its
dealer service quality. It aims to match industry in terms of volume growth and
outperform in terms of mix improvement (Berger is primarily a mid- and mass-end player).
Kansai Nerolac has stepped up focus on the decorative segment and has increased its
adspends by ~100 bps over the last couple of years. It is aggressively marketing its brand
‘Impressions Eco Clean’ on the ‘healthy’ paint platform.
In addition to the above, new entrants Nippon, Sherwin Williams, Jotun are also
increasing their dealer network and expanding geographical presence.
Capex. Players are in the process of enhancing their capacity, an indication of good demand
conditions in the long term.
Asian Paints is in the process of setting up a plant in Khandala. The construction is in
progress with Phase I to be commissioned in 4QFY13 with a capacity of 3,00,000 KL. The
capex for Phase I, including cost of land, would be about Rs10 bn.
Akzo Nobel has capacity of 100 mn liters currently. It is in the process of enhancing
capacity at its Hyderabad plant and that would add another 30 mn liters. It is also setting
up a plant in Gwalior which will commence operations in 2013 and has a capacity of 50
mn liters.
Berger has planned capex of Rs1.6 bn over the next 2-3 years in Andhra Pradesh for
setting up a plant with capacity of 160,000 MT.
Retain SELL on Asian Paints; expensive valuations and near-term earnings risk
could provide better entry points
We retain SELL on Asian Paints with a target price of Rs2,900. The stock is trading at its
highest-ever relative P/E versus BSE-30 index since 1993. Moreover, our worries about
APNT’s FY2012E performance are intact, (1) uncertainty in international operations,
particularly Middle East and Egypt operations, (2) input cost inflation is not entirely a passthrough
in FY2012E, in our view and (3) likely moderation in decoratives paint demand, auto
and industry may not provide buffer. We have modeled a 20 bps decline in EBITDA margin
to 17.9% in FY2012E, largely on account of gross margin pressure offset to some extent by
savings in SG&A (positive effects of operating leverage).
We remain bullish on the medium-term (2-3 years) prospects of paint industry. However, we
believe expensive valuations and near-term earnings risk could provide better entry points.
We maintain earnings estimates; our standalone EPS estimates are Rs94.6 and Rs111.4. We
continue to value the international business at 6X EV/EBITDA. Key risks include higher-thanexpected
demand conditions and significant correction in input costs providing opportunity
for APNT to improve margins.
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