The company shows an uninhibited appetite for growth in revenues and profits
Colours of many vibrant hues
The financials of Asian Paints are awash in as many brilliant hues as the varied colours of the paints that it has on offer. The company's revenues and profits are growing yearly at a fast clip, (revenues up 26% at Rs 91.2 bn, with pre-tax profits growing 21.5% to Rs 13.6 bn in 2011-12 as compared to the preceding year) and the company is simultaneously expanding capacity, and adding new plants to its list of units already under production. It is also debt free (what little debt that it holds is in the form of sales tax deferrals that the UP State and the AP State Governments have doled out). It sells cash down, and, trade payables at year end are appreciably larger than trade receivables. Its gross fixed assets are able to generate more revenues than previously, and the revenues generated per employee are also picking up steam. There is also plenty of excess cash sloshing around in the till or it is invested in liquid securities. Other income is also making its mark-at Rs 1.4 bn it accounted for 10.4% of the pre-tax profit in 2011-12 against 6.7% previously. (But the sharp increase in other income is also due to a one time beneficial impact of profit on sales of securities). The directors are also very judicious with the dividend payouts - and for some reason the dividend payout is pegged at around 46% of the net profits for the year.
The funds flow management reveals that the capital assets of Rs 6.1 bn that the company tagged on during the year was more than financed through cash generated from operations. The company also excels in working capital management in the very sense that the year-end current assets are only a shade higher than the current liabilities on display. The share price relative to its face value is scaling a new high. It helps that the company makes do with a piddling paid up capital base of Rs 960 m. It also helps that the promoters both individually and through bodies' corporate hold close to 53% of the paid up equity, thereby reducing floating stock to that extent. The promoter holding in the company is a bit dicey though. The annual report informs that the promoters individually hold 11% of the equity, while bodies corporate hold another 41.7%. But there are only two bodies corporate that hold more than 5% of the paid up equity. One is a promoter owned private limited company called Geetanjali Trading and Investment holding 16.1% of the shares, while the other fat cat is LIC with a stake of 5.5%. In other words, the other family controlled bodies collectively hold 25.5% of the corporate held equity - but each one of these entities holds 5% or less of the equity. There is of course no shortage of privately held family companies on hand to share the booty. According to the footnote in the annual report there are 48 privately held companies controlled by directors /relatives of directors, etc.
Revenues and profits gallop along
To put matters in perspective, the gross revenues of the standalone company, excluding other income, rose by a slice over 400% to Rs 90.6 bn (based on one calculation) in 2011-12 over that of the figures of Rs 18.1 bn recorded in 2002-03. The profit before tax and other exceptional items grew even more serenely by 510% to Rs 13.6 bn from Rs 2.2 bn. What should be noted here is that the finance costs debited to the P&L account each year, right through the decade, has amounted to only niggardly sums. The gross fixed assets grew less spectacularly by 340% to Rs 16.1 bn from Rs 3.6 bn. Juxtapose this with the growth in the book value of investments to Rs 9.1 bn from Rs 1.5 m a decade ago - a rise of 522%. What is also significant here is that the paid up capital has only risen from Rs 642 m in 2002-03 to Rs 960 m to date. (Given this background, bonus shares in all likelihood will be a strict no-no, going forward). The reserves and surplus on the other hand weighs in at a humungous Rs 23.9 bn. The percentage dividend meanwhile has risen from 110% on a lower capital base to a high of 400% in the latest year. The number of employees has grown more sedately from 3,327 nos to 4,937 numbers over this period.
Quite obviously therefore the company is able to have its cake and eat it too. It is of course lucky that it is an established player off 66 years standing in the Indian firmament in the business of paints, enamels and varnishes. It is also lucky that paint companiesenjoy pricing power in the decorative paints segment - one of the two major segments that paint companies operate in. The other major segment is the industrial paints segment where companies do not possess the same pricing power. An important point to be noted is that imported raw materials at Rs 10 bn accounted for over 25% of all raw material consumption - which implies that the company may not exercise a firm grip over input costs. (This factor may have some play on profitability in the current year given the sharp drop in the rupee dollar parity rate, unless it is able to pull a rabbit out of the hat). As the annual report informs, the decorative paints segment contributes more than 75% of the Indian paints market. Add to this the point that it is a well oiled company, and it is a clean winner at the end of the day.
Making a bleak effort at the international stamp
At some point in time the management also decided to tom-tom the point that it is time for the company to straddle countries across the globe to give it the international stamp. With this end in mind it acquired an international brand, Berger, at some point, as also set up a bewildering string of subsidiaries, step down subsidiaries and yet other double step down subsidiaries. It also boasts of two joint ventures, but they operate within the shores of the country. One of the two joint ventures in turn boasts of two 100% owned siblings. There appears to be this insane love to beget new entities, and for what earthly purpose? These siblings sweep across the Caribbean, Middle East, Asia and the South Pacific - a grand total of 17 countries. Very sensibly it appears to have kept away from the big ticket regions where the competition would have put paid to their plans. The book value of it investments in its subsidiaries and joint ventures - before provision for diminution in value - added up to Rs 2.2 bn against Rs 1.6 bn previously.
To be fair however, these subsidiaries appear to be standalone operations given the relatively minor inter-se dealings with the parent. The parent sticks its neck out to the extent of providing letters of comfort to banks on behalf of its subsidiaries to the extent of Rs 2 bn. The parent sells finished goods both to its siblings and joint ventures, and earns income from the processing of goods, but the amounts are not very material. It is also the beneficiary of royalties received from the joint ventures and its siblings. The only curious entries here are the sale of trade payables and the sale of trade receivables presumably relating to its siblings and joint ventures etc amounting to Rs 410 m and Rs 525 m respectively. What in heaven's name are these concoctions? Is the compnay into the Factoring business too? Besides these amounts, there are the balance receivables and balance payables at year end amounting to Rs 723 m and Rs 334 m respectively, again presumably relating to its siblings. Collectively these figures add up to more than the revenues accrued during the year to the parent from the sale of goods or from the purchase of goods. Something does not add up here. Or consider the following entry 'Reimbursement of expenses - paid donation' amounting to a handsome Rs 333 m and relating to its siblings. What's this double edged dagger all about?
For the matter of record, the consolidated company drummed up gross revenues of Rs 107.2 bn and recorded a pre-tax profit of Rs 14.5 bn. In other words the value addition revenue wise was Rs 16.6 bn, while the pre-tax profit added was only a mere Rs 910 m. But more on this aspect further on in this copy.
How the figures add up
As is the custom in the paint industry trade, the company offers discounts of various hues for what it sells. In the revenue from operations schedule it has shown discounts of Rs 3.7 bn. In the other expenses schedule of the profit and loss account for the year, there is a further cash discount of Rs 3.7 bn. That is a total discount of Rs 7.4 bn. Why are there two discounts booked, and what exactly is the difference between the two discounts please -one expense entry provided for before deduction of excise duties, while the other expense entry is made after deduction of excise duties? At least that is the manner in which the accounts have been presented.
The biggest expenditure and by a mile at that is the cost of materials consumed at Rs 47.2 bn - up 28% over the preceding year. This increase was only marginally higher than the 25.7% increase that it recorded in net revenues (including other income) for the year. Employee payouts rose a mere 13.7% to Rs 3.4 bn. The average salary paid out per employee works out to Rs 6,91,979 per year against Rs 6,47,521 per employee per year previously. The amount spent on advertisement and sales promotion expenses account for only Rs 3.4 bn - seen in the light of the gross revenues that it has stacked up. But if one factors in the discounts too, then the total expenses incurred to push sales go up by the multiples.
This in sum total is what the parent is all about. For consolidation purposes the company has incorporated the results of 29 siblings - six of them direct siblings, 10 indirect siblings, and the balance represent siblings of siblings etc. Its step-down siblings also include the Berger brand across several hemispheres. The good news is that this is one company whose siblings generate profits and share it with their immediate parent. Some 17 of the siblings declared dividends totalling Rs 790 m. But the fact is that Rs 665 m of this sum accrued from just six companies. The parent's direct off-take from this bonanza of sorts was Rs 169 m. The balance sum accrued to other parent companies of siblings in this convoluted setup.
Paradoxically enough the two largest companies, paid up capital wise - the Singapore dollar denominated Berger International and the US dollar denominated Asian Paints (International) based out of Mauritius with capital bases of Rs 1.5 bn and Rs 1.3 bn respectively have no revenues to show but both have drummed up pre-tax profits. That is due to the fact that both are holding companies of their far flung international operations, and have to make do with their dividend accruals. But the company with the largest turnover is the Egypt based offspring SCIB Chemicals. It recorded a turnover of Rs 3.5 bn and logged in a pre-tax profit of Rs 583 m. Next in line is AP Coatings an India based offspring with sales of Rs 2.2 bn, but it could only manage a pre-tax loss of Rs 82 m. Third in line is the Emirates based Berger Paints with revenues of Rs 1.4 bn but this too could only manage a bottom-line in red ink. Asian Paints Bangladesh, Asian Paints South Pacific, Asian Paints Lanka, Asian Paints Nepal and some of the Berger Paints operations are companies of some substance revenue wise, but the Bangladesh and Lanka operations need to get more traction on the profitability front. (Collectively speaking, the 10 companies bearing the name Berger rolled out revenues of Rs 4.6 bn, and reported pre-tax profits of Rs 142 m). The balance offspring are a motley mix, barely subsisting in a manner of speaking. In sum total its pip squeak offspring are not going to be of much reckoning for year on perhaps.
Thus investors will have to remain focussed on the results of the standalone company for some time to come.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.