Company Research

Research Associate: Pooja Jain August 29, 2012 Pooja.jain@frrshares.com, Tel: +9122 43344222

Asian Paints Ltd – Domestic paints volumes disappoint

Date: 30.8.2012

Investment Overview:

• Asian Paints is India’s largest paint company & Asia’s third largest paint company, with a turnover of Rs 96322.40 Mn.

• Asian Paints has been included for the first time in Forbes Asia’s Fab 50 List of companies.

• The capacity expansion from 1,50,000 KL p.a. to 2,00,000 KL p.a. at the Company’s plant at Rohtak, Haryana was commissioned during the quarter.

• The company’s Decorative Paints business segment contributes around 94% in the total paint business.

• Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 14% over 2011 to 2014E respectively.

• Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and Taubmans.

Shareholders Information

Date 29-August-12

CMP (Rs) 3701.40

1 Year Price Var% 12.36

52 Week High (Rs) 4170.00

52 Week Low (Rs) 2551.05

Industry PE 30.83

Share Holding Pattern As on 30th June 2012

Promoters 52.79%

FII 18.08%

DII 8.70%

Others 20.43%

Total 100.00%

Stock Performance (1 year)

Company Research

August 29, 2012

COMPANY BACKGROUND:

Asian Paints is India’s largest paint company and Asia’s third largest paint company, with a turnover of Rs. 96322.40 Mn.. The group has an enviable reputation in the corporate world for professionalism, fast track growth, and building shareholder equity. Asian Paints operates in 22 countries and has 27 paint manufacturing facilities in the world servicing consumers in over 65 countries. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and Taubmans. The capacity expansion from 1,50,000 KL per annum to 2,00,000 KL per annum at the Company's plant at Rohtak, Haryana has been commissioned in April, 2012. Business Segments Company business is divided mainly into two segments as follows: • Paints Segment This is the primary business of the company. Out of the total revenue earned by the group 9% is generated from this segment. This segment is divided into two.

� Decorative Paints:

Decorative Paints business contributes around 94% in the total paint business. It has 5 manufacturing plants operating all over the country, which is strategically located in-order to cater to market. In Decorative paint segment, the Company operates in four main segments i.e. interior wall finish, Exterior wall finish, Enamels and Wood Finishes. Besides, the company outsources around 25-30% of its total production. Decorative paints segment constitute around 72% of the paint market in India.

� Industrial Paint Segment:

In this business, the company caters to automotive, powder, protective coatings, road markings segment, floor coatings and General Industrial Paints. Most of the industrial paints business is operated by two companies’ viz. Asian PPG Ltd. and Asian Paints Industrial Coating Ltd. The company ranks first in the automotive paints business in domestic market. The company ranks second in protective segment and first in the road-marking segment. Recently it has entered in floor coating segment.

Company Research

August 29, 2012

Chemicals Segment: Chemical business includes manufacturing of Phthalic Anhydride (PAN) and Penraerythritol (PENTA). APL has its PAN manufacturing plant at Gujarat (capacity –25,200 MT) and PENTA manufacturing facility at Tamil Nadu (capacity – 3000 MT). The company consumes nearly 50% of its production as captive consumption and sells the remaining in the open market. This business contributes around 3% to company’s consolidated revenues.

Results Update:

• Top-line grows by 12.5% yoy:

• Asian paints has posted top line of Rs. 25392.50 mn against Rs.22571 mn for the same

quarter previous year, a growth of 12.50% on y-o-y basis where as PAT for the quarter was

Rs.2989.40 mn against Rs. 2715.90 mn for the same quarter last year, and a growth of

10.07% on y-o-y basis. The company has reported an EPS of Rs.30.06 for the quarter

ended June 30, 2012 as compared to Rs. 27.49 for the quarter ended June 30, 2011.

• Gross margins up 153bp yoy, EBIDTA ends flat

EBIDTA rose 12.47% to Rs. 4465.5Mn while margin remained flat at 17.53% as a 151 bps

decline in raw material expenses was completely offset by 48bps and 103bps increase in

other expenses and employee expenses.

Company Research

August 29, 2012

• Prices increases impact volume growth:

Asian paints ltd has witnessed a weak volume growth for Q1FY13 of 2% on parent basis.

Asian Paints had undertaken substantial price increases (12%) in FY12 on the back of rising

raw material prices (titanium dioxide and crude derivatives) and increase in excise duty.

Further, in Q1FY13 with the RM index for the company being higher at 106.1 over FY12

base of 100, the company undertook additional price increase of 3.2% effective May 1,

2102. We believe these extensive price increases along with a slowing industrial paint

demand, higher volume growth base of 13% in FY12 and destocking led to the more than

expected slowdown in sales.

• International operations grew by 10%:

APNT witnessed pressure in its international business in Nepal due to political instability,

while Bangladesh and Srilanka performed well. Sales growth in Caribbean, South Asia and

Jamaica remained under pressure. Middle East and Trinidad reported modest growth. On

the margins front, international business continued with weak performance due to inability in

taking price hikes to compensate the raw material inflation.

• The company has given guidance of Rs 750 crore Capex for FY13E, which includes Rs

500 crore to be spent on the Khandala plant in Maharashtra.

• Festive season demand to drive sales in H2FY13

Although sales growth Q1FY13 is below expectation, we expect volumes improving in coming quarters mainly post monsoon and prior to Diwali festival. Titanium di-oxide prices are expected to come off, given lower demand from China and Europe. Thus, sales would gain traction from Q3FY13 onwards. However, we believe volume growth would temper to 9% in FY13E (13% in FY12) and the sales CAGR would be 15.4% from FY12-14E.

• Industrial Segment:

The Industrial segment continued in subdued performance and registered weak growth. Both the automotive and protective segment performance was affected due to subdued demand environment in Auto and non Auto industry and drying up investment cycle in these sectors. We expect the performance of Industrial segment to remain weak in coming few quarters and too revive with revival in GDP growth. However, these segments contribute less to the topline and hence the impact will not be very high. If we take a look at the business, the consolidated business of the company can be bifurcated into three major segments viz. decorative paints (81 per cent of revenues), international segment (13 per cent) and industrial paints (6 per cent). So with the industrial segment contributing just 6 per cent, the impact will be lower.

Company Research

August 29, 2012

Financial Highlights:

Q-O-Q Performance (In Rs Mn)

Particulars Q1 FY13 Q1 FY12 YoY (%) Q4 FY12 QoQ (%)

Net Sales 25479.4 22655.5 12.46% 25459.8 0.08%

COGS 14838.4 13536.5 9.62% 15213.1 -2.46%

Gross Profit 10641 9119 16.69% 10246.7 3.85%

Employee Cost 1585.5 1300.5 21.91% 1354.1 17.09%

% of Sales 6.22% 5.74% 48bps 5.32% 90bps

Other Expenditure 4590 3848 19.28% 5065.7 -9.39%

% of Sales 18.01% 16.98% 103bps 19.90% (189bps)

Total Expenditure 21013.9 18685 12.46% 21632.9 -2.86%

EBIDTA 4465.5 3970.5 12.47% 3826.9 16.69%

Depreciation 334.1 291.1 14.77% 313.8 6.47%

EBIT (ex other income) 4131.4 3679.4 12.28% 3513.1 17.60%

Other Income 239.4 253.5 -5.56% 396.8 -39.67%

EBIT 4370.8 3932.9 11.13% 3909.9 11.79%

Interest 108.7 65.1 66.97% 166 -34.52%

EBT 4262.1 3867.8 10.19% 3743.9 13.84%

TAX EXPENSES 1272.7 1151.9 10.49% 1096.7 16.05%

PAT 2989.4 2715.9 10.07% 2647.2 12.93%

MINORITY INTEREST 105.6 79.3 33.17% 52.4 101.53%

Net Profit 2883.8 2636.6 9.38% 2594.8 11.14%

EPS 30.06 27.49 9.35% 27.05 11.13%

Margins (%)

Gross Profit 41.76% 40.25% 151 bps 40.25% 151 bps

EBIDTA 17.53% 17.53% - 15.03% 250bps

EBIT 16.21% 16.24% (3bps) 13.80% 241bps

EBT 16.73% 17.07% (34bps) 14.71% 202bps

PAT 11.32% 11.64% (32bps) 10.19% 113bps

Company Research

August 29, 2012

Y-o-Y Performance (In Mn.)

Particulars FY12 FY11 % Change Total Income 96322.4 77223 24.73%

Total Expenses 81219.5 63914.3 27.08%

Operating Profit (Excl OI) 15102.9 13308.7 13.48%

Other Income 1083 679.8 59.31%

Operating Profit 16185.9 13988.5 15.71%

Interest 433.8 259.8 66.97%

PBDT 15752.1 13728.7 14.74%

Depreciation 1211.3 1131.3 7.07%

PBT 14540.8 12597.4 15.43%

Tax 4335 3783.9 14.56%

PAT 10205.8 8813.5 15.80%

Cash Flow Statement (Rs. Mn)

Year End March FY 11 FY 12 OP/(loss) before Tax 13281 15088

Interest/ Div. Received 680 1074

Interest Paid (232) (410)

Direct Taxes Paid (3,502) (4,274)

(Incr)/Decr in WC (784) (1,075)

CF from Operations 9443 10404

CF form Invest. 345 (6,204)

CF FROM FINANCING Activity

(4,584) (4,219)

Net Change 5204 (19)

Add: Opening Balance 1058 6262

Closing Balance 6262 6243

Balance Sheet (Rs. Mn)

Year End March FY11 FY12 Share Capital 959.2 959.2

Reserves & Surplus 20915 26525.8

Total Debt 1474.3 1476.7

Deferred Tax Liabilities -851.8 -928.3

Net Block 13098.7 13005.5

Capital Work-in-progress 433.2 6170.8

Investments 5563 7037.3

Current Assets 27010.9 32748.5

Current Liabilities 20806.6 27705.2

Net Current Assets 6204.3 5043.3

Company Research

August 29, 2012

NET SALES (CONSOLIDATED)

EBIDTA (CONSOLIDATED)

25.34%

5.04%

29.60%

4.47%

23.32%24.30%

21.95%

29.48%

12.50%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

0

5000

10000

15000

20000

25000

30000

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13

Net Sales (Rs. Mn) Growth Y-o-Y (%)

18.97%

18.31%

16.43%

14.99%

17.59%

14.35%

15.52%

15.07%

17.59%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13

EBIDTA EBIDTA Margins(%)

Company Research

August 29, 2012

Investment rationale

Robust financial performance: Asian paints consolidated net sales has grown at a

decent CAGR of 16.92% in the last five years. Continuous focus on expanding

geographical coverage through a large dealer network and on newer and more

innovative products for its customers boosted its top line.

1st largest player with a strong distribution network: An Asian paint is an established

player in the Indian paint industry. Its owns strong and established paint brands. By

virtue of its revenue, it is the 1st largest player. It has very large distribution network

in India. It boasts of 90 depots across the country. It has over 27,000 retailers.

20.09%

23.98%

22.27%

15.59%

24.73%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

2007-08 2008-09 2009-10 2010-11 2011-12Consolidated Net Sales (Rs.Mn) Growth Y-o-Y (%)

12.66%

50.72%16.95%

16.56%

3.10%

Sales breakup of top 5 paint companies

Akzo Nobel India Ltd.

Asian Paints Ltd.

Berger Paints India Ltd.

Kansai Nerolac Paints Ltd.

Shalimar Paints Ltd.

Company Research

August 29, 2012

� Geographically diversified:

The Asian Paints group operates in five regions across the world i.e. South Asia, South East

Asia, South Pacific, Middle East & Caribbean through its five corporate brands viz. Asian

Paints, Berger International, SCIB Paints, Apco Coatings and Taubmans. The company

along with its subsidiaries has operations in 17 countries across the world with 24 paint

manufacturing facilities, servicing consumers in 65 countries. It is the largest paint company

in eleven countries.

� Most paint companies are hit by the fact that they do not make the raw materials

themselves. For example, phthalic anhydride (PAN) is manufactured from orthoxylene and

which goes into the production of paints along with titanium dioxide. Asian Paints is the only

paint company that manufactures PAN. The other paint companies have to import their

stock. Since PAN prices generally outpace international orthoxylene prices by almost 50%

paint companies end up paying a fortune when prices rise. In such a situation Asian Paints

benefits by selling PAN in the open market.

� Product innovation to match changing consumer needs and dynamic business

environment:

In Decorative paints, Asian Paints is present in all the four segments v.i.z Interior Wall

Finishes, Exterior Wall Finishes, Enamels and Wood Finishes. It also introduced many

innovative concepts in the Indian paint industry like Colour Worlds (Dealer Tinting Systems),

Home Solutions (painting solutions Service), Kids World (painting solutions for kid's room),

Colour Next (Prediction of Colour Trends through in-depth research) and Royale Play

Special Effect Paints etc.

� Continuous Capacity expansion:

The current installed capacity stood at 644,000 tons, which rose by 50,000MT (expansion at

Rohtak). Capacity is expected to increase to over 1.2mn MT by FY15, which will include the

new plant of 0.4mn tons at Khandala; the first phase of 0.3mn tons of this plant would be

commissioned in 4QFY13. For the Khandala facility company will be incurring cap-ex of

Rs.10bn, of which Rs5bn would be spend during the current fiscal.

� Forbes Global magazine USA ranked Asian Paints among the 200 Best Small Companies in

the World for 2002 and 2003 and presented the 'Best under a Billion' award, to the

company. Asian Paints is the only paint company in the world to receive this recognition.

Forbes has also ranked Asian Paints among the Best under a Billion companies in Asia In

2005, 06 and 07.

Company Research

August 29, 2012

� Peer Comparison:

Akzo Nobel

India Ltd Kansai

Nerolac Berger Paints Shalimar Paints Asian Paints

Sales growth (5 yr CAGR) 4% 16% 19% 14% 21%

Net Profit growth (5 yr CAGR) -15% 15% 15% 25% 29%

Operating Margin (5 yr avg) 15% 13% 10% 7% 15%

Net Margin (5 yr avg) 14% 8% 6% 2% 10%

Return on Equity (5 yr avg) 18% 21% 24% 23% 47%

Return on Assets (5 yr avg) 17% 19% 15% 8% 38%

Return on Capital Employed (5 yr avg)

23% 27% 25% 22% 56%

TTM PE 16.0 22.7 27.3 14.5 37.0

Clearly, Asian Paints has delivered superior returns relative to its competitors. Over the past 5

years, the company has seen dynamic growth in both its revenue as well as earnings. On a

consolidated basis, revenues grew at a compounded annual growth rate (CAGR) of 21% while

net profits grew at a CAGR of 29%.At the same time it was able to maintain healthy margins and

return ratios as well. FY12 operating and net margins were 14.9% and 9.4% respectively; while

Return on Equity and Return on Capital employed were 41.4% and 54.7% respectively.

Valuation-

We expect FY13 EPS to be at Rs. 120 and estimate P/E to be 33 times thus target for the stock is Rs 3960. At the current market price of Rs 3702.25, the stock trades at about 30 times its likely FY13 per share. We recommend you to ‘HOLD’ the stock at the current prices or lower. Given the company’s stable balance sheet, expanding product range, expanding product market and steady growth, we believe these valuations provide a good entry point for long term investors. Long term investors should ACCUMULATE the stock at every decline.

Company Research

August 29, 2012

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