There are very few examples of Indian companies that look beyond domestic shores and aim of making it big in the international arena. Asian Paints (APL) is one of them.
The domestic market leader recently acquired two companies, one in Egypt and the other in Singapore. The first acquisition, SCIB Chemicals S.A.E, Egypt, is one of the top five paint companies in Egypt. The acquisition for a 60% stake in the company was made at a consideration of US$ 5 m (Rs 250 m). As per the management, the Egyptian paint market offers similar growth prospects like India with reforms gaining momentum. The estimated Egyptian paint market is 140,000 metric tonnes (MT) valued at Rs 7.5 bn. To put things in perspective, this amounts to around 15% of the Indian paint market size of Rs 50 bn.
Another significant move by APL is the acquisition of Berger International (BIL), the Singapore stock exchange listed paint major. BIL has operations in 11 countries that include China, Singapore, Thailand, Malaysia, Myanmar, Bahrain, Malta, United Arab Emirates (UAE), Jamaica, Barbados and Trinidad & Tobago. BIL also holds a 30% stake in Dutch Boy Philippines Inc (a Philippines based paint company). The combined paint manufacturing capacity is estimated at 50,000 MT (22% of APLís existing capacity). The acquisition consideration, funded by APL, would amount to Rs 576 m (US$ 12 m).
Consideration (Rs m)
China, Singapore, Thailand, Malaysia, Myanmar, Bahrain, Malta, United Arab Emirates (UAE), Jamaica, Barbados and Trinidad & Tobago
Since APLís international growth strategy revolves around SAARC countries, BILís plants in South East Asia and Arab nations offer growth synergies. Moreover, the Indian paint major already operates in select Caribbean islands since 1975. BILís Carribean operations are cash rich and command significant market share. APL is positive on the South East Asian market and hopes to turnaround BILís operations.
While the Egyptian operation has sales to the tune of Rs 540 m, BILís turnover is estimated at Rs 3,220 m. Currently, APLís international operations contribute 5% to its revenues, estimated at around Rs 710 m in FY02. With the two acquisitions, international operations gain significance and would account for as high as 15% of estimated consolidated sales in FY03. APL also hopes to turnaround some of its own and BILís loss making subsidiaries as well in FY03.
While international exposure brings with it a set of opportunities, there are few risks attached with it as well. For one, the path to turnaround could be delayed, as most subsidiaries are in the SAARC and other smaller developing countries that run a major risk of political instability. This could have a major effect on consolidated profitability in the immediate term. Currency risk is also the other key cause of concern.
Asian Paints currently trades at Rs 342 implying a P/E multiple of 15.4x on standalone FY03E earnings. While valuations are expensive on a peer valuation basis, growth prospects remain promising for the company. However, one has to invest in the stock based on consolidated profitability especially in light of the fact that international operations would account for a substantial portion in the future. BIL is still a loss making company and the loss has been widening in the last few years. Due to regulatory restrictions, the company was not able to reveal all information pertaining to the acquisitions in the recent analyst conference. Wait and watch.
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