Investment Shastra

Company Shastra

Asian Paints Ltd. – What makes it a Leader?

Asian Paints’ 10 YEAR X-RAY*: Green (Very Good)

(* 10 YEAR X-RAY shows the financial performance of a company in the last 10 years.)

Asian Paints Ltd, in brief

Asian Paints is India’s largest paint company and among the top ten decorative coating companies in the world. It is a fully integrated paints company that operates in the 2 main segments – decorative and industrial. It has more than 50% market share in the organized paint industry. The company has been able to cater to the vast Indian paint market with the help of its strong distribution network – 25000+ dealers and 14,000+ Color World outlets with tinting machines. It has a huge global presence, operating successfully in 17 countries

What does Asian Paints’ past say?


Asian Paints has performed robustly in all its parameters over the last 10 years. Its impressive fundamentals in the past form a strong base for its future. Hence, the 10 YEAR X-RAY of Asian Paints is Green (Very Good)

Asian Paints has an excellent financial track record, which is an indication of it having an unbreachable moat.Stock Shastra#4 highlights the importance of a moat (sustainable competitive advantage) in a business: Having a wide moat helps a company survive competitive pressures & remain a leader.

In the Indian paint industry, Asian Paints has been a leader since the last four decades.

What has helped Asian Paints maintain its leadership position till date?

It is the presence of 2 unbreachable moats –High Brand Equity and Strong Distribution Network – that Asian Paints Ltd has developed over the years.

The 2 Unbreachable Moats developed by Asian Paints Ltd:

  1. High Brand Equity: Asian Paints realized the need for brand building as early as the sixties, which has now made it an iconic brand. It has re-positioned itself from time to time to cater to the changing mind-sets of consumers and has built an emotional connect with consumers, in that process. For eg: It changed its 80’s positioning of ‘Celebrate with Asian Paints’ – catering to the habit of painting during festivals to ‘Har Ghar Kuch Kehta Hai’, in the late 90’s, reflecting the shift in the consumers’ mind, in terms of paint becoming a high-involvement category.
  2. Strong Distribution Network: The second strong moat of Asian Paints is its Strong distribution network, which is more than twice as large as its nearest competitors. It has a direct distribution network of 25,000 dealers, where the company pro-actively connects with the dealers themselves. It is present in 17 countries

Both these moats – High Brand Equity and Strong Distribution Network have been its major growth drivers till date. No retailer can do without Asian Paints products & hence they are widely available. As a result, It has been able to cater to the vast Indian paint market. These 2 moats have helped it maintain its market leadership position over the years

What is Asian Paint’s Short-term Outlook?

 

  • Asian Paints has sold its loss-making units in China, Hong Kong, Malaysia and Thailand. This will remove the dampening effects these units have, on its profitability

 

  • Asian Paints is looking at an upswing in consumer demand and strong recovery in real-estate, construction & automotive industry

  • Hardening of crude oil prices (60-70% of raw material cost) and sharp fall in rupee are a few short-term concerns

With the expected increase in demand from user-industries & the positive effect of its divestment in its loss-making units, we can expect the short-term outlook of Asian Paints to be Green (Very Good)

What is Asian Paints’ Long-term Outlook?

Asian Paints is India’s largest paint company, with more than 50% market share in the organized paint industry. It has:

Rising demand for paints will drive revenues: The demand for decorative paints segment (75% of the paint industry) will be spear-headed by the demand from growing real estate industry. Asian Paints is the market leader in the decorative paints segment. Currently per capita paint consumption in India is at 0.5-0.75 kg which is very low compared to developed countries average of 22kg. This shows a huge potential ahead for Indian paint companies and especially for Asian Paints

The company is also focusing aggressively on the industrial paints segment where it is currently in the 2nd position. The demand for industrial paints is expected to rise with the growing demand from the automotive sector and other industries

Capacity Expansion to cater to growing demand: The Company has set up a plant at Rohtak in Haryana with an initial capacity of 1.5 lakh kilo litres (KL) which can be scaled to 4 lakh KL in future expansions. The plant has started operations and will cater mainly to the industrial paints segment. It has also acquired land near Pune in Maharashtra for a decorative paints plant

Causes for Concern:

  • The unorganized paint segment (35% of the paint industry) reduces the pricing power of the organized segment (65%)
  • The increasing presence of MNC’s (ICI, Nerolac, Berger) may increase competition which may lead to a pricing war in the future, putting pressure on margins
  • Asian Paints lacks in the Decorative Business-to-Business segment, where builders prefer ICI

Despite these concerns, Asian Paints is well-armed to grow in the future due to its strong moats, its market leadership position, rising demand for paints etc. Hence, we can expect the long-term outlook of Asian Paints to be Green (Very Good)

Conclusion:

Asian Paints is India’s largest paint company having a Strong Brand & Huge Distribution network. It has a sound financial past & is expected to have robust growth, both in the short-term and long-term

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4 comments

  • About 8 months back I thought it is overpriced and waited for correction. But it has not taken place.One more point in its favour.
    When u ask the contract labour, he will suggest two names Nerolack n Asian paints and considerring cost aspect -for individual
    hoem painting- he will first say Nerolack n then Asian. Anyway one cannot have all good cos in ones p.folio. Arthchakra

  • Hey,
    15 months back (March,2009) or even a year back, Asian Paints was available close to Discount Price. So wait till it reaches an attractive price.
    You are right about Nerolac being favored where cost is concerned, but Asian Paints is always rated higher on quality.
    Thanks