Asian Paint

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Asian Paints APNT IN; ASPN.BO July 17, 2014FMCG | India

SBICAP Securities Ltd (SSL)Mafatlal Chambers, A-Wing 2nd Floor, N.M. Joshi Marg Lower Parel, Mumbai - 400013 + 91-22-4227 3300/01 [email protected]

Sagarika Mukherjee +91 22 4227 3386 [email protected]

Asian Paints: Transforming dreams to dcor; Initiating with HOLD SBICAP Securities Ltd

[email protected] July 17, 2014 | 2

Table of Contents

Back Executive summary Transforming dreams to dcor .................................................................... 3

Industry growth drivers for decorative paints ........................................................................................... 4

Change in consumer behavior to propel growth and premiumization ....................................................... 6

Investment Rationale ............................................................................................................................... 7

Top line CAGR for APNT in F15e-16e expected to be 15% led by 10% CAGR in volumes ............. 7

Operationally strongest and most dynamic in changing the paints industry landscape ................... 10

Rapidly spreading and far reaching distribution network ................................................................. 11

Benign prices for Titanium Dioxide in our assumptions ................................................................... 13

APNT leads the sector in terms of pricing actions ........................................................................... 15

Ad-spends are on the rise due to several product launches ............................................................ 16

EBITDA margin to increase by 60bps in F15-16e ........................................................................... 16

Earnings growth expected to be 20% in F15-F16e ......................................................................... 17

Financial Snapshot ................................................................................................................................ 18

Valuation ................................................................................................................................................ 23

Key Assumptions .................................................................................................................................... 23

Key Risks ............................................................................................................................................... 23

Company Description ............................................................................................................................. 24

Financials ............................................................................................................................................... 30



Financial SummaryY/E March (Rs mn) F12 F13 F14e F15e F16eSales (mn) 96,322 109,386 127,148 144,449 168,758Growth(%) 24.7 13.6 16.2 13.6 16.8EBITDA margin (%) 15.7 15.9 15.7 16.1 16.3Net Profit (mn) 9,652 10,919 12,288 14,749 17,706EPS (Rs) 10.3 11.6 12.7 15.4 18.5Growth(%) 17.3 12.7 9.4 21.0 20.0P/E (x) 56.3 49.9 45.6 37.7 31.4Dividend yield (%) 0.7 0.8 0.9 1.1 1.3ROCE(%) 46.8 43.8 41.0 40.2 40.7ROE(%) 39.1 35.6 33.1 33.3 33.5Source: Company, SSLe

Transforming dreams to dcor; Initiating with HOLD

We initiate coverage on Asian Paints (APNT) with a HOLD rating and a target price of Rs592. We value APNT at 32x F16e EPS of Rs18.5 in line with historical valuations. We are not compressing the multiple despite deceleration in earnings growth due to superiority in terms of product offerings, efficient supply chain and vast distribution network that is 2x the next largest competitor. Nonetheless, earnings growth in F15-16e, expected to be 20% p.a. led by 15% top line growth and benign raw material inflation, is promising.

Earnings growth expected to decelerate to 20% p.a.: We believe that top line growth will be at 15% (10% volume growth) in F15-16e period, a shade lower than 19% CAGR (13% volume growth) registered in F04-14 period, in line with fall in GDP growth rate estimates. We have pencilled in a realisation increase of 5% in F15-16e period in-line with average WPI inflation in paints/distempers and benign TiO2 prices. We believe ad-pro expenses are expected to rise by 100bps due to new product launches in the premium end and BTL activities for increasing reach in the rural markets. EBITDA margin will increase marginally by 60bps in this period led by 120bps expansion in gross margin. Earnings expected to grow at 20% p.a in F15e-16e.

Operationally strongest and most dynamic in changing the industry landscape: Asian Paints has a strong supply chain as 1) it has rapidly identified lucrative catchment areas and set-up depots to achieve the shortest delivery time of 4-5 hrs compared to 24 hrs of other players. 2) It has a wide product portfolio that spans all price points (distempers to premium emulsions). The company is able to deliver 90-95% of the order placed as inventory availability is high at all times as compared to 60-65% of other players. 3) The inventory churn is much faster (15 days of APNT compared to 1.5months of others) due to strong supply chain and wider distribution network at all levels (CNF, dealers, retailers and contractors).

Initiate coverage with HOLD rating and TP Rs592: APNT has traded at 34x/32x historically for 3yr/2yr average. We estimate APNT will deliver 20% earnings growth a tad lower than 24% average delivered in F04-14 period. However, we believe it will command a premium over other companies due to its size, network, and innovation capabilities. Hence we value the company at 32x F16e EPS of Rs18.5 with a target price of Rs592 and HOLD rating on the stock.

Key risks to our call: Delay in kick starting the economy and volatility in TiO2 prices and fluctuation in foreign exchange rates

Initiating Coverage HOLD

Current price (16 Jul) RsTarget price RsUpside/(downside) % 2

Market dataMkt capitalisation Rs bn 556.2Average daily vol '000 638.952-week H/L Rs 604 / 373.4Shares O/S mn 959.2Free float mn 452.8Promotor holding % 52.8Foreign holding % 18.0Face value Rs 1.0

Price performance (%)1m 3m 6m 1yr

Nifty (abs) 1.2 14.2 20.7 28.0Stock (abs) 7.4 8.4 17.0 19.9Relative to Index 6.2 (5.8) (3.7) (8.1)

Performance

580 592

(10)

0

10

20

30

40

300

400

500

600

700

Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Asian Paints (LHS) Rel. to BSETMCG (RHS)

(%)(Rs)

Source: Bloomberg, SSLe



Industry growth drivers for decorative paints

Volume growth in decorative paints is cyclical in nature Historically, the correlation between real GDP growth rate and volume growth witnessed for top 5 paint players has been quite high as the product is very discretionary in nature. The GDP factor (x) is around 2x for the top 5 players (Asian paints, Berger, Kansai Nerolac, Akzo Nobel, Shalimar paints) in the industry (which comprise 74% of the paints market). In F08-14 period, the industry registered a CAGR of 18% of which 10%/8% was volume/price growth respectively.

Decorative paints growth linked with GDP

0.5

1.0

1.5

2.0

2.5

0.0

4.5

9.0

13.5

18.0

F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14

(x)(%

)

GDP (LHS) Volume growth (RHS) Correlation factor (LHS) Source: IMF, APNT, Berger Paints, Kansai Nerolac, Akzo Nobel, Shalimar, SSLe

Asian paints (2.2x) and Berger paints (2.3x) are the only two companies that have correlation factor higher than that of the overall industry indicating that their volume growth is a tad bit higher than others. APNT and Berger also have a higher contribution coming from decorative paints rather than industrial and auto paints, which is the case with Akzo Nobel and Kansai Nerolac. As a result, the volume growth for Kansai Nerolac and Akzo Nobel are more susceptible to the economic cycles and off late the moderation in 2-wheelers and passenger car vehicles have adversely hit them.

Indian passenger car vehicles market de-grew in 2013-14 leading to pressure on automotive paints demand Two wheeler volumes show salience in this environment

(12)

0

12

24

36

0

700,000

1,400,000

2,100,000

2,800,000

F08 F09 F10 F11 F12 F13 F14

(%)

(No.

of u

nits

)

Passenger (LHS) Growth (RHS)

0

8

16

24

32

0

4,000,000

8,000,000

12,000,000

16,000,000

F08 F09 F10 F11 F12 F13 F14

(%)

(No.

of u

nits

)

Two Wheelers (LHS) Growth (RHS) Source: SIAM, SSLe



APNT has stabilized volume growth and gained market share

0%10%20%30%40%50%60%70%80%90%

100%

F93

F94

F95

F96

F97

F98

F99

F00

F01

F02

F03

F04

F05

F06

F07

F08

F09

F10

F11

F12

F13

Mar

ket S

hare

(%)

APNT Kansai Berger Akzo Shalimar Source: APNT, Berger Paints, Kansai Nerolac, Akzo Nobel, Shalimar, SSLe

Industrial growth remains sluggish leading to contraction in demand for industrial paints The Index of Industrial Production (IIP) declined by -0.1% F14, compared with 1.1 % in F13. Contraction in consumer durables and capital goods were the key reasons behind contraction in the index, hence showing that demand from industrial and automotive segment (coil and protective coatings) continues to be under pressure.

Data suggests contraction in industrial output leading to weak demand for industrial paints. Growth over corresponding period of previous year

Weight 456.82 88.25 156.86 298.08 84.6 213.47 10002005-06 6.1 18.1 6.6 10.7 16.2 8.6 8.62006-07 8.9 23.3 11.5 16.1 25.3 12.3 12.92007-08 8.9 48.5 7.3 17.6 33.1 10.2 15.52008-09 1.7 11.3 0.0 0.9 11.1 (5.0) 2.52009-10 4.7 1.0 6.0 7.7 17.0 1.4 5.32010-11 6.0 14.8 7.4 8.5 14.2 4.2 8.22011-12 5.5 (4.0) (0.6) 4.4 2.6 5.9 2.92012-13 2.5 (6.0) 1.6 2.4 2.0 2.8 1.12013-14 2.1 (3.6) 3.1 (2.8) (12.2) 4.8 (0.1)YTD FY15 6.8 9.3 3.0 (0.7) (2.5) 0.5 4.1Source: CSO, SSLe

Non-durables GeneralPeriod Basic Capital

Inter-mediate

Consumer goods Durables

IIP Index Industrial growth remains sluggish

8.6

12.9

15.5

2.5

5.3

8.2

2.9 1.1

(0.1)

4.1

(2)

3

8

13

18

F06 F07 F08 F09 F10 F11 F12 F13 F14 YTD F15

(%)

Source: CSO, SSLe

Industrial and auto data indicate moderation in growth going ahead.



Change in consumer behaviour to propel growth and premiumization

Economic growth and higher disposable income has led to a shift in demand India has grown at an average annual rate of 7.3% in the past decade with an accelerated growth for a period of four years in F04-08 where the growth average around 8.8%. The rapid economic growth had increased and enhanced employment and business opportunities and in turn increased disposable incomes. The benefits of growth trickled down, increasing the number of people from the economically weaker class to join the middle class. This phenomenon has led to shift in demand from unbranded to branded consumer goods like from lime to distempers in rural areas and to high-end emulsions in urban areas. This trend is supported by the fact that emulsions (interiors & exteriors) have registered the fastest growth (23.9% & 27% respectively) within the various categories of paints in F08-14 period while the industry registered a CAGR of 18% (10%/8% was volume/price growth respectively). Distempers, cement paints and enamels were laggards during the same period.

Exterior emulsion paints have grown explosively at the cost of cement paints and lime colours

10.80

23.927

11.48.6

17.8

5.1

8.6

0

7

14

21

28

Enam

el

Inte

rior

Emul

sion

Exte

rior

Emul

sion

Dis

tem

per

Cem

ent

pain

t

Woo

d Fi

nish

es

Putty

Prim

ers,

Th

inne

rs

(%)

Source: Industry, SSLe

Urbanization set to increase by 2% p.a. till 2030 which will provide support for growth in decoratives: Urbanization in India has increased from 27.9% in 2001 to 31% in 2011. As per industry estimates, the population in urban areas will increase to 560 mn (40.1% of population) in 2030 from 360mn (29.4% of population) in 2008, registering a growth of 2% p.a. which is an additional support for volume growth in decorative paints.

Repainting cycle has shortened from 10 yrs to 7 yrs as colour trends change every year: As per APNT management, repainting comprises 70% of the volumes in decorative category and the cycle has gradually shortened from 8-10 years to 6-7 years. More and more customers, especially in the urban areas have taken to the idea of good-looking houses and now like to apply colour effects according to the latest trends in walls paints. APNT has launched ColourNext in 2003 which is a research based annual trend forecasting initiative, which predicts the colours that are likely to have the most influence on Indian interiors every year. ColourNext is the outcome of extensive research spread over six months involving over 100 designers and multi-disciplinary experts from across India studying societal, lifestyle and design trends.

Paint companies poised to benefit from changing consumer preferences and favorable demographics

in India



Investment Rationale

Top line CAGR for APNT in F15e-16e expected to be 15% led by 10% CAGR in volumes for decorative segment APNT has registered sales CAGR of 19% in F04-14 period led by volume growth in decorative segment of 13% in the same period. We believe the volume growth will be around 10% in next two years as per the GDP growth of 5.1%/6.3% in F15e/F16e and applying a factor of 1.7x (in-line with factors taken from years when GDP growth was subdued). Price led growth will be 5% in line with the pricing action of 6% taken by APNT in F04-14 period. WPI inflation for paints since 2004 also suggests that price increases have been around 5-6% on average every year. Industrial and auto paints are expected to be flat during this period and pricing action is very marginal in this segment.

GDP growth expected to fall to 6.3% levels from 7.3% seen in the last decade

0

3

6

9

12

F91

F92

F93

F94

F95

F96

F97

F98

F99

F00

F01

F02

F03

F04

F05

F06

F07

F08

F09

F10

F11

F12

F13

F14

F15e

F16e

GD

P gr

owth

(%)

Source: IMF, SSLe

Volume growth linked to GDP

(1.0)

0.5

2.0

3.5

5.0

(5.0)

2.5

10.0

17.5

25.0

F92

F93

F94

F95

F96

F97

F98

F99

F00

F01

F02

F03

F04

F05

F06

F07

F08

F09

F10

F11

F12

F13

F14

F15e

F16e

(x)

(%)

GDP Growth % (LHS) Sales Growth % (LHS)GDP Multiplier (RHS)

Source: IMF, Company, SSLe



Decorative sales registered CAGR of 19% in F04-14 period

0

8

15

23

30

0

40,000

80,000

120,000

160,000

F04

F05

F06

F07

F08

F09

F10

F11

F12

F13

F14

F15e

F16e

(%)(R

s m

n)Decoratives Sales (LHS) Growth (RHS)

Source: Company, SSLe

Sales quantity became 13x in 20 years; volume CAGR expected to be 10% in F15-16e period

(5)

3

10

18

25

0

300,000

600,000

900,000

1,200,000F9

1F9

2F9

3F9

4F9

5F9

6F9

7F9

8F9

9F0

0F0

1F0

2F0

3F0

4F0

5F0

6F0

7F0

8F0

9F1

0F1

1F1

2F1

3F1

4F1

5eF1

6e

(%)

(KL)

Sales Quantity (LHS) Growth (RHS) Source: Company, SSLe

Increase in realization for product portfolio of APNT

20.8

13.8

(2.5) (2.1)

1.6

7.1

(1.1)

1.3

(4.4)

1.4

(0.7) (0.1)

4.2

2.1

4.8 3.2 3.3

9.8

(1.0)

6.2

10.1

8.4

6 5 5

(6.0)

1.5

9.0

16.5

24.0

F92

F93

F94

F95

F96

F97

F98

F99

F00

F01

F02

F03

F04

F05

F06

F07

F08

F09

F10

F11

F12

F13

F14

F15e

F16e

(%)


Volume growth will decelerate to 10% from 13% in F04-14 period



Increase in realization for APNT in line with WPI inflation in paints (~4-5%)

-10%

0%

10%

20%

30%

Apr-

05Se

p-05

Feb-

06Au

g-06

Jan-

07Ju

l-07

Dec

-07

May

-08

Nov

-08

Apr-

09O

ct-0

9M

ar-1

0Se

p-10

Feb-

11Ju

l-11

Jan-

12Ju

n-12

Dec

-12

May

-13

Oct

-13

Apr-

14

WPI

Infla

tion

(%)

Source: CSO, SSLe

WPI Inflation in distemper Average around 4-5%

-10%

0%

10%

20%

30%

Apr-

05Se

p-05

Feb-

06Au

g-06

Jan-

07Ju

l-07

Dec

-07

May

-08

Nov

-08

Apr-

09O

ct-0

9M

ar-1

0Se

p-10

Feb-

11Ju

l-11

Jan-

12Ju

n-12

Dec

-12

May

-13

Oct

-13

Apr-

14

WPI

Infla

tion

(%)

Source: CSO, SSLe

The overseas business registered a CAGR of 15% in F04-14 period and is expected to grow at 13% in F15-16e period. We have pencilled in slight moderation taking into account the muted GDP growth estimates for respective regions.

Middle East and Asia have been the fastest growing geographies

15.0

5.1

18.3 18.9

9.0

12.5

5.3

12.5

16.2

10.3

0

5

10

15

20

Total Caribbean Middle East Asia (South Asia + SE Asia)

South Pacific

(%)

F07-14 F15-16e Source: Company, SSLe

We believe WPI inflation in paints can be looked at as a benchmark for price increases



Operationally strongest and most dynamic in changing the paints industry landscape

Leveraging relevant technology trends to make supply chain more efficient Asian Paints has a strong supply chain as 1) it has rapidly identified lucrative catchment areas (smallest sales of around Rs100-200mn) and set-up depots around it to cater to the local demands. This has let them achieve the shortest delivery time of 4-5 hrs compared to 24 hrs of other players. 2) it has a wide product portfolio that spans all price points (distempers to premium emulsions). The company is able to deliver 90-95% of the order placed as inventory availability is high at all times as compared to 60-65% of other players. 3) the inventory churn is much faster (15 days for Asian Paints compared to 1.5months of others) due to strong supply chain and wider distribution network at all levels (CNF, dealers, retailers and contractors). The strength of its network and supply chain has giving it the pricing power to charge a premium of 5% over other players in all the segments.

APNT has leveraged relevant information technology trends to fine tune the supply chain to reduce stock-outs. The CRM platform has been strengthened to form an ideal place to target products and services to the right audience and at the right time.

Extremely active R&D team fueling growth strategy with new products and capabilities: APNT has a strong focus on new capabilities/ development for new products, feature enhancement of existing products and productivity improvement and cost reduction. In F14, APNT launched 16 new products in the decorative segment. In the exterior wall coating segment, your Company has launched the top end new product Ultima Protek based on in house developed acrylicnanosilica hybrid emulsion which comes with ten years warranty. Apcolite Advanced - an interior mid segment emulsion paint with excellent stain cleanability and burnish resistance. In the recent past APNT has also commercialized several brands in the wall putties and water proofing segment.

Apcolite advanced was launched to bridge the gap between Apcolite Premium Emulsion and Royale. The key highlight in the interior emulsion category has been the nationwide launch of Royale Aspira.

16 new product launches in F14 to reduce dependence on enamels and distempers


APNT has leveraged relevant information technology trends to fine tune the supply chain to target products and services to the right audience

and at the right time.

Growth strategy is fuelled by strong R&D support to launch new products and enhance capabilities.

APNT launched 16 new products in decorative segment in F14 spanning interiors/exteriors and

water proofing segment

Apcolite advanced was launched to bridge the gap between Apcolite Premium Emulsion and

Royale. The key highlight in the interior emulsion category has been the nationwide launch of

Royale Aspira.



Rapidly spreading and far reaching distribution network

Colour world stores have grown at CAGR 20% in F04-14 period aiding the volume growth of 13% witnessed in the same period In 1998, the tinting machine made its advent in the paint market, which allowed customers to mix colours to get the particular shade they wanted. The advent of tinting machines also made the supply chain more efficient. Typically, fewer SKUs (stock-keeping units) mean less choice for the customer but tinting machines allow the dealers to hold far less inventory than they would otherwise need to offer customers a choice of 1,300 colours. The machines brought more customers into the shops, the dealers became more involved in the product and that increased the awareness about the brand. The wide product offering in terms of finishes/colours/effects etc are changing the perception about interior/exterior paints in the consumers mind and the widespread network of colour worlds/ colour idea stores is making the customer more involved in product purchasing.

Colour world stores with tinting machines introduced to customize colours and increase customer involvement

4,30

0

5,50

0

7,00

0

8,50

0

10,0

00 12,0

00 15,0

00

15,0

00

20,0

00

23,8

00 27,0

00

0

7,000

14,000

21,000

28,000

F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14

(No.

of

stor

es)


Tinting machines available with dealers

27000

12000

75005500

0

6,000

12,000

18,000

24,000

APNT Berger Paints Kansai Nerolac Akzo Nobel

(Nos

)

Source: Company, Industry, SSLe

Rapid expansion of its network and installation of tinting machines at dealer level has given a first

mover advantage to APNT and has led to higher barriers to entry

APNTcolourworldstore




APNT is driving colour consultancy services to educate consumers: Colour idea stores are award winning concept stores which provide expert advice from experienced colour consultants and services required for painting the house. The idea is to provide the consumer with the right ambience in which to check out all the options and get some advice, especially since not all dealers have the resources or time to educate customers. Currently APNT has 160-170 colour idea stores and these stores have successfully promoted premium, smooth and texture paints and colour consultancy services were extended to 28000 customers in FY13.

Rapidly spreading the network of colour world stores has given them the first mover advantage; raised barriers to entry: Asian Paints has total retail reach of about 35k outlets of which Colour World dealers comprise 27k across the country. Asian Paints has 27k tinting machines with dealers compared to 12k of Berger. In 2001, Asian Paints had 2750 tinting machines in the market and they have grown by 12x in 2001-13 period. We gathered that each company has an exclusive tinting machine which cannot be used to produce shades of other brands. Since Asian Paints has a wide colour portfolio and has products that span all price points, it could rapidly tie up with dealers/retailers across the country (initiative began pre-2001) by supplying tinting machines and banking facilities for the same. Cost of a tinting machine is Rs3.5 lac (was around Rs5lac in 2001) and around Rs2-2.5lacs is borne by the dealer himself. They have a three way arrangement with banks which provide credit to dealers for buying the machine from paint companies. Secondly, the pay-back period for the machine is around 5 years. Initially Asian Paints used to bear the cost of the installation which the dealer would pay back in terms of lease arrangements. This raised entry barriers for other players (Berger, Akzo Nobel, Kansai Nerolac) as having a single tinting machine was sufficient and optimal to meet the demand.

Spreadingthe color idea store to promote premium paints among customers and provide

painting services.

APNT zoomed past the other players in terms of installing tinting machines at distributor level. Tinting

machines provide flexibility in terms of inventory management and reduces the requirement to predict

specifications of future demands.



We pencil in benign prices for Titanium Dioxide in our assumptions Titanium Dioxide prices expected to remain benign this year; packaging material expected to rise by 6% p.a. Titanium Dioxide or white pigment forms the bulk of the costs for paint manufacturers. For APNT pigments (80% white pigment, 20% coloured) form 35% of the cost basket. Titanium Dioxide prices shot up steeply in 2012 due to artificial shortage created by major producers of it in the world in order to raise prices. The prices were up by 40% in 1HC12 due to the same while the entry of Chinese players into the market helped in easing the prices. Post that, the prices fell by 10-12 % in 2013. We believe that prices will see moderate inflation of 2% in C14 as has been the trend in prices until now. Packaging costs (14% of total COGS) have risen by 18% in F14, of which inflation was ~6%. For F15-16e we expect the prices to rise by 6% p.a. for APNT in line with the trend seen in prices until now. As a result we expect the gross margin of APNT to expand by 120 bps to 43.5% in F16e from F14 levels. APNT has taken a price hike of 2.2% till May14.

Titanium Dioxide forms the largest component of the cost basket (F14)

Pigments,Extenders, Minerals

36%

Additives18%

Solvents16%

Resins4%

Oils6%

Ortho Xylene0%

Methanol0%

Acetaldehyde0%

Monomers15%

Others5%

Raw material breakup


WPI inflation in titanium Dioxide a key indicator of cost inflation for APNT

-20%

0%

20%

40%

60%

Apr-

05Se

p-05

Feb-

06Au

g-06

Jan-

07Ju

l-07

Dec

-07

May

-08

Nov

-08

Apr-

09O

ct-0

9M

ar-1

0Se

p-10

Feb-

11Ju

l-11

Jan-

12Ju

n-12

Dec

-12

May

-13

Oct

-13

Apr-

14

WPI

Infla

tion

(%)

Source: CSO, SSLe



Inflation in pigment prices from the actual purchase made by APNT

9.1

14.0

10.0

30.8

12.8

38.1

25.8 26.2

38.6

9.9

4.1

0

10

20

30

40

F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14 In

flatio

n (%

)




APNT leads the sector in terms of pricing actions

Paint companies regularly pass on the inflation to the end consumer by taking price hikes: Material costs form 43% of total painting costs (paints + labour charges) where paint costs could range from Rs20/sq.ft (low end distemper brand) to Rs37.8/sq.ft. (high end premium emulsion brand) depending upon the brand of paint used. We believe consumers are not affected by price increases because bulk of the volumes for decoratives (60-70% of the volumes) comes from repainting which happens in a cycle of 7-8 years. Secondly, we believe decoratives also fetch the festival demand and the wedding season in which consumers are flexible in terms of shelling out the extra amount for special occasions.

Actual price increases taken by APNT

3.6

13.1

3.9

12.0 12.3

5.16.5

2.2

0

4

8

12

16

F08 F09 F10 F11 F12 F13 F14 F15

(%)

Source: Company, SSLe Note: Data as of May14

Realization growth has been in-line with price hikes showing no major down trading: Actual price hike taken by APNT (56.5% over last 6 years) is only slightly higher than the increase in realization (42.9% over last 6 years) of APNT suggesting that there was no down trading despite the steep hikes taken in certain years. Additionally it suggests that there was a higher growth registered in the low end of the product portfolio due to consumers in rural markets switching to branded distempers from lime wash. Brands like Tractor Emulsion (Rs150/lt), Utsav Acrylic Distemper (Rs87/kg) and Utsav Enamel (Rs200/lt) have made significant inroads and helped convert consumers from using unbranded paints/distempers to adopt acrylic distempers (2x the price of distempers). Average realization for APNT has grown by 56.5% over last 6 years

3.3

9.8

(1.0)

6.2

10.1

8.4

6 5

(2)

2

5

9

12

F08 F09 F10 F11 F12 F13 F14 F15e

(%)


APNT has managed to maintain realization growth in line with price increase showing no

major down trading



Ad-spends on the rise due to several product launches Popularity of branded paints increasing with desire to embellish existing dwelling units; APNTs ad-spends/discounts on the rise to capture the market There is an urge for better looking homes (reflected in Har ghar kuch kehta hain campaign by APNT) driven primarily by increased education and availability of information and then, by rising incomes. The paints industry has given a fillip to this demand by continuously innovating in terms of product range (Royale brand of paints by APNT was launched at the top end of interior paints category with variants like Special effects and Metallics to render extra smooth finishes with certain designs), durability (APNT tied up with Dupont USA to co-brand the Royale range of emulsions with Teflon which renders toughness and durability) to pricing points (Tractor premium distemper brand and Utsav -economy brand of APNT are present in acrylic distemper category at very low price point to upgrade consumers from lime/cement paints to a basic distemper). The industry as a whole is also shifting away from enamels (75% crude content, oil based paints) to emulsions (35% crude based and water based paints) and developing environment friendly paints with VOC (volatile organic compounds) levels standardized under Green seals GS-11 framework.

We expect ad-spends/ discounts to be on the rise for APNT as they are driving consumption and penetration

7.7 7.9 7.6

11.2 12.1 11.8 12.0

12.5 12.3 13.0 13.5

14.2 14.6

0

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16

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(Ad-

spen

ds %

of s

ales

)


EBITDA margin to increase by 60bps in F15-16e; gross margin benefits likely to be ploughed back in to ad-spends/discounts and commissions

13.0 12.8 12.7 13.0 14.9

12.3

18.5 17.2

15.7 15.9 15.7 16.1 16.3

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20

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We expect earnings growth for F15-16e period to be around 20% p.a. for APNT led by higher other income and stable tax rates ~30%. APNT is expected to record lower capex during the next couple of years as it has recently completed its expansion program in Khandala and Rohtak. This will lead to higher cash accruals and other income from investments. Effective tax rate is expected to be at 30% for next couple of years as per managements guidance. We estimate an EPS of Rs15.4/18.5 in F15e/F16e as per our assumptions.

Earnings growth expected to be 20% in F15-F16e led by higher other income due to low capex

20.7 21.5 32.5

45.6

(2.8)

110.0

0.9

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(40)

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40

80

120

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F15e

(%)




Financial Snapshot

Sales growth accelerated in 2009-14 period compared to 2004-08 period APNT registered a CAGR growth of 18-19% in the ten year period of 2004-14 of which the 2004-08 period was marked by a higher volume growth of 16% compared to 12% in 2009-14 period. This was a reflection of buoyant economic growth witnessed in 2004-08 period (GDP growth 8.8%) compared to 2009-14 period (GDP growth 6%).

Decorative sales registered CAGR of 19% in 2009-14 period

0

8

15

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30

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40,000

80,000

120,000

160,000

F04

F05

F06

F07

F08

F09

F10

F11

F12

F13

F14

F15e

F16e

(%)(R

s m

n)

Decoratives Sales (LHS) Growth (RHS) Source: Company, SSLe

Volumes grew at a CAGR of 12% in 2009-14 period

8.7

13.2 13.8

17.8 17.5

13.4

16.4 16.8

12.0

6.07.6 7.7

12.5

0

5

10

15

20

F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14 F15e F16e

(Rs

bn)


Volume growth has slipped from 16% in 2004-08 to 12% in 2009-14. Expected to fall further to

10% in 2015e-16e



Realisations increased by 6% CAGR in 2009-14 period due to heavy focus on water based paints and several product launches to drive premiumisation.

4.2

2.1

4.8

3.2 3.3

9.8

(1.0)

6.2

10.1

8.4

6 5 5

(2)

2

5

9

12

F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14 F15e F16e(%

)


APNT also launched a variety of paints in the premium end (Royale Play Special Effects, Royal Play Metallics, Royale Shyne and Royale Aspira) to upgrade consumers from mid to premium level paints. The premium emulsions category saw a revival in F14 with the re-launch of brand Apcolite with the proposition of dependable performance. A new product, called Apcolite Advanced, was launched to bridge the gap between Apcolite Premium Emulsion and Royale. Along with this, a significantly improved packaging and endorsement by a celebrity cricketer created a lot of excitement and sales in the mid segment of interior emulsions. The key highlight in interior emulsion category has been nation-wide launch and subsequent success of ultra luxury Royale Aspira last year. APNT also launched variety of premium brands in exterior paints segment under the brand Apex Ultima and Ultima Protek (comes with Teflon co-branding for its top coating).

APNT has the highest operating margin in the industry due to continued focus on emulsions and product mix improvement

Decoratives as a % of sales risen from 77% in F04 to 82% in F14

77 76

77 77 78

79

77

82 83

82 82

72

75

78

81

84

F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14

(%)


Water based paints fetch higher realizations and margins (~500-600bps) and hence add to the margin kicker for Asian Paints. Decoratives form 82% of the total sales for APNT which takes the profitability levels higher as decorative paints fetch a margin of 16% as compared to 7% in industrial or automotive paints due to low pricing power, dependence on OEMs and greater competitive intensity. Industrial paints fetch lower margins as they are oil based paints.

Decoratives form the largest product segment with 82% contribution



Margin profile for different business segments

15.3 15.5

3

9

0

5

9

14

18

APNT Decoratives Automotive & Industrials

Overseas

(%)


APNT identified the potential to upgrade customers at all levels (low end distempers, mid and premium) way back in F05 when the company started heavily advertising its offering in distempers on one end to convert consumers from using non-branded paints to distempers.

Free cash flow generation expected to increase in future as most of the capex is behind them Asian paints has spent around Rs27.6bn as capex in 2004-14 period of which majority of the spend ~Rs25bn was done in 2008-14 period as the company increased its domestic paints capacity from 3.6lac KL in F08 to 9.4lac KL in F14. In F13, APNT commissioned a state of the art manufacturing unit in Khandala with an initial capacity of 3lac KL and added another 50,000 KL in Rohtak plant. APNT has already initiated the phase 2 (phase 1 was completed in F11) expansion in capacity of Rohtak plant to raise the capacity by another 2lac KL (current capacity 2 lac KL). The new capacity in Rohtak is expected to be commissioned post F16. APNT has also announced another set-up of manufacturing plant in Mysore which will be an integrated paint, resins and emulsions factory, which again is expected to be commissioned post F16.

Higher cash flow generation expected in next couple of years due to low capex



Installed capacity expanded by 2.5x in F08-14 epriodHeavy investment in capacity expansion already done Installed capacity expanded by 2.5x in F08-14 periodwith in last couple of years

0

300,000

600,000

900,000

1,200,000F0

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(KL)

0

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6,400

F04

F05

F06

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F09

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(Rs

bn)

Free cash flow generation expected to increase as capacity expansion is done with

0

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16,000

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(Rs

bn)




Capacity was tripled in F05-13 period owing to strong growth in decorativesCapacity Expansion Capacity Location Purpose

FY05 30000 (Initial capacity) - Scalable to 1,00,000 KL Sriperumbedur , Chennai Emulsions (5th Factory in India)

FY05 30000 (Initial capacity of 14,000KL) Taloja, Maharashtra (Green Field) Industrial Coatings (Work initiated)

FY06

6500 MT (Initial capacity of 1200MT) . First phase designed to enable production of 3000MT

Baddi, HP (Brown field)

Powder Coatings (2nd manufacturing unit). Will be commssioned in 4QFY06.Capacity to be augmented in APICL. Acquired land in Baddi in FY05 by taking100% equity in Surya Powder Coating Ltd (SPCL) . The first plant was locatedin Sarigram , Gujarat. APNT well placed to cater to the Northern and westernmarkets.

FY07 30000 (Initial capacity of 14,000KL) Taloja, Maharashtra (Green Field)

Industrial Coatings (Commissioned). Helped in rationalising contractmanufacturers and has led to efficiencies in production and customer servicethrough manufacture and supply of bulk products from a single location.

FY07 100,000 KL Ankleshwar Received environmental and other clearances to produce 100,000KL p.a.

FY07To enhance the auto JVs supply capability to automotive OE customers

Sriperumbedur , Chennai APPG acquired 10.43acres on lease from State Industries PromotionCorporation of TN to set up a paint plant in Chennai

FY07 Expanded capacity to 50,000KL Sriperumbedur , Chennai The capacity was increased due to explosive growth in emulsions

FY08 Sarigram Plant capacity expanded to meet powder coatings demand

FY08 Secured Land Rohtak Secured land in Rohtak to expand capacity by 2010

FY08 Sriperumbedur , Chennai Polymer Plant commissioned during 1QFY08

FY08 3200KL Sriperumbedur , Chennai To enhance the auto JVs supply capability to automotive OE customers.APPG's first manufacturing unit.

FY09 Expanded capacity to 100,000KL Sriperumbedur , Chennai The capacity was increased due to explosive growth in emulsions

FY09 150000KL Rohtak , Haryana Erection of 6th plant of APNT going as per schedule to be commissioned in2010-11FY09 150000KL Rohtak , Haryana Commissioned

FY10 Expanded capacity to 140,000KL Sriperumbedur , Chennai Continued bouyancy in demand for emulsions.

FY10 300000KL Khandala Land acquired in Kesurdi

FY11 150000KL Rohtak , Haryana Emulsions (Phase 1) - commissioned

FY12 50000KL Rohtak , Haryana Emulsions (Expansion)

FY13 300000KL Khandala Emulsions plant commissioned Source: Company,SSLe

Future Plans: Addition of around 9lacs KL, almost doubling the current capacity in next 7-8 years

Capacity Expansion Capacity Location Purpose

By F16e 200000KL Rohtak , Haryana Emulsions (Phase 2)

Post F16e 700000KL Mysore, Karnataka Mysore Integrated Paint & Resins / Emulsions Manufacturing Plant Project.Capex involved Rs26.5bn Source: Company,SSLe, CMIE



Valuation

Initiate coverage with HOLD rating and TP Rs592:

Earnings growth in F15-16e is expected to be 20% p.a. led by 15% top line growth and benign raw material inflation. APNT has traded at 34x/32x historically for 3yr/2yr average. We estimate APNT will deliver 20% earnings growth a tad lower than 24% average delivered in F04-14 period. We are not compressing the multiple despite deceleration in earnings growth due to superiority in terms of product offerings, efficient supply chain and vast distribution network that is 2x the next largest competitor. Hence we value the company at 32x F16e EPS of Rs18.5 with a target price of Rs592 and HOLD rating on the stock.

1-year Forward P/E Band 1-yr Fwd Rolling P/E Chart

0

150

300

450

600

Apr-

04Se

p-04

Mar

-05

Sep-

05M

ar-0

6Se

p-06

Mar

-07

Aug-

07Fe

b-08

Aug-

08Fe

b-09

Aug-

09Fe

b-10

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10Ja

n-11

Jul-1

1Ja

n-12

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3D

ec-1

3Ju

n-14

(Rs)

Price 15x 20x 25x 30x 32x 34x

0

10

20

30

40

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p-04

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-05

Sep-

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ar-0

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-07

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b-08

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n-11

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n-12

Jul-1

2Ja

n-13

Jul-1

3D

ec-1

3Ju

n-14

(x)

price (Rs) Average 1-Std (-) 1 Std Source: Company, SSLe

Key Assumptions F14e F15e F16e

Decoratives volume growth(%) 7.6 7.7 12.5Inc in realisation(%) 6.1 5.0 5.0Net sales growth (%) 16.2 13.6 16.8Gross margin(%) 42.3 43.3 43.5Employee expenses (% of sales) 6.0 6.1 6.0Ad-spends (% of sales) 13.5 14.2 14.6EBITDA growth(%) 15.2 16.2 18.2EBITDA margin (%) 15.7 16.1 16.3Source: SSLe

Key risks:

1) Delay in pick up in investment cycle in India could lead to lower than expected volume growth

2) Rupee depreciation against the dollar could lead to erosion of margin

3) Steep increase in titanium Dioxide prices could lead to price increases and hence weaken volumes

4) We suspect the recent foray into household improvement sector to capitalise on the existing network of hardware stores could be margin dilutive and capital intensive.



Company Description

Asian Paints (APNT) is Indias largest (54% market share) and Asias third largest paint company, with a turnover of Rs. 127.15 bn and net profit of Rs12.3bn. APNT operates in 17 countries and has 23 manufacturing facilities in the world servicing consumers in over 65 countries with 7000 employees worldwide. Domestic decorative segment forms the largest (82% of sales) and most profitable segment (92% of profits) for APNT. The group operates in five regions across the world (14% of sales) with market leadership in most of the geographies. APNT has the widest distribution network in the industry with retail reach of 35,000 outlets of which 27000 are colour world outlets. Decorative Paints: Largest business segment with 82% market share; key driver of growth In Decorative paints, APNT is present in all the four segments v.i.z Interior Wall Finishes, Exterior Wall Finishes, Enamels and Wood Finishes. It also introduced many innovative concepts in the Indian paint industry like Colour Worlds (Dealer Tinting Systems), Home Solutions (painting solutions Service), Kids World (painting solutions for kids room), Colour Next (Prediction of Colour Trends through in-depth research) and Royale Play Special Effect Paints, just to name a few.

Decoratives form the largest and the most profitable segment for APNT

Decorative82%

International 14%

Industrial and

Automotive4%

Decoratives, 92%

International , 8%

Industrial & Automotive

, 0%


APNT has always been a leader in the paint industry with 54% market share in the domestic decorative paints market. Decorative paints account for 75% of the overall paint market (~Rs300bn) in India which is touted to be at Rs230bn which has grown at 16% CAGR in 2005-14 period. APNT has been at the fore front of innovation, technology and marketing initiatives in order to drive further penetration and premiumization within the existing customer base. APNT has been pushing new concepts in India like Colour Worlds, Home Solutions, Colour Next, and Kids World to increase the customers engagement in the choice of colours and the whole painting process which in turn leads to higher realizations (due to adoption of products at the premium end) and increases the frequency of painting as well.

Industrial and automotive coatings contribute 4% to the company revenues Asian Paints also operates through PPG Asian Paints Pvt Ltd (50:50 JV between Asian Paints and PPG Inc, USA, one of the largest automotive coatings manufacturer in the world) to service the increasing requirements of the Indian automotive coatings market. APNT is the second largest automotive coating supplier in India, catering to both automotive OEM and refinish segments.

Asian Paints has formed another 50:50 JV with PPG named Asian Paints PPG Pvt Ltd to service the protective, industrial powder, industrial containers and light industrial coatings markets.



APNTs revenue share in both the JVs together is Rs5.61bn (4% to consolidated revenues) and operates at wafer thin margin of 3% due to low pricing power and relatively smaller size compared to the market leader (Kansai Nerolac) in this space.

International presence in 17 countries and market leader in eleven; capacity expansion underway in Asia and Middle East to support growth The group operates in five regions across the world viz. South Asia, South East Asia, South Pacific, Middle East and Caribbean region through the five corporate brands viz. Asian Paints, Berger International, SCIB Paints, Apco Coatings and Taubmans. The overseas business registered a CAGR of 15% in F04-14 period and is expected to grow at 13% in F15-16e period. We have pencilled in slight moderation taking into account the muted GDP growth estimates for respective regions.

The Middle East region is the largest operating region for the group outside India. The region contributes 51% of the revenue from overseas operations. The new plant being set up by the subsidiary in Oman at Sohar is expected to be completed by the end of financial year 2014-15. The company is also underway to expand the capacity of its Bangladesh plant from 12,000 KL to 24,000 KL per annum and will be commissioned in F15.

In April, 2014, APNTs wholly owned subsidiary in Mauritius, Asian Paints (International) Limited (APIL), signed an agreement with shareholders of Kadisco Chemical Industry PLC., Ethiopia to acquire either directly or through its subsidiaries 51% of its share capital. Kadisco is a major paints player in the Ethiopian market and is involved in the manufacturing and selling of paints, other coatings and adhesives in Ethiopia.

Geography wise sales break-up Geography wise profit break-up

Caribbean13%

Middle East 50%

Asia29%

South Pacific

8%

Caribbean1%

Middle East 54%

Asia29%

South Pacific 16%


Over the years, profitability has improved in Asia region for APNT while all the other regions have underperformed. We believe that the future growth and profitability drivers of the overseas business will lie in Middle East and Asia region due to strong growth and due to market leadership position in these geographies.



International Business Summary

Y/E Mar F07 F08 F09 F10 (15m) F11 F12 F13 F14

Total 6,323 7,030 9,110 12,124 9,880 11,555 14,568 16,832 Caribbean 1,523 1,500 1,633 1,958 1,568 1,718 1,996 2,154 Middle East 2,606 3,190 4,651 6,521 5,159 5,784 7,365 8,430 Asia (South Asia + SE Asia) 1,464 1,720 2,206 2,795 2,403 3,147 4,061 4,915 South Pacific 730 620 620 850 750 906 1,146 1,333 EBIT (Rs mn) 213 560 698 1,818 1,079 1,059 1,306 1,480 Caribbean 28 70 57 109 119 76 75 17 Middle East 253 420 559 1,215 681 615 778 802 Asia (118) 20 23 371 150 246 290 427 South Pacific 50 50 58 123 129 122 163 234 EBIT Margin (%) 3.4 8.0 7.7 15.0 10.9 9.2 9.0 8.8 Caribbean 1.8 4.7 3.5 5.6 7.6 4.4 3.8 0.8 Middle East 9.7 13.2 12.0 18.6 13.2 10.6 10.6 9.5 Asia (8.1) 1.2 1.0 13.3 6.2 7.8 7.1 8.7 South Pacific 6.8 8.1 9.4 14.5 17.2 13.5 14.2 17.6 Source: Company, SSLe

APNT has a strong foothold in decorative paints category in our neighbouring countries like Nepal, Bangladesh and Sri Lanka. The company is also one of the leading players in institutional segment in Middle East region. The performance in Caribbean region has been under severe pressure



Overseas footprint

Country Colorworlds Plant Capacity (KL) Comments Commencement

Nepal 400 8000 Market Leader. The manufacturing plant is located Hetuada industrial estate 1985

Bangladesh 200

Expansion from12,000 KL to

24,000 KL per annum is nearing

completion andcommissioning is expected by the first quarter of

2014-15.

JV with Confidence Cement - leading & reputed producer of cement in Bangladesh. Plant situated in Gazipur. 500+ dealer network. Has become the 2nd largest paint company in Bangladesh. Depots are strategically located in Dhaka, Chittagong, Sylhet, Khulna, Comilla, Bogra

2002

Sri Lanka 200 5500

One of the largest paint companies in Sri Lanka, manufacturing complete range of Protective and Decorative paints. The subsidiary at Sri Lanka has acquired land at Matugama Industrialestate for a new manufacturing facility.

1999

Bahrain

It is the leading paint company in Bahrain. One of the few companies that has manufacturing setup in Bahrain. They have 75 retailers selling the product in Bahrain. With a strong base in Bahrain the company also exports to Saudi Arabia. Berger Paints is also the default company of choice when it comes to the large projects and governmental undertakings in the housing and educational sectors.

1989

Oman

JV with Al-Hassan Group of companies has used the strength of both the corporates to build a good retail network across the Sultanate. Starting with a focus on wood coatings, Asian Paints has now become the market leader in this segment with a wide range of products and unmatched service capabilities. Asian Paints is the preferred supplier for the largest joineries in Oman.

1999

UAE

Berger Paints is among the fastest growing coating companies in the UAE. The company has established a good presence across all the emirates, and with a state-of-the-art manufacturing facility in Al Quoz, Dubai, Berger Paints is well placed to serve the growing requirements of the UAE. The company has a very good presence in the institutional segment, bagging some key projects like the International City, Jumeirah Islands, Dubai Healthcare City etc. The wide range of products that Berger Paints offers to its consumers is available through the high-end Colourworld showrooms.

Barbados, Jamaica, Trinidad

Berger, which commenced manufacturing in the Caribbean in 1953 is the largest Paint Manufacturing Company in the English speaking Caribbean - a legacy inherited from Lewis Berger, the German colour chemist who founded the Berger Paints' dynasty in London, in 1760. With manufacturing centres in Barbados, Jamaica and Trinidad, the most notable contribution to Berger's success has been the Company's on-going commitment to the development and manufacture of paint products which are technologically correct, environmentally friendly and formulated to withstand harsh tropical conditions.

1953

Singapore - Group Head Office

Berger Paints Singapore, today, operates a full scale manufacturing plant making a wide range of paint products of the highest quality standards. It also exports to several countries. Berger Coatings are recognised and specified by leading multinational companies in the Oil and Gas industry, Engineering and Construction industry and by owners of ocean fleets.

1939, listed in 1994




Foray into home improvement and dcor In F13, APNT embarked on new journey to cater to the growing demand of contemporary home improvement category with acquisition of 51% stake in Sleek Group for a consideration of Rs1.2bn. In F14, Sleek registered a turnover of Rs810mn and made a loss of Rs35mn. Sleek is a major player in the organized modern kitchen space and is engaged in the business of manufacturing, selling and distribution of modular kitchens as well as kitchen components including wire baskets, cabinets, appliances, accessories, etc., with a pan India presence. It has a retail network of more than 30 showrooms including shop-in-shops and a network of more than 250 dealers. For future growth, APNT has chalked out plans to expand the business presence of Sleek in geographies where it is currently limited, configuring the IT systems and enhancement of manpower and process capabilities. With this initiative, APNT plans to increase the synergies between the expansion of the network for Sleek and APNTs current dealership network. We believe this will lead to higher thorough put within the existing network. Along with the entry into kitchens, APNT has identified bathroom fittings as an opportunity area. It has entered into a binding agreement in May, 2014 to acquire the entire front end sales business of Ess Ess Bathroom Products Pvt. Ltd., including brands, network and sales infrastructure.

APNT has shown some concentrated effort in diversifying the business into home improvement solutions with the acquisition of Sleek and Ess

Ess.



Key management personnel

Mr. Ashwin C. Choksi Chairman: Mr Choksi served as the Managing Director of Asian Paints Limited since 1984. Mr. Choksi has been the Non-Executive Chairman of Asian Paints Limited since April 1, 2009 and has been its Director since December 18, 2003. He joined Asian Paints in 1965 in the materials function of the Company. He rose to the position of Managing Director in 1984 and subsequently became Executive Chairman in 1997 served until 31 March, 2009. He served as a Non Executive Director of Berger International Ltd. from May 18, 2009 to June 21, 2 013. Mr. Choksi holds a Masters degree in Commerce from the University of Mumbai, India. He holds an Masters degree in Commerce from Sydenham College, Mumbai.

Mr. K. B. S. Anand MD & CEO: Mr Bakshi has been the Managing Director and Chief Executive Officer of Asian Paints Limited since April 1, 2012 and served as its President of decorative business unit prior to taking up this position. Mr. Anand served as Vice President of Sales & Marketing at Asian Paints Ltd. He has over 33 years of experience. Mr. Anand has been an Additional Director of Asian Paints Ltd since April 1, 2012. Mr. Anand holds B.Tech., P.G.D.M. degree from IIM, Calcutta.

Mr. Jalaj Ashwin Dani - President, International Business: He manages the international operations of Asian Paints that span across 23 countries. Mr. Dani serves as the President of Human Resources, International and Chemicals at Asian Paints Ltd., the ultimate parent company of Berger International Limited. Mr. Dani served as the President of International Business Unit at Asian Paints Ltd. He is associated with various Chambers of Commerce in India and abroad. He serves as the Chairman of Western Region of the Indian Paints Association and a Member of The Young President Organization, U.S.A. Mr. Dani holds a Master's Degree in Chemical Engineering from Massachusetts Institute of Technology and a Bachelor's Degree in Chemical Engineering from the University of Wisconsin, U.S.A. He has attended the Advanced Management Program conducted by INSEAD, France.

Mr. Jayesh Merchant CFO: Mr. Merchant serves as Compliance Officer, Company Secretary, Chief Financial Officer and Vice President of Corporate Finance at Asian Paints Limited. Mr. Merchant serves as President of Industrial JVs at Asian Paints Limited. Mr. Merchant served as Director of Finance at UTV Software Communications Limited form 2000 to 2002. Mr. Merchant served as the Group Vice President of Finance and Company Secretary at Ion Exchange (India) Ltd. from 1995 to 2000, prior to which he was an Assistant Company Secretary in Castrol India Limited form 1984 to 1995. He has been a Non-Executive Director of Berger International Limited since May 18, 2009. Mr. Merchant is overall in-charge of Corporate Finance, Accounts, Taxation, Internal Audit, Legal and Secretarial of Berger. He holds Commerce and Law Degrees from Bombay University and is an Associate member of the Institute of Chartered Accountants of India as well as the Institute of Company Secretaries of India.



Financials Income Statement Balance SheetY/E Mar (Rsmn) F12 F13 F14e F15e F16e Y/E Mar (Rsmn) F12 F13 F14e F15e F16eNet sales 96,322 109,386 127,148 144,449 168,758 Cash & Bank balances 6,243 7,520 9,317 14,583 21,535 growth (%) 24.7 13.6 16.2 13.6 16.8 Other Current assets 25,973 31,240 35,569 39,919 46,507 Operating expenses 81,211 92,036 107,169 121,234 141,322 Investments 2,182 1,298 1,944 1,944 1,944 EBITDA 15,112 17,349 19,979 23,214 27,436growth (%) 13.5 14.8 15.2 16.2 18.2 Net fixed assets 19,176 25,002 26,332 26,457 26,371 Depreciation &amortisation 1,211 1,546 2,457 2,876 3,086 Goodwill & intangible assets - - - - - EBIT 13,901 15,803 17,522 20,339 24,351 Other non-current assets 3,547 2,807 7,212 9,712 12,212 Other income 1,074 1,145 1,342 1,822 2,197 Total assets 57,122 67,866 80,373 92,614 108,568 Interest paid 434 367 422 439 472Extraordinary/Exceptional item - - (100.0) - - Current liabilities 23,012 27,283 32,065 35,898 41,800 PBT 14,541 16,582 18,342 21,722 26,076 Borrowings 3,411 2,510 2,538 2,738 2,938 Tax 4,274 4,394 5,364 6,517 7,823 Other non-current liabilities 1,847 2,623 2,917 2,917 2,917 Effective tax rate (%) 29.4 26.5 29.2 30.0 30.0 Total liabilities 28,270 32,416 37,520 41,554 47,655 PAT 10,206 11,595 12,627 15,206 18,253Minority interest 318.5 456.4 439.5 456.2 547.6 Share capital 959 959 959 959 959 Reported Net profit 9,887 11,139 12,188 14,749 17,706 Reserves & surplus 26,526 32,884 39,434 47,185 56,491 Non-recurring items (235.0) (219.9) 100.0 - - Shareholders' funds 27,485 33,843 40,393 48,144 57,450 Adjusted Net profit 9,652 10,919 12,288 14,749 17,706 Minority interest 1,367 1,608 2,460 2,916 3,464 growth (%) 17.3 12.7 9.4 21.0 20.0 Total equity & liabilities 57,122 67,866 80,373 92,614 108,568

Key Financials ratios Cash Flow StatementY/E Mar F12 F13 F14e F15e F16e Y/E Mar (Rsmn) F12 F13 F14e F15e F16eProfitability and return ratios (%) Pre-tax profit 14,541 16,552 18,342 21,722 26,076 EBITDAM 15.7 15.9 15.7 16.1 16.3 Depreciation 1,211 1,546 2,556 2,876 3,086 EBITM 14.4 14.4 13.8 14.1 14.4 Chg in working capital (4,101) (1,587) (1,682) (868) (1,038) NPM 10.0 10.0 9.7 10.2 10.5 Total tax paid (4,296) (4,385) (4,802) (6,517) (7,823) RoE 39.1 35.6 33.1 33.3 33.5 Other operating activities (359) (259) (416) (1,383) (1,725) RoCE 46.8 43.8 41.0 40.2 40.7 Operating CF 6,996 11,868 13,999 15,830 18,575RoIC 71.2 60.7 59.8 67.3 78.9

Capital expenditure (5,464) (6,438) (2,492) (3,000) (3,000) Per share data (Rs) Chg in investments 1,075 984 (4,113) (2,500) (2,500) O/s shares (mn) 959 959 959 959 959 Other investing activities 532 919 577 1,277 1,470 EPS 10.3 11.6 12.7 15.4 18.5 Investing CF (3,856) (4,535) (6,029) (4,223) (4,030) FDEPS 10.3 11.6 12.7 15.4 18.5 FCF 1,533 5,430 11,507 12,830 15,575 CEPS 11.6 13.2 15.3 18.4 21.7 BV 28.7 35.3 42.1 50.2 59.9 Equity raised/(repaid)DPS 4.0 4.6 5.2 6.3 7.5 Debt raised/(repaid) 969 (1,016) (369) 200 200

Dividend (incl. tax) (3,831) (4,621) (5,467) (6,022) (7,229) Valuation ratios (x) Other financing activities (404) (371) (333) (439) (472) P/E 56.3 49.9 45.6 37.7 31.4 Financing CF (3,266) (6,007) (6,169) (6,261) (7,501) P/BV 20.2 16.4 13.8 11.6 9.7 EV/EBITDA 36.6 31.8 27.5 23.7 20.0 Net chg in cash & bank bal. (126) 1,326 1,802 5,346 7,044 EV/Sales 5.7 5.0 4.3 3.8 3.3 Closing cash & bank bal 6,243 7,520 9,317 14,583 21,535

Other key ratiosD/E (x) 0 0 0 0 0 DSO (days) 27.2 29.7 28.9 28.9 28.9

Du Pont Analysis - RoENPM (%) 10.0 10.0 9.7 10.2 10.5 Asset turnover (x) 3.2 3.0 3.0 2.9 2.8 Equity multiplier (x) 1.2 1.2 1.2 1.1 1.1 RoE (%) 39.1 35.6 33.1 33.3 33.5 Source: Company, SSLe



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