Asian Paints had an analyst meet yesterday to detail out the company’s international growth strategy. The growth strategy includes introducing new products and increasing market share. We would also like to focus on recent acquisitions by the company viz. Berger International, Singapore and SCIB (Egypt), in this article. While Asian Paints, on a standalone basis, has performed well in 1HFY03, the acquisition of Berger International and SCIB, Egypt has taken the company to a new league.
One of the key objectives of Asian Paints, as far as the international operations are concerned, is that the focus in primarily on developing economies and SAARC countries. There are some pros and cons. For one, like India, per capital consumption in most of such countries are significantly lower than international average. To put things in perspective, consumption is as low as 2 kgs and 1 kg in Egypt and China as against more than 22 kgs in developed economies. Secondly, competition is lower from MNCs like Sherwin Williams and Kansai in such markets, which makes it ideal for Asian Paints to grow at a faster clip. However, as experienced in select Carribean nations like Fiji and other parts like Sri Lanka, local unrest (primarily political) is a big cause of concern. Also, Asian Paints is now exposed to currency risk as well. Remember South East Asian crisis in mid 1990s.
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). The estimated capacity of the company is 25,000 MT, which is 18% of market size of 140,000 MT. Even with such a high share in terms of capacity, SCIB has a meager 5% market share in the country. The plant is operating at 50% capacity utilisation levels. Asian Paints own plants operate at 90% plus capacity utilization. The company will bring in its marketing and production expertise for the new acquisition. Further, SCIB primarily operates in the low-end category. However, Asian Paints plans to introduce new products in the future and hopes to increase market penetration. But we do not foresee any significant contribution from this operation till FY04.
As far as Berger International (BIL) is concerned, there has been a marked improvement in profitability in 1HFY03. As against a loss of S$ 3.9 m in 1HFY02 (Rs 105 m), BIL has posted a profit of S$ 0.4 m (Rs 11 m), which is positive sign. BIL has eleven plants across the globe (Read Asian Paints: Spreading wings for more details). Of the 11 countries, the company has market leadership in 5 countries. One of the big positive for Asian Paints as a result of this BIL acquisition is that the company need not spend significantly on brand promotion, given the strength of Berger brand in all these markets. Another key advantage, which we said in our earlier analysis, is benefits from economies of scale in raw material costs. BIL will add 50,000 MT of capacity to Asian Paints (current capacity utilisation is around 50%).
Asian Paints has targeted at achieving a 10% turnover growth in the next two years for Asian Paints International (API). API is the holding company for some of its own international operations and the growth projections do not include BIL.
The stock currently trades at Rs 333 implying a P/E multiple of 15.8x consolidated FY03E earnings. We expect Asian Paints India to remain the key growth driver for the next two years. International operations are a long-term story and we do not see any need to revise our consolidated numbers as of now.
For more detailed analysis with projections, view our complete research report on Asian Paints.
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