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 financial year 2013, the industry is expected to
grow at a promising annual rate of 12-13 per cent, taking it to the figures of Rs. 500
billion by financial year 2018. It is anticipated that the demand from both consumer
as well as industrial segments (the primary segments of the industry) would be
increasing steadily in the foreseeable future. However, financial year 2014 was
somewhat challenging, as demand was subdued, and inflation was on a rise over
this period as well. Talking of sectors within the paint industry, around 35 per cent
market is covered by the unorganized sector, with the organized sector covering the
rest. The unorganized sector comprises of around 2000 units having small to
medium sized plants that manufacture paints.
The organized sector of the Indian paint industry is dominated by these players:

Asian Paints
Kansai Nerolac
Berger Paints
Shalimar Paints

The paint industry was historically dominated by the unorganized sector in India.
But over the time, foreign players (and a few Indian ones) entered the market,
backed by rapid industrialization and institutionalization. This led to the
restructuring of this sector, and made way for the organized sector to cross the
halfway mark and reach the levels of 65 per cent market share. The smaller
(unorganized) players were either amalgamated or integrated as suppliers in the
supply chains of major players. The top five players control more than 80 per cent
market in the organized 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. Such a promising
environment has attracted many global players to establish their bases here in
India. 7 of the top 10 global paint manufacturers have their facilities set up in the
country. India's share in the global paint market stands at a meager 0.6 per cent,
with per capita paint consumption lying around 1.5 kgs. These figures show how
magnificent scope this industry has in India, and the recent developments in this
sector show how the global and local players are aligning themselves accordingly.
The progress of the industry is largely influenced by a number of factors like
innovative products, new technologies, associations and consolidations, exiting of
the poor performers from the market. Presently, industry is anticipating growth from
new demand pockets like tier-II and tier-III cities. It can thus be expected that there
would be a mass acceptance of quality products in the future. The growing demand
for quality paints coupled with increasing income levels of people from tier-II and

tier-III cities has fueled the growth of premium paint market of Indian decorative
paint sector.
Due to increased government funding for infrastructure, both industrial and
decorative sectors of the paint industry are expected to show tremendous growth in
the near future. The Indian paint market typically shows oligopoly. The Indian paint
industry has come a long way from the point when paint was considered to be a
luxury item. Newer usages of paint (for example, for preventing corrosion) are
gradually finding public awareness; this trend is very promising for the Indian paint
industry. The industrial variety of the paint picked up momentum with the entry of
MNCs in sectors like automobile and consumer durables etc.
The paint industry is largely divided, as stated earlier, into two segments:
Decorative and Industrial. The decorative paint can be applied over woods, walls or
metals. Cement paints and emulsion are applied on outer walls, whereas interior is
painted with either solvent based or water based paints. The industrial category, on
the other hand, has two subcategories: Automotive and Non-Automotive.
Let us have a detailed look at the two main sectors in the Indian paint industry:
Decorative and Industrial.
Decorative Paints: The current industry structure for decorative paints shows
oligopoly. The entry barriers are very high, as this is a capital intensive industry. It
essentially isolates the well established players from others, giving the formers an
upper hand in driving prices. Interestingly, around 70 per cent usages of decorative
paints are under repainting, whereas the remaining usages are for fresh painting.
This sector contributes around 75 per cent of the total revenue from the paint
industry.
Industrial Paints: The industrial paints segment remains dominated by foreign firms.
This segment has technological advantage over peers, hence it attracts more
competition. Moreover, pricing power remains considerably weak, and margins are
slumped; making this sector of paint industry more sensitive to the changes of raw
material (input prices). Talking in terms of revenue generated, this sector
contributes around 25 per cent of the total revenue from the paint industry.
There are several factors that fuel the ever increasing demand for decorative paints.
Here is the list that highlights a few of them:

Greater levels of migrants moving to cities in order to seek better opportunities

Prevailing culture of nuclear families
Easy availability of financing for housing loans
Higher demand for residential housing
Increased purchasing power across people from various income groups
Reduction in repainting cycles

 Spurt in commercial construction backed by rapid economic growth

Setting up of state of the art Research & Development labs
Talking of recent developments in the sector, all the players are coming up with a
wide spectrum of products to cater to the requirements of their customers. Their
customers prefer premium products over value alternatives, hence the companies
can play in higher margins, ultimately improving their profitability considerably.
A significant aspect of the financial planning of these companies is the branding and
thus advertising. The customers in this particular industry see purchasing paint as a
high involvement buy. Branding not only helps in product differentiation for these
players, it also helps them pitch their quality products effectively, thus allowing
them to enjoy higher margins over the product spectrum offered to the customers.
Especially the urban customers are influenced the most by advertisements
highlighting the quality of the products offered. And this segment of customers does
not hesitate in spending additional sum for quality products.
Another aspect that seeks considerably investment and dominatingly appears on
income statements and cash flows is the supply chain of these companies. These
players have been investing heavily on distribution networks spread across the
nation. A 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 offer a better
customer service across various points of sale.
The urban customer is now favoring quality products (traditionally s/he preferred
low cost alternatives), whereas the rural customer is shifting from unorganized
players to their organized counterparts. Both these trends show a promising future
for the paint industry in a developing country like India. And this is one of the
underlying reasons behind anticipating such a magnificent annual growth for this
particular sector over the upcoming years. Currently, the urban sector contributes
for 55 per cent of the total revenues of this industry, while the rural sector
contributes for the rest.
The industrial paints segment, on the other hand, has been growing rapidly but has
not yet received the scale and prominence shown by its counterpart. However,
rapid industrialization and demand from other core sectors is going to change the
scenario of this segment for the good. Just like decorative paints segment, this
segment also has a range of factors that influence its demand and sales:
Increase in domestic production of automobiles coupled with easy vehicle
financing options
Economic growth fuelling rapid industrialization and establishments of new
industries
Government policies on infrastructure to boost spending

Industrial paints require higher technical expertise and investments. As a result, the
entry barriers for this particular segment have traditionally been higher, and the
segment is principally dominated by foreign players. These players can invest
heavily (backed by their global headquarters), and also carry technical knowhow of
decades.
There are some key differences between the two categories of this industry.
Industrial paints, unlike their decorative counterparts, do not need branding, as they
are sold directly to businesses (B2B). Also, very few players in this segment means
the potential clients are easy to find, discarding the need for branding and
advertising. Secondly, the distribution network is not as widespread as decorative
segment, as these players cater only to B2B clients. However, after sales services
are need to be more effective because of stringent quality policies in the industry. In
the industrial paints segment, manufacturing companies interact with clients
closely, to offer them tailor made customized products meeting their specific
requirements. This helps the players develop personalized relations with their
clients, thus securing a steady returns and growth. A range of raw materials is
required in the paint industry. While resins/latex and pigments are the major raw
materials (in terms of volume), solvents and containers also form a considerable
share, followed by additives.
Every dominant player in this industry caters to both the major segments of the
paint industry: decorative and industrial. However, the proportion of the two (by
revenues generated) varies largely from company to company. Where Asian Paints
drives almost 93 per cent of its revenue from the decorative paints segment, the
same figure for Kansai Nerolac is 55 per cent. The rest of the revenues (in both
cases) are contributed by the industrial paints segment.
Another important factor is sourcing of the raw materials. Companies relying heavily
on foreign sourcing are affected the most by foreign currency fluctuations and
changes in the regulatory environment. However, the trend is now changing even
for the foreign players, and they too are resorting to local sourcing, as it improves
scalability. Kansai Nerolac stands at the maximum sourcing risk over its peers, as it
is the dominant player in the industrial paints segment. This segment inherently
seeks foreign sourcing and technology. Asian Paints has gradually been reducing its
domestic sourcing, an indicator that the company is spreading its wings in the
industrial paints segment.
It is also essential to have a look at the expenditure of these established players on
brand creation and advertising. In absolute terms, Asian Paints is the highest
spender on advertising (which goes in-line with its being a company having 93 per
cent of the revenues coming from decorative paints segment. On the other hand,
Kansai Nerolac, a company having the dominance in the industrial paints, spends
only 3.8 per cent share of its sales on brand creation and advertising.

Another trend that follows the pattern of branding is retail network and distribution.
Companies dominating in the decorative paints segment have to have a widespread
network, whereas the ones catering mainly to industrial paints segment need not
have such a vast network of retailers. Asian Paints enjoys the most widespread
network across the country with over 28200 dealers. Kansai Nerolac, on the other
hand, has a distribution network comprising around 12000 dealers. With 8000
dealers, Akzo Nobel shows the least number of retailers among the industry leaders.

Asian Paints - Introduction, History, Financial Deals

and Operations:
Since its inception in 1942, Asian Paints has come a long way. It was set up as a
partnership venture by four friends (Champaklal H. Choksey, Chimanlal N. Choksi,
Arvind R. Vakil and Suryakant C. Dani) willing to take on the world's most famous
and biggest brands operating in India at that time. Within 25 years, Asian Paints
established its dominance in the Indian paints industry, it became a corporate force
to be reckoned with. Customer focus and innovative spirit have always been the
forces that drive the company culture. The company has been the market leader
since 1967 (Interestingly, during the period 1957-66, the company underwent a
strategic change from being a family owned company to a professionally managed
organization). Today, it is double the size of any paints manufacturer in the country,
thanks to the effective leadership at the top. The company caters to a wide range of
customer requirements in both decorative and industrial paint sectors. It also offers
ancillaries like wall primer, exterior wall putty, acrylic wall putty and wood primer
etc.
This chemicals company is headquartered in Mumbai, India. It is India's largest as
well as Asia's third largest paint company. In addition to Asian Paints, the parent
group operates around the world through its subsidiaries like Apco Coatings Limited,
Berger International Limited, SCIB Paints and Taubmans. The company made a foray
in automotive paints in 1997 with a joint venture with PPG industries. The joint
venture thus formed is known as PPG Asian Paints. The company manufactures
plastic coatings and body coatings.
Asian Paints has always been known for being a reputed and well recognized
organization on global level. Forbes Global Magazine USA ranked the company
among the 200 best small companies in the world for two consecutive years, 2002
and 2003. The company also received the 'Best under a Billion' award. Asian Paints
is the only paint manufacturing company in the world to receive such recognition.
Business magazine 'Business Today' ranked the company as the ninth best
employer in the country. It has been well recognized by Economic Times as well.
Segment Wise Revenue Mix:

Asian Paints has bifurcated its operations in two main divisions: Decorative paints
and industrial paints. The two segments contribute to the revenue with different
levels; have different cost structures, diverse clientele, different demand drivers and
supply chain infrastructure. As stated previously, the supply chain for decorative
paints is more spread out as compared to that of the industrial paints division.
Financial Deals:
In year 2006, Berger International Limited, the overseas arm of Asian Paints Limited,
divested its stake in Dutch Boy, a Philippines based firm. The deal was worth Rs.
6.74 crore. This was seen as a part of company's refined strategy to cut exposures
in loss-making units. The company executed a conditional stock purchase
agreement involving a sale of 427,000 shares of Dutch Boy Philippines.
Asian Paints also signed a 50:50 new joint venture agreement with PPG Industries,
an American company offering coatings, paints and specialty products. This joint
venture was in-line with an anticipation of accelerating the growth of the business of
non-decorative coatings in India. The two companies already had one joint venture,
by the name Asian PPG Industries Limited. Under the mutual understanding pact,
Asian Paints would focus on second joint venture while PPG would concentrate on
the first; in order to best utilize their respective strengths and continue dominating
the paints market.
APPG currently offers transportation coatings and is expanding in domains like
industrial liquids, consumer and marine markets. The second joint venture will cater
to the segments like
protective, industrial containers, industrial power and light
industrial coatings.
Asian Paints principally believes in inorganic growth as well when it comes to
expanding business and exploring new territories. The company acquired 51 per
cent stake in Sleek International Private Limited (also known as Sleekworld). It also
bought a 51 per cent stake in Kadisco Chemical Industry of Ethiopia.
The company has also adopted vertical integration policy wherever applicable. It
helps the company to diversify into products like Phthalic Anhydride and
Pentaerythritol, which are used in the manufacturing of paints.
Operations and Market Share:
Asian Paints is the country's largest paint manufacturer. The company dominates
the market with around 52 per cent market share (overall) covering both industrial
and decorative paint segments. The company has a formidable position in the
decorative paints segment, with more than 60 per cent market share. The company
is so strong in this domain, its market share is almost 2.5 times the share of its
closest competitor. Overall 10th largest paint producer in the world, the company is
aligning its strategies to become the 5th largest in the foreseeable future.

The company has the widest and most diverse range of offerings especially in the
decorative paints segment. It nonetheless keeps refreshing the entire portfolio of
offerings regularly in order to keep up with the ever changing dynamic and pace of
the paints market in India. This quality, backed with a strong R&D division makes
Asian Paints the undisputed market leader.
As stated above, the company offers a wide range of products. It covers various
price ranges within this diverse portfolio of product offerings. It has a price
spectrum so effective, that it can cater to an urban customer as well as a rural
customer. The company works on relatively lower margins sold to masses in rural
consumer market. It enjoys higher levels of margin on high quality (premium)
products sold to the urban population. Contribution from the higher end products is
expected to grow even further in upcoming years, as public income in general is on
a rise.
Another formidable quality that decorates the profile of Asian Paints is the strongest
supply chain, the distribution network. The company principally covers the whole
nation within the paints industry. Over the years, the company has invested heavily
on strengthening its supply chain. It also conducts modules like dealer development
programs, keeping customer centric model at the core of its operations. The results
thus obtained are marvelous, giving the company a robust infrastructure network in
place. All the manufacturing plants, 2 chemical plants, 350 raw material and
intermediate goods suppliers, 18 processing centres, 6 regional distribution centres,
140 packing material vendors and 72 depots are all integrated to form one
homogenous system.
Being the market leader, Asian Paints enjoys a strong pricing power in the industry
(14 price hikes in 36 months). It essentially means the company can raise prices
when crude oil prices go up without affecting the volumes. Such flexibility in pricing
ensures constantly increasing revenue levels for the company. However, the
converse is also true- the company also passes savings to its consumers. When the
excise duty was reduced, the company genially brought down the prices of its
product offering.

International Presence:
Today, Asian Paints operates in 19 countries across the globe. It is the largest paint
manufacturer in 11 countries. The group operates across five regions: South Asia,
South East Asia, South Pacific, Middle East and Caribbean. It operates with various
names depending on the region it serves: Asian Paints, Berger International, Apco
Coatings, SCIB Paints, Kadisco and Taubmans. It has manufacturing plants in foreign
destinations like Sri Lanka, Nepal, Bangladesh, Singapore, Tonga, Fiji, Vanuatu,
Samoa Islands, Solomon Islands, Dubai, Bahrain, Egypt, Oman, Jamaica, Barbados,
Trinidad & Tobago and Ethiopia.

Looking Forward:
The advances in information technology and emergence of future ready research
and development facilities are going to be the main focus of management in the
coming years. This would help the firm build superior and stronger products
enabling it to compete more effectively and also streamline its operations more
efficiently.

Challenges:
Maintaining margins against inflationary pressures from input materials (especially
crude oils) still remains a major challenge before the company. The decorative
paints business remained on track backed by capacity additions and continuous
expansion. Industrial paint segment, however, experienced a slump as margins
continued to erode against rising costs. A slowdown in the core automobile sector
also dented the financials in this domain of industry. The company could leverage
its domestic operations and contain the situation quite successfully, owing to the
large amount of global operations.
Talking of the challenges, Asian Paints MD & CEO Mr. K B S Anand agreed the extent
to which global crude oil prices influence company's financials. In a reply to a
question about falling crude oil prices, he was quoted as saying: "The fall in crude
oil prices would definitely increase the earning potential of companies and people of
the country. Hopefully this should have a gross domestic product (GDP) multiplier
effect. All consumer companies would do better, the demand would increase, and as
a result we should do better.".

WHY IS ASIAN PAINTS SO SUCCESSFUL

Asian Paints is one of the most financially successful paint manufacturing company
in the world. There are several factors that contribute to the better financial returns
the company enjoys. Let us have a look at these factors and their influence on the
financial returns of Asian Paints.
1. Higher margins: The Company caters to both the segments of paints industry, viz
decorative and industrial. However, 93 per cent of its revenue comes from the
decorative segment, which traditionally enjoys higher margins on premium
products. Rising disposable incomes and contained inflation figures have favored
the urban consumers to demand high quality products over cost saving products.
These high quality premium products come with higher margins for the company,
thus resulting into higher profit margin (profit/sales).

2. Pricing power: The Company dominates the decorative paints market with almost
60 per cent market share. Such a dominant player generally retains the pricing
power to a considerable extent. As a result of this, the company manages to keep
its high margins unaffected by passing any increase in raw material prices to the
consumers directly. Such a strategy ensures steady flow of high margins, thus
again contributing towards higher profit margin (profit/sales).
3. Highly efficient supply chain: The Company has in place a highly efficient supply
chain and distribution network. It has invested heavily on its supply chain to
ensure efficient hub and spoke model for the distribution of raw material as well
as finished goods. Moreover, the effective implementation of technology has
ensured higher production capacity per plant. All these factors help the company
to operate on less assets to generate more revenues. In other words, a highly
efficient supply chain ensures high asset turnover (sales/assets).
4. Vertical integration of supply chain: With the help of vertical integration wherever
possible in the supply chain, the company has successfully kept the overall
margins high, thus ensuring higher profit margin (profit/sales).
5. Healthy B2B relations with industrial paint clients: The Company keeps consumer
interest at the core of its ideology. It therefore enjoys long lasting client
engagement in the industrial paints domain. Such a healthy relation benefits the
company in the long run, as it can have higher margins from its clients in
exchange of differentiated customer service and customized service. Higher
margins in turn ensure higher profit margin (profit/sales).
6. Virtually zero debt company: Asian Paints virtually operates on zero debt. It
therefore does not have to pay interests that corrode net profits. Thus, such a
practice ensures higher profit margin (profit/sales).
Thus, Asian Paints enjoys higher profit margin as well as asset turnover. These
factors would further be discussed using DuPont analysis.

DuPont Analysis

Return on Equity
31.38%

Leverage (Assets/Equity)
Return on Assets
1.67
18.83%

Multiplied

Profit Margin
10.54%

Multiplied

Total Asset Turnover

1.79

Divide into
Revenue
12597.06

Total Cost
11278.95

Operation
Cost

Net Income
1327.4

Subtra
cted
from

Interest
31.16

Depreciatio
Taxes
n
606.17
223.11

Revenue
12597.06

Revenue
12597.06

Fixed Assets
3998.81

Divided

Total Assets
7105.42

Added

Current
Assets

A/c
Receivables

Cash and
Bank

Other CA
458.35

Inventories
1802.18

It refers to a method of performance measurement that was started by the DuPont

Corporation in the 1920s. With this method, assets are measured at their gross book

value rather than at net book value in order to produce a higher return on equity
(ROE). It is also known as "DuPont identity".
DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
The attached excel provides the DuPont analysis for Asian Paints. It contains both
the 3 step and 5 step formula for the purposes of interpretation.
On the basis of its DuPont analysis, we can infer that:

While the return on equity on the Sensex stocks in FY2014 has been average
of 16.8%, Asian Paints has certainly outperformed the index ROE, by
constantly having an average ROE over the past 6 years as 33.7%
The ROE of Asian Paints is fairly stable over time which is indicator of stability
of earnings of the firm.
Despite good figures for the ROE of the company, it does not tell a complete figure
since a company may also boost its ROE by taking on additional debt. Thus we will
analyse the components of its ROE.
Asset turnover ratio for the company is quite high, which is a good indicator
and which contributes to the high profitability of the company.
The companys financial leverage has been low as compared to its major
peers. Their low leverage and high ROE means that a good portion of returns
are coming from organic sales or effective management, not artificial
leveraging.