Fundamental Analysis of Asian Paints

Summary

Asian Paints Ltd continues to exhibit steady growth despite global uncertainties. Most metrics indicate that the company is doing well in overcoming bottlenecks and continues to utilize its robust business model to drive growth. In this article, we will examine the company’s performance over the past year, its strengths, as well as any underlying challenges. 

Asian Paints is a prominent Indian multinational company that specializes in manufacturing and selling a wide range of paints, coatings, and related products. The company has seen its business grow over the last year. For the first quarter of FY2023, Asian Paints reported that its sales had reached Rs 9,153.80 crore, up by 6.7% in comparison to Rs 8,578.90 crore during the same quarter of FY 2022. This was accompanied by a noticeable increase in its net profit which grew by 52.5% (Y-o-Y) to reach Rs 1,550.40 crore, up from Rs 1,016.9 crore during the same quarter of last year.

The company’s consolidated PBDIT margin, or its "Profit Before Depreciation, Interest, and Tax Margin" grew by 510 basis points to reach 23.2%. Amyt Syngle, Managing Director, and CEO of Asian Paints said that the firm had recorded double-digit growth in volume in its decorative business segment. Let us understand the opportunities and challenges that the firm is looking at in the days ahead. 

Company overview

What gives Asian Paints its edge 

With more than 8 decades of operations in the sector, the company has crafted its own business model to lend it a distinct competitive edge as well as create a domain differentiator. Some of its key operation advantages are as follows:

• Adequate production facilities: With more than 20 manufacturing facilities across the country, Asian Paints can service demand from the nearest facility instead of having to rely on transporting them from afar.
• Research and Development: Efforts put into innovation and research ensure that their products stand out while meeting customers’ needs. 
• Strong distribution network: A 100,000+ strong team of distributors and retailers ensure robust customer reach. From rural towns to metropolitans, Asian Paints is ubiquitous. 
• Direct-to-customer sales: With close to 70,000 dealers across the country, their products are always available. Also, this helps build more direct customer relations by eliminating middlemen. This not only drive sales but also helps gather information on the pain points. 

Concerns on the horizon

A successful business model and a strong market for its products notwithstanding, there are a number of factors affecting the business of Asian Paints. While some are within control, a few are beyond it.

• Global headwinds such as forex tightness in Asian countries and continuing trade wars and sanctions are hampering trade and sourcing of materials. 
• Economic uncertainties at scale are limiting policy formulation and increasing reliance on government interventions. 
• Unstable crude prices because of the continuing Russia-Ukraine conflict are also affecting trad. Given that the industry is heavily reliant on the crude oil market, fluctuations and uncertainties will continue to trouble the company if the conflict continues. Also, resulting sanctions cause an even bigger demand-supply gap, sending crude oil prices spiralling upwards and affecting industries such as these. 
• An unfavourable fast five-year current ratio of 186.56 in comparison to an average of 188.96% for the industry, or in other words challenges with liquidity and ability to cover short-term liabilities. 
• While most branches continue to work well for the company, the Kitchen and Bath business segments have shown relatively slugging growth.
• Limited expansion of its international portfolio. 

Despite these underlying challenges, the growth trajectory for Asian Paints is likely to continue. This is driven by: 

• A return on equity (ROE) of 26% for the last three years
• An increase of 0.05% in holding by domestic institutional investors 
• An increase of 0.46% in holding by foreign institutional investors
• The easing of inflation on raw materials and other intermediaries
• The upward trajectory of segments such as UPVC doors and windows, decorative lighting and fabrics
• Increased efforts to drive formulation, sourcing and operational efficiency

Summing up 

In short, Asian Paints is performing well, ticking all the right boxes, and showing signs of consistent future growth. It is also committed to using its resources to weather the uncertainties it is up against. Moreover, despite returning a sizeable chunk of its income to investors, the company still managed to sustain growth.

For the last three years, Asian Paints’ EPS grew by 15% for each year. If this continues, this will work wonders for the company because EPS growth is widely considered to be an attractive and healthy attribute. A high EPS will draw investments and improve key financials, thereby boosting growth in the long term. And finally, with the easing of crude price uncertainties and other macroeconomic concerns, the company looks set to register higher growth that seem to be in line with key figures in its recent declarations.

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