Slide 2:

Industry Overview :
The Indian Paint Industry is currently valued at Rs 500 billion and it is the second largest paint
industry in the Asia Pacific region. The industry can be segregated on the basis of the product
type - Decorative and Industrial.
Decorative segment enjoys 75% market share which includes surface-based products interior
and exterior wall paints, wood finishes, enamels, putties and primers.
The industrial segment having 25% market share. The demand for industrial segment is mainly
driven by automotive segment.
Exports amounted to Rs 18 bn and imports of Rs 11 bn.

Based on revenue share, Asian paints dominates the industry with a market share of 39%,
followed by Berger paints having 12% market share.

Increase in disposable income, growth in real estate and automobile industry, urbanization,
shorting of the repainting cycle, rise in nuclear families and housing programmes by the
government have impacted the growth prospects of the industry.

Recent trends seen in this industry include industry consolidation owing to the Covid impact,
newer customer centric products, modern advancement in paint products and increase in paint
consumption in rural areas.

Slide 3:
Company Overview:

Asian Paints enjoys dominant share in the industry and is the third largest in Asia. It appeared
on Forbes List of World’s best regarded companies in 2019. It initially started off with a paints
company and has diversified its offering with providing services too. Having a look at the
revenue segmentation, we can see it derives 97.7% of its revenue from the sale of paints and
2.3% from the sale of home improvement services based on its last fiscal reporting. Looking at
the ownership pattern we see that 52.79% of ownership lies in the hands of the promoters, FIIs
holding 20.38%. The company has expanded its operations in many countries including UAE,
Egypt, Indonesia, Fiji makings its presence in the global platform. The company also undertaken
various societal initiatives like Project NEW which focuses on eco-friendly manufacturing
activities. The company also conducts financial literacy programmes for painters.

Slide 4:
Business strategy

Innovation & Branding

Asian Paints has a deeper understanding of its clients than its competitors. Company understands
what product types (for instance, the launch of washable distemper in the 1950s), colour shades
(deep shades rather than pastel shades), are in demand in various parts of the country.
Asian Paints is the only paint company with strong brand recall for its sub-brands, both in the
economy and in the premium segment. All of the other paint businesses, such as Nerolac, Dulux,
and Berger, have been able to build brand recall for only the mother brand.

Backward & Forward integration

Backward integration
Around 50% of raw material used by the paint companies are crude oil derivatives and
account for about 30-35% of total material cost” Thus by manufacturing raw materials
through its Penta division, Asian Paints can immunize the company against volatile crude
oil and derivatives pricing.

Forward integration

Asian paints has forayed into different segment of services to facilitate end-to-end
painting and designing experience of the customers. Various services like providing color
consultancy through color idea stores, Ezycolour consultancy, AP homes and so on

Customer - centric

Asian Paints has never shown resistance in identifying itself with customers who are budget
conscious. This is quite evident with its launch of washable distemper back in 1950.

Their Utsav product line provides paints at price at par with local companies in order to enable
people to buy branded paints without burning a hole in their pockets

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Inorganic expansion

Mergers and Acquisitions

Asian Paints strategy with respect to M&A has been to acquire capacity instead of going for
fresh investment so that it could gain the synergies by building on the ready-made brand,
distribution and so on (except for Bangladesh where AP had to set up its factory considering
there was no good company to acquire).The company has used acquisitions as both a market
entry and a market expansion strategy

Joint Venture
Asian Paints has a 50:50 JV with PPG Inc. USA, which is one of the largest automotive coating
manufacturers in the world. The JV helps Asian Paint to accelerate growth in the non-decorative
coatings space.

Strong distribution network

Through their strong distribution network, they are able to reduce their inventory turnover for
their business. It has also set its Distribution center next to manufacturing units thereby reducing
the time and cost of transportation

Asian Paints have a deep-rooted relationship with its dealers, During Covid -19 dealers were
provided with additional credit period and incentives for timely payments

International strategy

In general, the strategy underlying the international operations of AP has been: -

a) To capitalize on growth opportunities in emerging economies by leveraging

on company’s skills in India

b) To prepare for the long-term future by gaining exposure to the emerging

markets

c) Focus on its core business and stick to paint industry as much as possible

Forex risk management

The company’s foreign exchange cash inflows and outflows amounted to 118.85 crores and
2087.55 crores for financial year 2020-2021. The company is exposed to the foreign exchange
risk owing to its operations in around 13 countries and in addition to that a large part of raw
materials are also imported by company. Any fluctuations in the local currency vis - a - vis US
dollar can have an impact on company’s financials.

The Company has in place a Risk Management Policy and a mechanism to assess risk,
periodically review it and ensure that steps are taken to mitigate the risks. The Risk Management
Committee (RMC) periodically meets to discuss the key strategic and business risks and the risk
treatment plans being taken by the Company.

The table here shows the number of forward contracts bought by the company to hedge for
foreign currency exposure.
The below table shows the foreign currency exposure unhedged with respect to various
currencies where it can be seen that AP is mainly exposed to the fluctuations in USD exchange
rates

The hedging policy used by the company is

● To enter into forward exchange contracts with average maturity of less than one month to
hedge against its foreign currency exposures
● To hedge its exposures above predefined thresholds from recognized liabilities and firm
commitments that fall due in 20-30 days
● Also, it does not enter into any derivative instruments for trading or speculative purposes

Translation risk

● transactions in foreign currencies entered into by the Company are recorded in the
functional currency (i.e. Indian Rupees)
● Exchange differences arising on foreign exchange transactions settled during the year are
recognized in the Statement of Profit and Loss Account

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Slide 6:

VALUATION

For the valuation of Asian Paints, we have used the DCF approach. The discounted Cash flow approach is
suitable for the company as it is a stable company for which future cash flows can be predicted easily. We have
used the historical data for the last 5 years for our projections. We have calculated the terminal value at the end
of 10 years using a gradually declining growth rate. We have taken a bottom up approach and projected the
revenue growth in the company on the basis of the different segments it operates in.

We’ve calculated the Cost of Equity using CAPM and Cost of Debt using the 10 years G-sec rate plus the
credit spread according to Asian Paints’ credit rating. Based on the intrinsic value derived from our model,
Asian Paints is overvalued by 10.1%. Next, what we see is our sales projection over the next 5 years, we see it
crossing the 40,000 Crs mark owing to various reasons like shortening of the repainting cycle - earlier people
would go years without repainting but with time people have grown conscious and covid has also led people to
be more hygienic, demand picking up in rural areas as they give up on traditional methods of painting. The
revival of the housing segment and industrial coating segment will also propel this growth in revenue.
Slide 7:

ROE

Speaking about Return on Equity - it measures how efficient the management is in making profit with the
shareholders’ funds. We have projected the income statement and balance sheet for Asian Paints for the next
five years. Historically Asian Paints has constantly been the leader in ROE and has outperformed the industry
average. We have used the 3 step DuPont analysis to further gauge its sustainability.
The three components of our analysis were:
1. Net Profit Margin which we expect to stay in the range of 14-17%, as the company is continuously working
hard to cut costs and improve efficiency of their supply chain.
2.The second component is the Total Asset Turnover, the higher increase in assets over the coming years as
compared to the increase in Revenue is giving us a declining Asset turnover.
3. And finally, financial leverage or the equity multiplier.

Since the company is seeing a more than proportionate increase in Equity due to higher retained earnings as
compared to the rise in the value of the assets, we have projected a decline in financial leverage, although the
company has been witnessing a declining financial leverage historically too.

Given that the ROE is not driven by debt, has been maintaining higher levels than peers historically, the
company should be able to sustain its ROE above the industry average.

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Slide 8:

Sustainability Model

Asian paints aims to become a one-stop décor solution. It endeavors continuously to sharpen its Risk

Management systems and processes in line with a rapidly changing business environment. Some of the key

strategic and business risks the company is actively managing are explained in the table. It is extremely important

to note that they continue to treat data as a strategic asset and have deployed many projects using the power of

AI/ML in analytics.

I would like to explain the 2 most important risks that the company is facing.

1. Customer Facing: For this the company uses digital as a channel to interact with the customer has
become more and more prevalent.
2. Emerging risks: Asian paints regularly identifies and assess opportunities with respect to the internal
and external factors.
In addition to identifying all possible risks and taking necessary steps to mitigate the same, Asian Paints is expected
to be a future survivor. Let us analyze how is that going to happen:

• Using diversification, Asian Paints is expanding the beautiful home store and sanitary ware business.
• Asian paints has had a constant aggressive move to reduce material costs. Their R&D teams constantly
find alternative suppliers and go for even small discounts possible.
• The team gives products to distributors, shopkeepers etc on credit. Instead of focusing on collecting the
money here they will try to create demand in certain areas so that they are perceived as leader. The
strategy here is that because the demand is so high the vendors are able to sell that product faster
thereby paying back.
• A lot of the money is tied up in inventory which is not being sold in such a business, so what Asian
paints tries to focus on is offering schemes and offers across their network so they can free up the

inventory which is not being sold and thus can free up cash to be reinvested in the business again .

Asian paints has smart factories with total automation and standardization. Their focus on research is also always
high. Asian Paints has 200 researchers assigned to create new products. It has 70 patents to its credit as of now.
In order to reduce its dependency on domestic revenue, the company has expanded to South Asia, South Pacific,
Middle East, and Africa. Over the past year, several new products were launched in both the premium and value
segments, which filled key gaps in the markets.

We can see all these sustainability strategies working through:

1. the free cash flows which are steadily increasing from FY2016-17 to FY2020-21 from Rs 809 to Rs 3209.
2. The sales and net profit margin which is also improving.
3. Asian Pains in its peer group is the market leader in terms of market capitalization.

Thus justifying that the model is sustainable.