Asian Paints, growth outlook is quite robust

• Set up in 1942, the Asian Paints group is the largest paint manufacturer in India. About 80% of its revenue comes from decorative paints and the remaining from industrial paints and overseas operations.
• The Bottom line of the company has returned to the pre-covid levels with profits increasing by 21.56% YoY.
• In the past 3 years the stock price of the company has grown at a CAGR of 24%. The company is a leader in the paints market in terms of market share, which is supported by resilient fundamentals.
• Asian Paints LTD has registered a robust sales growth of 5% YoY. This is a significant amount as the company saw negative sales growth in the previous quarters.

HIGHLIGHTS

• Sales staggered in Q1FY21 due to the COVID-19 Lockdown. However, sales in Q2FY2021 have demonstrated a remarkable growth of 58.03% as compared to the previous quarter.
• This growth has also complimented the profits of the company as the profits of the company have doubled as compared to the previous quarter.
• The company gave a sizeable return of 46% in the past 8 months, even when the markets had a negative sentiment. The group enjoys a dominant market share of over 50% in the organized domestic paints segment. In the decorative paints segment, which comprises about 70-75% of the Indian Paints industry, the group has a share of about 60%

KEY RISK FACTORS

• Sluggish Growth in Tier 1 Cities
• Uncertainty in Crude oil prices
• Low Demand from tier-1 cities
• Seasonality of the Business, i.e. the decorative paints segment of the company is a seasonal business, as people do not paint/repaint their houses frequently.
• Dependence on the Automobile and Real Estate sector

VALUATION

• We estimate the sales to grow by 8%-12% in the coming 3 financial years. The stock is currently trading at 69.03x/73.80x its FY2022/23E EPS. APL commands a dominant position in the domestic decorative paints business, focus on becoming a complete play in the home decor space, sturdy balance sheet, and good dividend payout will keep valuations at the premium level. Sustained growth in the PAT margins demonstrates good prospects in the near term.

FINANCIAL PERFORMANCE

• The First-quarter of FY21 saw sluggish growth majorly impacted by lockdown imposed by the govt. However, Q2 saw a V-shaped recovery as the top-line saw improvement towards pre covid levels. We estimate the sales to grow by 8%-12% in the coming 3 financial years. The stock is currently trading at 69.03x/73.80x its FY2022/23E EPS.
• Q4FY2020 and Q1FY21 have been one of the toughest phases for the company as sales, reduced by 36% QoQ and profits reduced by 50%. This was later compensated in Q2FY2020 as quarterly sales increased by 58% , which in turn contributed to an increase in the bottom line of the company as profits grew twofold in the same period. APL commands a dominant position in the domestic decorative paints business, focus on becoming a complete play in the home decor space, sturdy balance sheet, and good dividend payout will keep valuations at the premium level. Sustained growth in the PAT margins demonstrates good prospects in the near term.
• The international business also registered close to double-digit volume growth, mainly driven by a strong recovery in Africa, Middle East, Sri Lanka, and Bangladesh. Nepal seemed still under pressure due to COVID-related restrictions. APL launched new products in premium and luxury emulsions in the international market to fill in product gaps.
• The waterproofing segment is also performing well across global markets. A majority of the company’s revenue is from the decorative paints category and the company is a market leader in the same. The company earned a revenue of ₹ 16923 Crores in FY2020 from the decorative coatings segment resulting in a 5% increase as compared to the previous fiscal. The home improvement business also saw an increase in terms of revenue. The company recorded a revenue of ₹ 457.7 Crores from its home improvement segment as compared to ₹ 202 crores in the previous year i.e. double the growth as compared to FY19.
• The percentage share of the Decorative coatings and Home improvement is expected to increase in the coming period as demand for repainting and renovation of houses is back to its normal stage. The revenue from international operations saw a slowdown as International trade was brought to a standstill in Q1 of FY21. The industrial coatings segment also bore the brunt of the ongoing pandemic and low demand from the Automobile sector.
• The Cash Flow trends of Asian paints show very promising numbers. The free cash flows of the company are at an all-time high. Free Cash to Firm (FCFF) stood at around ₹ 2422 Crores in FY20 indicating a 5 Year Growth CAGR of 23%. A Better Interest Coverage ratio, rising profits, reduced investment in WC are some of the driving factors to company’s free cash flow.
• The Free Cash flow to Equity (FCFE) of the company is also at an all-time high. The Free Cash Flow of the company stood at ₹ 2422 Crores indicating a double-digit growth as compared to the previous year. FCFF and FCFE of the company show a dip in FY17 due to increased investment in the working capital of the company. The company has negligible debt in its capital structure and is being successful in repaying the same. The free cash flows are expected to show an increasing trend now with a new product segment (hand and surface sanitizers) in the picture.

ECONOMIC OUTLOOK

• A bleak sign of optimism for the Economy because the GDP Contracted to 7.5%for the July-September quarter in comparison to the compression of a record of 23.9% in the previous quarter. This signals India into a technical recession since 1996. A Major reason for contraction within the previous quarter being Lockdown imposed by the govt which halted all the economic activities which led to a big decrease in demand for goods and services. With Construction, Manufacturing, Hotels & Transportation sectors recording biggest fall. To tackle the hardship faced thanks to covid 19 the govt and RBI have taken several measures to assist ease the impact of the virus on the economy.
• India’s GDP staged a resilient V-shaped recovery in Q2:2020-21 suggesting that the resumption of economic activity has been gathering pace. India’s GDP growth rose to (-)7.5 percent YoY in Q2, a sharp rebound from the lockdown-induced decline of (-)23.9 percent in Q1. This is in line with the experience of various economies globally. With the scaling back of lockdowns in May and June, which helped to break the chain of the spread, most economies rebounded from their troughs, posting sharp narrowing in contractions of quarterly growth amid lifting of the containment measures and pick up in business and consumer confidence.
• From deploying relief package of Rs.1.7 Lakh cr to providing loan moratorium extensions. However, the festive season has helped curve the pain for the economy by boosting demand. And a downward trend within the virus impact also. There is a notable decline within the export sector the general export from April 20 to August 20 is estimated to be around US$182.13B a 19.32% decrease compared to last year concerning imports for the given period it is estimated at US$167.94B a 38% decrease compared to last year. Moody’s altered its credit rating for India at Baa3 in contrast to Baa2 last year.
• After six consecutive months of sharp negative growth in industrial production, IIP growth for September was in the positive territory with a growth of 0.2 percent compared with (-)7.4 percent in the previous month and (-)4.6 percent contraction in the corresponding period last year. the growth in consumer durables (2.8 percent) and consumer non-durables (4.1 percent) reflects an improvement in consumer demand in the economy and reflects additional production by companies ahead of the festive season.
• The months of October and November 2020 have been of economic uncertainty with global composite PMI and goods trade activity showing a tepid increase. Energy and metal prices around the world have moved in different directions further adding to the uncertainty. In general, global inflation has softened in advanced economies while climbing up further in emerging market economies reflecting a relatively larger impact of supply-side disruptions on economically more challenged countries in the world. The index of eight core industries contracted slightly more in October than in the previous month due to a large contraction in the production of petroleum refinery products. This has also led to a contraction of petroleum exports. Manufacturing PMI moderated to 56.3 in November against the decade-high level of 58.9 in October. With the PMI Services index also ending the seven-month sequence of contraction to rise to 54.1 in October, growth of output in the second half of 2020-21 is poised to replicate the performance of Q2. Foreign Direct Investment (FDI) continues to endorse India’s status as a preferred investment destination among global investors as FDI inflow rises more than 10 percent year-on-year to reach US$ 40 billion in the first six months of 2020-21. FPI inflows also reflect the same sentiment reaching a historic high of US$ 8.5 billion in November. Consequently, and on the back of continued contraction in imports, forex reserves continue to scale new highs to reach US$ 575 billion on 20th November 2020, extending import coverage to now more than 16 months.

INDUSTRY OUTLOOK

• Global Scenario: As against the worldwide paints and coatings industry, which generates revenue of ~US$160bn, the Indian paint industry is valued at ~US$7.1bn as of FY20. Asia Pacific (APAC), the world’s largest coatings market with 45% market share and valued at US$71bn+ in 2019, has been growing faster than the worldwide and matured markets on account of relatively higher growth within the economy, especially in China and India.
  China is the largest part of the APAC market, comprising nearly 60% of volume and value. Including the subsequent two largest markets, India and Japan, the highest three markets account for over 80% of the quantity and value of the APAC region. Globally, the Asia Pacific region dominates the Paints and Coatings industry with a forty-five Market share of which China and India have a majority stake.
• The domestic paint industry has grown at a rate of 10.4% from FY08, when the market was valued at Rs159bn, to FY20, when the market size reached ~Rs520bn. Over the years, the ornamental paint segment (market share of ~75-80%) has grown at a CAGR of 11.4% against the economic segment (market share of ~20-25%), which has grown at a CAGR of seven .9%. Within the industry, the organized sector has been commanding ~70% market share and therefore the balance of 30% is accounted for by the unorganized sector.Till the primary half of the 2010s, the unorganized sector had ~35% market share, but with demonetization and implementation of GST, the organized players are ready to capture market share from the unorganized players. Over the past 20 years, the paints industry has been clocking a Cagr of 11.7%, with the previous 10-year paint Cagr trending at 12.7%.The key drivers to the present growth are majorly thanks to the boom in complementing industries like the household and automobile sector.
• Housing and land – Due to the ongoing pandemic and therefore the resulting lockdown, prospective buyers are stranded and are reluctant to manoeuvre outside, which has severely affected the buyer-seller relationship across sectors. However, the changing scenario has required both the availability and demand-side to adapt to new ways  that seems to be important for the real estate sector. The lockdown has compelled stakeholders to extend the utilization of digital platforms and technology during this sector. The global pandemic, leading to the nationwide lockdown since the last week of March has severely impacted the important estate market across the cities. Despite several measures being announced by the govt and financial institution to mitigate the adverse effects of COVID-19, launches within the residential market remained muted within the first two months of the quarter, with only a few projects launched within the latter a part of the quarter.
• New launches across the highest eight cities are on a decline for the past few years. Sluggish sales, increasing inventory overhang, and therefore the credit freeze infused by the shadow bank crisis has made developers take cognizance of things and finish projects in hand instead of launch new ones. The economic slowdown has resulted in fewer new launches also as sales, yet on the buyer’s side, the use of online platforms to look and find out property has quickly bounced back. Consistent with Housing Research, Q1 2020 saw a YoY increase of 30 percent in online search traffic over Q1 2019. While online searches initially declined in April thanks to the initial shock of the lockdown, this quickly recovered and registered a YoY increase of 25 percent over Q2 2019. Albeit sales have decreased, due to the economic downturn, the amount of interested buyers is increasing online, as sellers come up with innovative ways to make them buy, all from the comfort of their homes.
• Automobile- In the half-moon of the fiscal year 2019-20, there was an enormous decline within the car sales rate, which may be accounted to be 23 percent, while the passenger vehicle sale rate has nosedived to a mere 18 percent. This is often considered to be the worst quarterly performance since the third quarter of the year 2000-01. The industry produced a complete 26,362,282 vehicles, including Passenger Vehicles, Commercial Vehicles, Three Wheelers, Two Wheelers, and Quadricycles in April-March 2020 as against 30,914,874 in April-March 2019, registering a de-growth of (-) 14.73 percent over an equivalent period last year.In April-March 2020, overall automobile exports registered a growth of two .95 percent. While Commercial Vehicles and Three Wheelers exports declined by (-) 39.25 percent and (-) 11.54 percent, respectively.
  However, Passenger Vehicle segment exports marginally increased by 0.17 percent and Two-wheeler segment exports registered a growth of seven .30 percent in April-March 2020 over an equivalent period last year

CONCLUSION

According to the Invest India Platform, India is predicted to be the world’s third-largest automotive market in terms of volume by 2026. India holds a robust position within the international heavy vehicle arena because it is that the largest tractor manufacturer, second-largest bus manufacturer, and third largest heavy truck manufacturer within the world.

The Indian industry is slowly shifting its focus to electric cars intending to reduce emissions. The Union Cabinet has approved the proposal for the implementation of the second phase of Faster Adoption and Manufacturing of (Hybrid & Electric Vehicles (FAME-II) in India which is predicted to support up to 1 million two-wheelers.

Rising income and greater availability of credit and financing options are the key growth drivers for the world. Moreover, the demand for commercial vehicles driven by a high level of activity within the infrastructure sector has aided growth. India’s established auto ancillary industry also provides the specified support to spice up growth within the sector.

About the Company: APL is that the largest paint company in India with a market leadership of over 50 years and stands among one of the top 10 paint companies within the world. APL has 26 paint manufacturing plants in 15 countries, serving customers in over 65 countries globally. The corporate offers paints – decorative and industrial, wall coverings, and waterproofing alongside kitchen and bath fittings, adhesives, and services. Deco India, including decorative paints, waterproofing, wall coverings and, adhesives, constitutes almost 84% of the company’s total revenue, whereas the economic coating space, including automotive and non-automotive constitutes only 2%, through two 50:50 joint ventures with PPG industries Inc., USA (AP-PPG). The international business contributes ~12% to the entire revenue mainly dominated by Nepal, Sri Lanka, and Bahrain. A little portion is contributed by kitchen and bath fittings through its subsidiary, Sleek International Pvt. Ltd. (Sleek Kitchens) and Ess Ess Bath Fittings.

Asian Paints growth outlook is quite robust, would accelerate and its earnings have the potential to surpass expectations.