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Cultura Documentos
15 April, 2008
Analyst
Chintan S. Mehta
chintan.mehta@acm.co.in
Tel: (022) 2858 3407
Market Structure
The size of the Indian paint industry is valued at ~Rs.112 bn . Indian Paints Industry
can be classified into two sub-segments:
Volume Share Value Share
Size of Paint Industry is pegged Decorative Paints 90% 75%
at Rs. 112 bn.
Industrial Paints 10% 25%
Source : Crisinfac
The paint industry is divided into organized and unorganized sector. The unorganized
segment plays a huge role in decorative paint segment due to low technical know-how
and highly scattered market. The organized segment constitutes around 54% of the
Top six organised player total volume and 65% of value of paints industry. Again the whole paints industry
accounts for 84% by volume can be classified into decorative (75% of total industry size) and industrial paints
and 63% by value of total (25% of total industry size). Further, in organized segment, the top 6 players account
organised market for around 84% by volume and 63% by value. The remaining players in organized
business are largely present in non-auto industrial segment, and the unorganized
players are mainly operational in decorative paints segment as industrial paints
requires high technological know how and client tie-ups.
Demand Supply Dynamics
The Indian Paint Industry grew by 18% from Rs. 95 bn. in FY06 to Rs. 112 bn in
Paint industry grew by 18% as FY07 (Source: Company). The industry has a positive correlation with GDP as both
compared to last year have same drivers for growth. Demand for paints is both, derived as well as direct.
The demand for decorative paints is a direct demand whereas the demand for industrial
paints is a derived demand.
Demand drivers for Paints Industries
Increase in Per capita consumption of paints: The per capita consumption of
paints in developed countries is around 15-25 kgs and world average is around
15 kgs. Comparing this with domestic consumption, India’s contribution to world
paint markets is 0.6% with per capita consumption of around 800-900 gms. Based
on the expenditure in the construction activity and increase in the repaint activity
coupled with industrial growth, the industry is expected to increase at a 11.85%
CAGR over next three years
Increase in Real Estate Investments: The demand for decorative paints is
directly related to the increase in the investment in the real estate thus increasing
the cement area. Out of the total demand for decorative paints, around 30-40%
of the demand comes from the fresh construction (Source: CrisInfac). The size
New real estate construction of real estate industry is estimated to grow to Rs. 18,517 Bn, over next five years
accounts for 30-40% for period (Source: CrisInfac). Investment in real estate will be primarily led by
demand for decorative paints housing, which is expected to account for nearly 90% of total investment in the
sector (Source: Cris-Infac). India’s robust economic growth and resultant increase
in income are speeding up the pace of urbanization.
In India, about three fourth (3/4) of real estate development is for residential use
and balance one fourth (1/4) is predominantly for commercial use.
Total Construction Investment (Rs. Bn)
2001-02 to 2005-06 2006-07 to 2010-11P Implicit TAGR (%)
Real estate 10,218 18,517 12.6
Housing 9,810 17,338 12.1
Commercial real Estate 408 1,179 23.6
Source: Crisinfac
Prices in line with substitute product: Large scale of operations and technical
know-how have helped prices of paints to come down. They are now in line with
those of substitute products like lime wash, distemper etc., manufactured by local
players. This gives consumers the incentive to shift from lime to paints.
TiO2 constitutes around 30% of Titanium Dioxide (TiO2) is the largest consumed raw material for manufacture of
total manufacturing cost paints. It constitutes around 30% of the total manufacturing cost. TiO2 is available
in two grade i.e. rutile (imported and mainly used by the Indian paint industry) and
anatase (manufactured domestically).
Besides TiO2, there are other petroleum based raw materials which constitute around
40-50% of total raw material consumed. Hence any movement in crude oil prices
Petroleum products accounts will impact the profitability of the company.
for 40-50% of total raw material
cost
Asian Paints operates in 22 countries across the world. The company is one of the
largest paint companies in world and has manufacturing division at each of its location.
Asian Paints operates in five regions across the world viz. South Asia, South East
Asia, South Pacific, Middle East and Caribbean region through the four corporate
brands viz. Asian Paints, Berger International, SCIB Paints and Apco Coatings.
Segment
APL’s whole business operation can be divided into two segments i.e. Paints and
Chemicals.
(Source: Company)
As seen from the graph, the Indian paint industry is expected to grow at a CAGR
Indian Paint industry will grow of 11.85% from Rs. 112 bn. in FY07 to Rs. 156.7 bn. in FY10E, Assuming the
1.5 time the GDP growth country GDP grows @7.5% p.a. and the Indian Paint Industry growing at 1.5
times the GDP growth.
Capex Plans
Company Name Capex Plan Completion Period
1. Asian Paints Increasing the capacity by setting up plant at Rohtak, Haryana 150,000 tonne capacity being added in FY10 and subsequent
quantity will be added later in phase manner.
2. Kansai Nerolac The board has passed a resolution of setting up new plant worth Rs.690 Work for the same has not been started, but is expected to be operational
Paints Ltd. mn. with capacity of 24,000 mt. Besides this company also announced two by FY10E of this one project was already completed last year. This year
brownfield projects with total capex of Rs.1000 mn. brownfield projects. additional capacity of 10,200 tonnes would be coming.
3. Berger Paints N.A. N.A.
4. Shalimar Plans to increase the capacity by 25% from current 45,000 tonnes has N.A.
identified 4 companies as acquisition targets.
With its capex plan company’s installed capacity is expected to be 560,000 tonnes
in FY10E. with such plan APL is set to capture the major portion of demand .
APL has the highest volume sales among the top 7 players in the industry with a
market share of around 37%. Thus, huge volumes and high utilization levels gives
company ample capacity to capture new opportunities in the paint industry and
favorable market share.
APL is currently the market leader with approximately 50% of the total
manufacturing capacity. No other major capacity additions are expected from other
players apart from APL, hence substantial portion of demand has to be catered by
APL. This will give company a competitive advantage in terms of pricing.
APL has low debt-equity ratio of 0.4. Hence the company is in position to raise
additional debt and expand further. Further expansion would increase
Presence in Niche Segment
Auto refinish √ √ √ √
Powder Coatings √ √ √ √
Wood Finish √ √ √ √
The Company also has a short and efficient chain of distribution. The overview of
APL’s supply chain is as follows:
New Product launch: New product development is very important in paint
industry in order to cater to the changing taste of the consumer. APL launches new
product every two – three years. Besides, the company also has a concept called
ColourNext, Kids World, and Royale Play which help to attract customers.
Home solution & colour world: Asian paints have a customer centric approach
to business. The Company started with two concepts namely Home Solutions and
Colour World. APL is the world first company that has started providing painting
services. The home solution service works as follows:
By this service the company also gets in touch with the customer and gets first
hand information regarding the changing taste and consumer preference before
the competitors does. This service is currently operating in 12 cities all over the
countries. A “Colour World” service offered by the company provides around
8500 shades and an entire range of products from interior to exterior paints, giving
customer a one stop solution. Thus, both the above service not only provided
products to the customer but also with value added services and initiatives.
Continuous Research & Development: Extensive research & development has
enabled APL to launch innovative products
The company carries out R&D process through two ways i.e. a) Customer Approach
and b) Company Approach. Besides this the R&D facility also helps the company in
improving the internal efficiency of the company.
Risk
Industry Growth: Growth in paint industry is dependent on two activities (a) repaint
activity and (b) construction industry. Repaint activity which constitutes around
60-70% of the total decorative paint and remaining by fresh construction. Both the
activities are dependent upon the GDP growth and per capita income growth. The
demand for industrial paints will also be hampered if GDP growth slowsdown due
to slower industrial activity. Any slow down in growth rate of any of the above
factors will have direct impact on the volume of APL, thus effecting its profitability
and margins.
Low Entry barrier: Setting up new facility requires low capex making the players
more vulnerable to increase in competition APL has the major threat from the new
entrant. Due to very capital requirement for setting up a new plant, the company faces
a constant threat from new player entry in the market.
The Company’s revenue is expected to grow at a CAGR of 18.5% from Rs. 39,781
mn. in FY07 to Rs. 66,270.43 mn in FY10E, mainly due to capactiy addition and
better realisations.
Margins
In FY08E, the company was able to pass on the increase in the raw material cost
which helped the company to sustain in its raw material cost as a percentage to
net sale. Further, the increase in volume led to economies of scale resulting in
better operating margins.
APL’s net profit margins are in line with EBIDTA margins and are expected to
grow at a 28.2% CAGR from Rs. 2,810.3 mn. in FY07 to Rs. 5,916.4 mn. in
FY10E. Hence, EPS is expected to grow at a CAGR of 28.2% from Rs. 29.30 in
FY07 to Rs. 61.7 in FY10E.
Profitability Ratios
FY05 FY06 FY07 FY08E FY09E FY10E
Operating Profit Margin (%) 13.1% 13.0% 13.0% 14.9% 15.9% 16.2%
EBDITA Margin (%) 14.4% 14.0% 14.0% 15.9% 16.9% 17.2%
PAT Margin (%) 7.1% 7.0% 7.6% 9.3% 9.8% 10.1%
RONW (%) 32.0% 32.6% 36.1% 37.8% 34.7% 34.5%
ROCE (%) 38.0% 40.0% 41.9% 45.3% 43.3% 44.9%
Per Share Ratios
EPS (Rs.) 18.1 22.1 29.3 40.7 48.0 61.7
CEPS (Rs.) 25.3 28.3 35.6 47.2 56.1 71.5
BV Per Share (Rs.) 94.4 104.4 122.1 150.5 184.1 225.4
Valuation Ratios
P/E (x) 63.5 52.1 39.3 28.3 24.0 18.7
P/CEPS (x) 45.5 40.7 32.4 24.4 20.5 16.1
P/BV (x) 12.2 11.0 9.4 7.7 6.3 5.1
Capital Structure Ratios
Debt/Equity 0.4 0.4 0.4 0.3 0.3 0.2
Current Ratio 1.5 1.5 1.5 1.5 1.5 1.6
Turnover Ratios
Inventory Turnover (no of days) 64.8 59.1 59.5 60.0 63.0 63.0
Debtors turnover ratio (no of days) 42.2 42.0 41.8 42.0 45.0 45.0
Fixed Asset Turnover (x) 2.7 3.1 3.4 3.9 3.4 3.9
(Source: ACMIIL Research)
HNI Sales:
Raju Mewawalla, Tel: +91 22 2858 3220
Institutional Sales:
Bharat Patel, Tel: +91 22 2858 3732
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expressed in the report
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