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Asian Paints (APNT)
Consumer products
Reiterate positive bias after meeting with management. APNT is favorably placed
with a market share of more than 55% in the organized segment and gains of ~1%
every year. Key factors favoring the company are (1) APNT has (all) the pricing power,
(2) mix improvement – emulsions are growing at 2X distempers, (3) dealer strength is
the biggest entry barrier, (4) competitive landscape is changing, however, APNT
continues to demonstrate thought leadership. ADD.
Management meeting takeaways—positive hues
` APNT has (all) the pricing power
Driven by input cost inflation, specifically titanium dioxide, monomers and vegetable oil, the
company took a price hike of 2.9% in December 2010. Continued good demand conditions have
enabled the company to take four price hikes so far; 4.15% in May, 2.6% in July, 1.2% in August
and 2.9% in December—which indicates APNT and the industry’s intention to defend gross
margins. 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 share by resorting to undercutting is limited).
` Mix improvement
There is steady mix improvement in favour of emulsions – emulsions are growing at more than
20% while distempers are growing in single digits. This is a key positive as margins are significantly
higher in emulsions.
` Dealer strength is the entry barrier
APNT has a distribution network of 27,000 dealers and estimates the universe to be ~55,000
dealers. A strong dealer network is key for success in the paint industry where the wholesaler –
distributor – retailer model does not exist. APNT has more than 90 depots (adds 5-6 depots every
year) servicing the dealers and is favorably placed as (1) its product portfolio covers the entire
spectrum of paints from primers, distempers to emulsions, and (2) it is able to maintain a high level
of service quality which is important since dealers prefer high volume rotation and low inventory
levels; for e.g. some dealers in Mumbai are serviced twice a day.
` Competitive landscape is changing
Historically, competition in the paint industry has been muted but in the past few years,
MNCs are showing growing interest in the Indian paint market. We see increasing activity
levels from Akzo Nobel, Nippon, Sherwin Williams and Jotun. Nippon has recently expanded
to Mumbai and North India after prototyping its marketing mix in South India. Akzo is
strong competition to APNT in the emulsions segment and Berger is more competitive in the
mid to mass segment – distempers and enamels. We see instances of (1) higher activation
spends, (2) a spate of new launches and (3) aggressive dealer acquisition activities by
competition (incentives offered to exclusive APNT dealers to stock competition products as
well).
` Thought leadership, as always
APNT has been at the forefront in terms of thought leadership (1) installing tinting machines
at dealer outlets, (2) establishing emotional connect with consumers through its
differentiated communication and enhancing consumer involvement, in our view (3) Home
Solutions concept is novel and likely the first of its kind wherein in addition to the paint
(product sale) the company also offers painting services. Home Solutions is present in 13
cities and though not a focus area for the company, it could gain scale given the increasingly
busy lifestyle of urban Indians and the ‘pain value’ attached with the painting process
Retain ADD
We reiterate our ADD rating as the underlying demand conditions for paints continue to be
good and competition is still rational (as evidenced by price increase to defend gross
margins). Our standalone EPS estimates are Rs86 and Rs103 for FY2011E and FY2012E. We
continue to believe 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 any inability of the
company to effect adequate price increases.
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