Company has been able to maintain its dominance despite near term challenges. We remain positive in the structural growth story due to 1) product portfolio straddling across price points 2) huge scope in entry-level paints given deep distribution 3) Its nearly 2x in size compared to the nearest competitor and 4) success of new products at 15-20% lower prices.
Volume Growth at ~11% for Financial Year 2020
Decorative volume growth was in double-digits till February which came down to low single-digit in the last quarter due to March lockdown. For the financial year 2020, Asian Paints registered a volume growth of ~11% and value growth of ~5.5%.
Decorative business improved in May and June
Business is better in smaller towns when compared to urban and Tier I cities. Since reopening, pent demand picked up in May which stabilized in June. Expect business improvement to continue as consumer confidence returns. The company has launched a Safe Painting campaign which has attracted a lot of leads in June. The Labour situation is also improving on the ground. The production level has jumped to 60-70% of the pre-COVID level. Dealer incentivization has increased currently to push sales but nothing extraordinary for now said the management during the conference call hosted by the company.
Margin gains driven by lower input prices
Lower Raw material prices has led to margin improvement. No fresh price cuts have been taken so far (barring the 1% portfolio level cut in last December), but the company has plans to pass on price benefits once the market opens up further. Asian Paints has no significant exposure to Raw material inputs from China, although the company has identified alternative vendors in case duties are imposed on inputs from that country.
International markets performance
Bangladesh, Sri Lanka and Nepal performance mirrors that of India, while African countries like Ethiopia and Egypt as well as UAE have performed better because of partial or no lockdown in these markets. Indonesia has done better when compared to the Indian market.
A slowdown in the economy is the biggest risk for the paints industry, as about 75% of demand for decorative paints arises from repainting, which, in turn, depends heavily on the country’s economic condition.
A rise in crude oil price and rupee depreciation could hurt margin as crude derivatives account for the majority of input costs.
Teji or Mandi?
Our take is Teji for Asian Paints as the paints industry is expected to post robust volume growth led by strong repainting demand and from construction. Growth in the repainting segment, accounting for about ~75% of decorative demand, is on account of good demand in rural and small towns.
Further, anticipated growth in construction activity over the next five years creates an opportunity for fresh painting. The company is expected to grow ahead of the market on account of its pricing strategy at the lower end, higher growth in premium products, brand equity, and distribution strength. However, moderation in real estate and auto segments can act as a barrier.
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