In order to deliver consistent outperformance, Asian Paints has relied on quality professionals, proactive use of technology, effective functioning of its Board and strong dealer relationships. These factors are likely to result in: (i) further market share gains in paints; (ii) successful expansion into adjacent categories; and (iii) dominance through the next phase of industry evolution. We expect revenue/EPS CAGR of 17%/ 23% over FY15-FY20. Factoring in the longevity of these growth rates, we arrive at a DCF-based (discounted cash flow) fair value of R986 (12% upside), implying an FY17e P/E (price-to-earnings ratio) of 42x. We change our stance to BUY.
Competitive position: Strong
Asian Paints’ strong foundation has been built by focusing on: (i) hiring top quality talent which is nurtured in a culture that provides rapid career progression and support even in employees’ personal lives (ii) using technology proactively to improve operating efficiencies; (iii) empowering professionals and Independent Directors on the Board in strategic decision making; and (iv) establishing deep-rooted relationships with dealers.
We expect market share gains of ~100bps each year over FY15-FY25
Asian Paints has built impregnable competitive advantages around supply chain in decorative paints through extensive use of technology to forecast demand accurately, shorten product delivery times and better manage working capital. These strengths will result in ~100bps market share gain each year over the next decade, and also help the firm expand into categories like waterproofing and construction chemicals.
Preparing for the next phase of evolution of the paints industry
The rising share of labour costs in a paint project and the increasing participation of the end customer in decision-making will lead to the emergence of: (i) DIY (Do It Yourself) format for paint projects; (ii) value added services offered by labourers like faster, cleaner project execution; and (iii) dominance of the organised format for dealer shops. With an objective to maintain its sector dominance, the firm has launched ‘colour consultancies’, ‘home solutions’, digital interfaces to upgrade its Colour Ideas stores, and is planning a launch of Home Improvement & Décor stores.
Change in stance from SELL to BUY; upgrade earnings & valuations
We expect 17.2%/23.1% revenue/EPS CAGR for Asian Paints over FY15-FY20, amidst 13.5%/11.0% decorative paints industry revenue CAGR over FY15-FY25/FY25-FY35. Our revised DCF factors in longevity of Asian Paints’ growth profile. This industry growth will be driven by decreasing repainting cycles (from 10.6 years currently to 8.5/7.5 years by FY25/FY35), and a rise in the share of pucca houses and the organised sector.