Asian Paints, Secret Sauce, Consistent Compounder, Valuation, Financial Model

1. Ticker : ASIANPAINT
Sector : Paints & Varnishes
Recommendation : BUY
Current price : Rs.1,960 [22nd August 2020]
Target price : ₹ 2,894.84
‘At the heart of all the great money machines in India lies a non-linear insight
which at that time looks like pure madness & 30 years later looks like undiluted
genius.’ –Saurabh Mukherja
“Every Color Tells A Story”

2. COMPANY BACKGROUND
 Asian Paints Limited (headquartered in Mumbai) is India's largest and Asia's third
largest paints corporation established in 1942. Asian paints is the market leader in
Indian paint manufacturing industry with a market share of close to 60%
 The company manufactures paints in the category of Decorative, Automotive and
Industrial segment. Apart from these the company also manufactures various
Accessories like, Wall Primer, Wood Primer, Putty and Stainers etc. Driven by its strong
consumer-focus and innovative spirit, the company has been the market leader in
paints since 1967.
 Asian paints operate in 15 countries in world across four regions with 17
manufacturing facilities across Asia, the Middle East, Africa & south pacific. Asian
paints has robust dealer network (70,000+) & well placed supply chain.
 Asian paints attracts top quality talent from the most prestigious institutions & then
grooms & empowers them. Result- Talented & Independent Professional Management
Team.
 CRISIL has assigned a ‘AAA’ Rating
 We have been lucky to have new jewels in the form of professional managers who
attempted to do things that haven’t been done before, and lucky to have a
management that allowed them to do so. –K.B.S Anand of Asian Paints

3. Performance Overview
 Asian paints went public in 1982. It has grown 1900x since 1982.
 Business doubles every three years.
 Asian paints has consistently maintained ROCE’s of more than 30% with a reinvestment
rate of more than 40%
Source: Value Research

4. INDUSTRY OVERVIEW
 The domestic paint industry consisting of decorative & Industry paint segment is
estimated at 50,000 crores.
 Paints industry has been consistent with the growth in Indian GDP showing
growth of 1.5-2x of India’s GDP.
 The per capita consumption of paints in India is very at 3.23 kg against that of
developed countries (38 kg’s in Singapore, 26 kg’s in US).
Asian Paints
60%
Berger Paints
18%
Akzo Nobel
8%
Kansai
Narolac
14%
% MKT. SHARE

5. S
A B
P
P
Pigments
PAN(Pthalic Anhydride)
Titamium Dioxide Imported
and 50%of the cost
S
Solvents
Acetone
Exported from Thailand and
Japan
E
Additives
Fungicides,Driers
DomesticallyProcured
B
Binders
Resins
Domestically Procured
Paint Industry is Raw Material Intensive
Around 300 raw materials are used which constitutes 70% of the total
cost.
50% of them are crude oil based.
30% of the raw materials has to be imported.

6. Valuation
Free Cash Flow valuation 1 2 3
2021F 2022F 2023F
Cash Flow from Operations 3,796.97 3,903.66 4,075.03
Less: CapEx (192.01) (1,267.25) (2,428.89)
FCFF 3,604.96 2,636.42 1,646.14
PV of FCFF ₹ 3,332.98 ₹ 2,253.61 ₹ 1,300.96
Terminal value 2,69,208.65 - -
Enterprise Value ₹ 2,76,096.21
Less: Total Debt -1,119
Add: Cash & cash equivalents 783
Add: Non-Operating Assets 1,913
Equity Value 2,77,673
No. of Shares 96
Intrinsic Value per Share ₹ 2,894.84
Terminal Value- Rs.2,69,208.65
Enterprise Value- Rs.2,76,096.21
Intrinsic Value Per Share- Rs.2,894.84

7. Forensic Check
ForensicAccountingCheckRatios & Metrics 2016H 2017H 2018H 2019H 2020H
CFO/EBITDA Ratio 76.55% 47.01% 61.83% 61.76% 58.93%
Yield on Cash &Cash Equivalent 0.95% 0.70% 1.31% 1.20% 0.72%
Contingent Liability to Networth 2.88% 3.71% 2.96% 2.44% 3.18%
Growth in Auditors fees to Growth in Revenues 2.73 -6.53 13.79 -0.80
Misc. Expenses to Revenues 0.91% 0.95% 0.43% 0.54% 0.58%
P&L&Dividend to ΔReserves 1.10 1.47 0.88 2.54
Volatility of Non operating income - - - - 30.14%
1. CFO/EBITDA- >50% on a firm’s revenue recognition indicates fair practices in revenue recognition.
2. Yield on cash & cash equivalent signifies cash is being used in best interests of the firm.
3. Contingent liability to net worth- The numbers are stable which indicates fair accounting practices established by
the company which reduces off balance sheet items risk.
4. Growth in Auditor Remuneration- Growth in auditor remuneration is consistent with growth in consolidated
revenues.
5. Misc Expenses to Revenues- A low ratio indicates authentic expenditure policy by the company.
6. Volatility of Non-Operating Income- Should penalize firms where volatility of NOI is unusually high, as this could
inflate profitability in years of low profits by resorting to such means as sale of assets, Investments & so on.

8. Financial Analysis
Financial Analysis of Asian Paints among its peers
Asian Paints BergerPaints Kansai Nerolac Akzo Nobel ShalimarPaints
EBITDA Margin 22.10% 20.00% 19.00% 19.00% -4.00%
Return on Equity 26.34% 25.63% 14.33% 20.01% -15.61%
Return on Capital Employed 31.30% 28.98% 18.19% 27.25% -10.17%
Cash Conversion Cycle 61 93 133 58 116
Receivable Days 32 40 54 54 75
Inventory days 109 125 126 107 136
Payable days 69 73 48 103 96
Debt-Equity Ratio 0.09 0.29 0.05 0.05 0.44
EPS 28.20 5.14 7.58 35.13 -7.03
PEGRatio 6.85 5.46 4.58 5.74 -
P/ERatio 83.35x 110.88x 62.79x 58.47x -
EV/EBITDA Ratio 56.89x 62.49x 39.16x 30.38x -
Highlighted cells shows best among peers

9. 84%
12%
2% 2%
%
Decorative Coatings International Operations Industrial Coatings Home Improvement Business
Revenue Mix of Asian Paints

10. Corporate Governance
 Satisfaction of the spirit of the law through ethical business conduct.
 Transparency & higher disclosure levels.
 Truthful communication about how the company is run internally.
 A simple & transparent corporate structure driven solely by the business needs.
 Asian Paints not only adheres to the prescribed Corporate Governance practices as
per the Listing Regulations but is also committed to sound Corporate Governance
principles and practices. It constantly strives to adopt emerging best practices being
followed worldwide.
 Management is the trustee of the shareholder’s capital & not the owner.
 The company was conferred upon the “Golden Peacock Award” for excellence in
corporate governance in 2019.
 Mr. Amit Syngle was identified as the successor to the Managing Director & CEO of
the Company and was groomed and mentored for the role by Mr. KBS Anand for over
a period of two years. Before being appointed as the Managing Director & CEO, Mr.
Amit Syngle held the position of Chief Operating Officer of the Company.
Source: The unusual Billionaries (Book), ACE Equity, Marcellus Newsletter, Annual
Report

11. Risk & Concerns
 Rise in crude oil prices which are integral part of the raw
materials.
 Weakening of currency (Rupee)
 PE derating
 Market Risk
 Pandemic Risk ( Resulting in job losses, cut in discretionary
expenses)
 Slowdown in key sectors ( Real Estate, Automobiles,
Infrastructure )
 Customer Facing Risk
 Information Security Risk (Cyber Attacks)

12. Secret Sauce
 Moats built predominantly around supply chain efficiencies; no room for competition through
better product quality or high trade efficiencies.
 Attracts top quality talent from the most prestigious institutions and then grooms &
empowers them. Result- Talented & independent professional management team.
 Makes use of technology to improve operating efficiencies, which helps in three ways:-
a) shape up moats around systems & processes (eg:- demand forecasting)
b) Suffocates competition through fewer price hikes.
c) Disrupts its products and processes once as in when required.
 They have collected data of almost every neighborhood in India for 50 years which helps
them to forecast demand & improve supply chain efficiency.
 Asian paints has lowest and most efficient cash conversion cycle among his peers.
 Asian paints is the only paints company in the sector which has not seen a change in its
controlling shareholders over the past seventy years.
 Asian paints is the only company in India which takes home 97% of MRP (3% goes to the
dealer) They deliver paint 4 times a day to 70,000 dealers i.e. 2.5 to 3 Lakh times a day.
Source: The unusual Billionaire's (Book), ACE Equity, Marcellus Newsletter, Annual
Report

13. Conclusion
 With consistent ROCE of more than 30% and revenue growth of more than 10%
since decades. The company has moat and because of its unique history and
future growth prospects. Asian Paints is a compounding machine with very good
creditability of management backed with strong earnings growth.
 Asian Paints has innovated in technology and continues to disrupt the whole
industry with strong supply chain management and large network of dealers. On
the valuation perspective it’s fairly valued.
 As the banking and consumption are bedrock of the economy. As the moat of
the company keeps on expanding which leads to increasing in accuracy of
forecasting demand. The growth story is just beginning, maybe it’s the start of
another grand bull run, and We can see Asian Paints will still lead the way.