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Bundling innovation and brand for growth… - Views on News from Equitymaster
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  • Jul 7, 2001

    Bundling innovation and brand for growth…

    If one were to count the fastest growing companies in the fast moving consumer goods sector, this company over the years has glued its position. The sole aim of this company is to extend its leadership in the paint sector and to change consumers’ perception about paints from a commodity to a brand-oriented play. Asian Paints is successfully transforming the Indian paint industry.

    The company has an overall market share of almost 36 percent in the Indian paint sector, predominantly in the decorative segment. One of the key strength of the company is the mascot ‘Gattu’. The company’s distribution network, which is around 16,000 dealers, is spread all over the country. In an effort to increase customer involvement in house painting, it has set up 2,100 ‘Colour World’ outlets as of March 31, 2001, where virtual painting is made possible.

    Though 2001 started off on a positive note for the company with sales soaring by 19 percent in the first half, the slow down in the economy subdued paint demand in the second half. The devastating earthquake in Gujarat resulted in sharp fall in paint demand in Western India, where Asian Paints commands a significant market share. Both agricultural and industrial output also fell sharply in the second half affecting the purchasing power of consumers.

    (Rs m) FY00 FY01 Change
    Sales 10,662 11,965 12.2%
    Other Income 136 185 36.0%
    Expenditure 8,885 10,054 13.2%
    Operating Profit (EBDIT) 1,776 1,911 7.6%
    Operating Profit Margin (%) 16.7% 16.0%  
    Interest 203 221 9.0%
    Depreciation 278 316 13.4%
    Profit before Tax 1,431 1,559 8.9%
    Tax 458 495 8.2%
    Profit after Tax/(Loss) 973 1,064 9.3%
    Net profit margin (%) 9.1% 8.9%  
    No. of Shares (eoy) (m) 40.1 64.2  
    Diluted number of shares 64.2 64.2  
    Earnings per share (Rs) 15.2 16.6  

    To put things in perspective, topline for the full year ended March 2001 grew by 12 percent to Rs 11,965 million (US$ 255 million) against 19 percent during the first half. Operating margins in the fourth quarter of 2001 has declined by as much as 350 basis points on account of lower realisations. As sales growth was not commensurate with the rise in advertisement expenses, margins declined by 70 basis points for 2001. Nevertheless, this is a creditable performance and puts forth the strength of its brand and thus the pricing power of the company.

    The exterior paint segment, however, grew by a healthy 38 percent in 2001 to Rs 1,350 million (US$ 29 million) and the company has become the market leader in just four years, outpacing Snowcem. This segment is expected to be one of the key drivers for growth in the future also.

    The main advantage of ‘Colour World’ is that it enables the company in maintaining only the base paint thus reducing the inventory and distribution costs. Also, sales from those dealers where such machines have been installed are approximately 50 percent higher than conventional dealer outlets. Asian Paints expects more number of existing dealers to install tinting machines in the coming years, which should benefiting in terms of higher sales growth. With raw material prices having stabilised, margins are expected to improve in 2002.

    To broaden the scope of business, Asian Paints has also entered into a 50:50 joint venture with PPG Industries of US for manufacturing and supplying paints to industrial users like automobile companies. The company has already crossed a turnover of Rs 1 billion and has a client list that includes Hyundai, Daewoo, General Motors, Bajaj Auto and Hero Honda.

    Besides, it has manufacturing plants in many SAARC countries and Africa, which include Tonga, Fiji Islands, Mauritius and Nepal. The company also acquired a paint plant in Australia and is setting up a green field paint-manufacturing unit in Bangladesh. Though these are developing markets, political stability in most of these countries remains under a cloud.

    Asian Paints has targeted a turnover of Rs 21 billion by 2004 (US$ 446 million) as against the current turnover of Rs 14 billion (US$ 299 million). So if the company were to achieve the target, it has to grow by atleast 17 percent to 18 percent per annum in the next three years. Given the current state of the economy, this seems to be a stiff task. The government’s slow reforms initiative continues to hinder growth prospects of the economy.

    However, the scenario could improve if the country’s gross domestic product moves to higher trajectory. The management is of the view that the company would grow at 1.25 to 1.5 times the GDP, if GDP grew by 6 percent and almost 2 times if GDP grew by 7 percent to 8 percent. Monsoons also play a vital role in influencing paint demand. With the meteorological department projecting a ‘normal rainfall’ in 2002, higher agricultural output should provide the necessary impetus for growth. For such an innovative company, the aim of becoming one of the top five decorative paint companies in the world by 2007 should not be a tough ask at all.



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