GR I Crew 16 2015 AsianPaints.doc

7/23/2019 GR I Crew 16 2015 AsianPaints.doc

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Overview of Indian Paint Industry:

The paint industry is one of the fastest growing industries in India. Estimated a

market worth Rs. 280 billion back in nancial year 20!" the industry is e#pected to

grow at a promising annual rate of 2$! per cent" taking it to the gures of Rs. %00

billion by nancial year 208. It is anticipated that the demand from both consumeras well as industrial segments &the primary segments of the industry' would be

increasing steadily in the foreseeable future. (owe)er" nancial year 20* was

somewhat challenging" as demand was subdued" and in+ation was on a rise o)er

this period as well. Talking of sectors within the paint industry" around !% per cent

market is co)ered by the unorgani,ed sector" with the organi,ed sector co)ering the

rest. The unorgani,ed sector comprises of around 2000 units ha)ing small to

medium si,ed plants that manufacture paints.

The organi,ed sector of the Indian paint industry is dominated by these players-

sian /aints

ansai 1erolac

erger /aints

3halimar /aints

The paint industry was historically dominated by the unorgani,ed sector in India.

ut o)er the time" foreign players &and a few Indian ones' entered the market"

backed by rapid industriali,ation and institutionali,ation. This led to the

restructuring of this sector" and made way for the organi,ed sector to cross the

halfway mark and reach the le)els of 4% per cent market share. The smaller

&unorgani,ed' players were either amalgamated or integrated as suppliers in thesupply chains of ma5or players. The top )e players control more than 80 per cent

market in the organi,ed sector.

Rapid industrial and in turn economic growth of India in recent years has caused a

tremendous increase in the demand for paints in the country. 3uch a promising

en)ironment has attracted many global players to establish their bases here in

India. 6 of the top 0 global paint manufacturers ha)e their facilities set up in the

country. India7s share in the global paint market stands at a meager 0.4 per cent"

with per capita paint consumption lying around .% kgs. These gures show how

magnicent scope this industry has in India" and the recent de)elopments in this

sector show how the global and local players are aligning themsel)es accordingly.

The progress of the industry is largely in+uenced by a number of factors like

inno)ati)e products" new technologies" associations and consolidations" e#iting of

the poor performers from the market. /resently" industry is anticipating growth from

new demand pockets like tier$II and tier$III cities. It can thus be e#pected that there

would be a mass acceptance of uality products in the future. The growing demand

for uality paints coupled with increasing income le)els of people from tier$II and


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tier$III cities has fueled the growth of premium paint market of Indian decorati)e

paint sector.

9ue to increased go)ernment funding for infrastructure" both industrial and

decorati)e sectors of the paint industry are e#pected to show tremendous growth in

the near future. The Indian paint market typically shows oligopoly. The Indian paintindustry has come a long way from the point when paint was considered to be a

lu#ury item. 1ewer usages of paint &for e#ample" for pre)enting corrosion' are

gradually nding public awareness: this trend is )ery promising for the Indian paint

industry. The industrial )ariety of the paint picked up momentum with the entry of

;1reater le)els of migrants mo)ing to cities in order to seek better opportunities

/re)ailing culture of nuclear families

Easy a)ailability of nancing for housing loans

(igher demand for residential housing

Increased purchasing power across people from )arious income groups

Reduction in repainting cycles


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3purt in commercial construction backed by rapid economic growth

3etting up of state of the art Research ? 9e)elopment labs

Talking of recent de)elopments in the sector" all the players are coming up with a

wide spectrum of products to cater to the reuirements of their customers. Their

customers prefer premium products o)er )alue alternati)es" hence the companiescan play in higher margins" ultimately impro)ing their protability considerably.

signicant aspect of the nancial planning of these companies is the branding and

thus ad)ertising. The customers in this particular industry see purchasing paint as a

high in)ol)ement buy. randing not only helps in product di@erentiation for these

players" it also helps them pitch their uality products e@ecti)ely" thus allowing

them to en5oy higher margins o)er the product spectrum o@ered to the customers.

Especially the urban customers are in+uenced the most by ad)ertisements

highlighting the uality of the products o@ered. nd this segment of customers does

not hesitate in spending additional sum for uality products.

nother aspect that seeks considerably in)estment and dominatingly appears on

income statements and cash +ows is the supply chain of these companies. These

players ha)e been in)esting hea)ily on distribution networks spread across the

nation. widespread network would help them reach out to the rural parts of India

&which they could not cater to in the past'" and also enable them to o@er a better

customer ser)ice across )arious points of sale.

The urban customer is now fa)oring uality products &traditionally sAhe preferred

low cost alternati)es'" whereas the rural customer is shifting from unorgani,ed

players to their organi,ed counterparts. oth these trends show a promising future

for the paint industry in a de)eloping country like India. nd this is one of the

underlying reasons behind anticipating such a magnicent annual growth for this

particular sector o)er the upcoming years. o)ernment policies on infrastructure to boost spending


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Industrial paints reuire higher technical e#pertise and in)estments. s a result" the

entry barriers for this particular segment ha)e traditionally been higher" and the

segment is principally dominated by foreign players. These players can in)est

hea)ily &backed by their global headuarters'" and also carry technical knowhow of

decades.

There are some key di@erences between the two categories of this industry.

Industrial paints" unlike their decorati)e counterparts" do not need branding" as they

are sold directly to businesses &2'. lso" )ery few players in this segment means

the potential clients are easy to nd" discarding the need for branding and

ad)ertising. 3econdly" the distribution network is not as widespread as decorati)e

segment" as these players cater only to 2 clients. (owe)er" after sales ser)ices

are need to be more e@ecti)e because of stringent uality policies in the industry. In

the industrial paints segment" manufacturing companies interact with clients

closely" to o@er them tailor made customi,ed products meeting their specic

reuirements. This helps the players de)elop personali,ed relations with their

clients" thus securing a steady returns and growth. range of raw materials is

reuired in the paint industry. Chile resinsAlate# and pigments are the ma5or raw

materials &in terms of )olume'" sol)ents and containers also form a considerable

share" followed by additi)es.

E)ery dominant player in this industry caters to both the ma5or segments of the

paint industry- decorati)e and industrial. (owe)er" the proportion of the two &by

re)enues generated' )aries largely from company to company. Chere sian /aints

dri)es almost D! per cent of its re)enue from the decorati)e paints segment" the

same gure for ansai 1erolac is %% per cent. The rest of the re)enues &in both

cases' are contributed by the industrial paints segment.

nother important factor is sourcing of the raw materials.


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nother trend that follows the pattern of branding is retail network and distribution.


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sian /aints has bifurcated its operations in two main di)isions- 9ecorati)e paints

and industrial paints. The two segments contribute to the re)enue with di@erent

le)els: ha)e di@erent cost structures" di)erse clientele" di@erent demand dri)ers and

supply chain infrastructure. s stated pre)iously" the supply chain for decorati)e

paints is more spread out as compared to that of the industrial paints di)ision.

Ginancial 9eals-

In year 2004" erger International =imited" the o)erseas arm of sian /aints =imited"

di)ested its stake in 9utch oy" a /hilippines based rm. The deal was worth Rs.

4.6* crore. This was seen as a part of company7s rened strategy to cut e#posures

in loss$making units. The company e#ecuted a conditional stock purchase

agreement in)ol)ing a sale of *26"000 shares of 9utch oy /hilippines.

sian /aints also signed a %0-%0 new 5oint )enture agreement with //> Industries"

an merican company o@ering coatings" paints and specialty products. This 5oint

)enture was in$line with an anticipation of accelerating the growth of the business of

non$decorati)e coatings in India. The two companies already had one 5oint )enture"

by the name sian //> Industries =imited. Hnder the mutual understanding pact"

sian /aints would focus on second 5oint )enture while //> would concentrate on

the rst: in order to best utili,e their respecti)e strengths and continue dominating

the paints market.

//> currently o@ers transportation coatings and is e#panding in domains like

industrial liuids" consumer and marine markets. The second 5oint )enture will cater

to the segments like protecti)e" industrial containers" industrial power and light

industrial coatings.

sian /aints principally belie)es in inorganic growth as well when it comes to

e#panding business and e#ploring new territories. The company acuired % per

cent stake in 3leek International /ri)ate =imited &also known as 3leekworld'. It also

bought a % per cent stake in adisco


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The company has the widest and most di)erse range of o@erings especially in the

decorati)e paints segment. It nonetheless keeps refreshing the entire portfolio of

o@erings regularly in order to keep up with the e)er changing dynamic and pace of

the paints market in India. This uality" backed with a strong R?9 di)ision makes

sian /aints the undisputed market leader.

s stated abo)e" the company o@ers a wide range of products. It co)ers )arious

price ranges within this di)erse portfolio of product o@erings. It has a price

spectrum so e@ecti)e" that it can cater to an urban customer as well as a rural

customer. The company works on relati)ely lower margins sold to masses in rural

consumer market. It en5oys higher le)els of margin on high uality &premium'

products sold to the urban population.


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=ooking Gorward-

The ad)ances in information technology and emergence of future ready research

and de)elopment facilities are going to be the main focus of management in the

coming years. This would help the rm build superior and stronger products

enabling it to compete more e@ecti)ely and also streamline its operations moreeciently.


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2. /ricing power- The


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It refers to a method of performance measurement that was started by the 9u/ont


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)alue rather than at net book )alue in order to produce a higher return on euity&RE'. It is also known as J9u/ont identityJ.

9u/ont analysis tells us that RE is a@ected by three things-$ perating eciency" which is measured by prot margin$ sset use eciency" which is measured by total asset turno)er

$ Ginancial le)erage" which is measured by the euity multiplier

The attached e#cel pro)ides the 9u/ont analysis for sian /aints. It contains boththe ! step and % step formula for the purposes of interpretation.n the basis of its 9u/ont analysis" we can infer that-

Chile the return on euity on the 3ense# stocks in GK20* has been a)erage

of 4.8L" sian /aints has certainly outperformed the inde# RE" byconstantly ha)ing an a)erage RE o)er the past 4 years as !!.6L

The RE of sian /aints is fairly stable o)er time which is indicator of stabilityof earnings of the rm.

9espite good gures for the RE of the company" it does not tell a complete guresince a company may also boost its RE by taking on additional debt. Thus we willanalyse the components of its RE.

sset turno)er ratio for the company is uite high" which is a good indicator

and which contributes to the high protability of the company.

The companyMs nancial le)erage has been low as compared to its ma5or

peers. Their low le)erage and high RE means that a good portion of returnsare coming from organic sales or e@ecti)e management" not articialle)eraging.

Documents

GR I Crew 16 2015 AsianPaints.doc