2 April 2013
Update | Sector: Consumer-Paints
Asian Paints
BSE SENSEX
S&P CNX
18,865
5,704
CMP: INR4,947
TP: INR5,000
Downgrade to Neutral
Valuations at peak; downgrade to Neutral
Positives relating to TiO2 price correction adequately factored in
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
APNT IN
7,738.1
311/204
2/2/34
M.Cap. (INR b)/(USD b)2,283/41.9
APNT has outperformed the market by 25%/44% in the last 6/12 months.
It is currently trading at all-time high valuations, which adequately discount the positives
related to the correction in titanium-dioxide (TiO2) prices, in our view.
We downgrade our stock rating to Neutral. Our target price is INR5,000.
Downside risks to volume growth
Our dealer checks indicate that after a strong 3QFY13 (13% volume growth in
decorative paints), led by festive season demand, 4QFY13 was a subdued quarter.
Our recent interactions with (a) Indian Paints Association President, Mr Ramakanth
Akula, and (b) Akzo Nobel management suggest a challenging environment in
CY13. The dull macroeconomic backdrop is impacting consumer sentiment and
discretionary spending. Given the positive correlation between decorative paints
volume growth and GDP growth (decorative paint volumes usually grow at 1.5-2x
GDP growth), we expect paint volumes to moderate in CY13.
Valuation summary (INR b)
Y/E March
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Payout (%)
Valuation
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
2013E 2014E 2015E
111.2 130.8 155.0
17.7 22.1 26.8
11.5 14.1 17.7
120.3 147.2 184.5
16.7 22.4 25.4
348.9 425.9 528.5
34.5 34.6 34.9
46.6 47.2 46.3
41.6 40.8 37.9
41.1
14.2
26.4
1.2
33.6
11.6
21.1
1.4
26.8
9.4
17.3
1.7
Ti02 price correction factored in
Ti02 prices have corrected ~25% from the peak and this augurs well for APNT’s
gross margin. Industry participants believe that the correction in TiO2 prices is
structural. (Until recently, TiO2 prices had remained stubbornly high despite
weak global demand for paints. The high prices were, therefore, unnatural.)
However, we note that the prices of other crude-based raw materials remain
firm. We factor in 70/100bp expansion in gross/EBITDA margin in FY14.
Shareholding pattern %
As on
Dec-12 Sep-12 Dec-11
Promoter
52.8
52.8
52.8
Dom. Inst
8.6
8.8
8.6
Foreign
20.1
19.6
19.5
Others
18.5
18.8
19.0
Outlook for industrial paints lackluster
Owing to weak capex spending and slowdown in the investment cycle, outlook
for the industrial paints segment remains lackluster. Slowdown in auto sales
portends incremental challenges ahead. However, this segment constitutes just
7% of APNT’s revenue. Performance of the international division remains mixed
and is heavily dependent on the Middle East.
Stock performance (1 year)
Competition intensifying but not a major threat
Competition has intensified, with Berger and Akzo Nobel increasing investments
in capacity and distribution. However, we believe that APNT enjoys a very strong
first mover advantage with the trade and is unlikely to be impacted significantly.
Valuations at peak; downgrade to Neutral
APNT is currently trading at all-time high valuations of 33.6x FY14E and 26.8x
FY15E EPS. It is now the third most expensive stock in our universe. We do not
expect these multiples to sustain, especially when discretionary consumption is
under stress and there are downside risks to volume growth. While we remain
positive on the long-term prospects of the paints industry, at current valuations,
we believe risk-reward is unfavorable. Downgrade to
Neutral,
with target price
unchanged at INR5,000.
1
Investors are advised to refer through
disclosures made at the end of the
Research Report.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +9122 3982 5404
Sreekanth P V S
(Sreekanth.P@MotilalOswal.com); +9122 3029 5120

Asian Paints
Downside risks to volume growth
Our dealer checks indicate that after a strong 3QFY13 (13% volume growth in decorative
paints), led by festive season demand, 4QFY13 was a subdued quarter.
Quarterly volume/realization growth trend
Source: Company, MOSL
The dull macroeconomic backdrop is impacting consumer sentiment and discretionary
spending. Given the positive correlation between decorative paints volume growth
and GDP growth (decorative paint volumes usually grow at 1.5-2x GDP growth), we
expect paint volumes to moderate in CY13.
APNT’s paint volume growth positively correlated with GDP growth
Source: Company, MOSL
Our recent interactions with (a) Indian Paints Association President, Mr Ramakanth
Akula, and (b) Akzo Nobel management suggest a challenging environment in CY13.
Takeaways from ConCall with IPA President
Strong consumption opportunity; low per-capita consumption; industry shifting
towards organized players.
The current year slowdown in the paint sector is on account of overall slowdown
in the economy. However, given the low per capita consumption and favorable
demographics, outlook for the sector remains very bright, and the demand is
expected to be strong in the medium to long term.
Indian paints sector is dominated by 4 players enjoying ~88% market share, with
the leader having ~50% plus market share in the decoratives category.
2 April 2013
2

Asian Paints
Territory-wise, West India is a mature market for premium products where
Emulsion sales are high, followed by South, North and East India.
East and North India are growing faster than industry and playing catch up, e.g.
the East's share of industry has gone up from ~12% to 14% in 5 years. In fact, East
India is the fastest growing market and Berger should benefit the most because
of its presence and leadership in the East.
Trade is the biggest barrier in the Indian paints industry, as the 4 companies
have several decades old relationship making it difficult for a new company to
enter and break into the existing trade network.
MNCs present in India are also finding it difficult (e.g. Sherwin Williams has
exited). MNCs mostly target mid and premium segments, as they are unable to
compete in the mass segment. Thus, low-end emulsions, distempers, enamels
(65% of industry) are unlikely to be target segments for any new player.
Of the ~45,000 dealers, Asian Paints reaches 30,000+ dealers. Hence, it is very
difficult to dislodge its leadership. Moreover, dealers and contractors need to
be incentivized more, and with space a constraint due to more than 1,000 SKUs,
trade will remain a big barrier.
Titanum-dioxide price correction likely structural
Ti02 prices have corrected ~25% from the peak. Industry participants believe that the
correction in TiO2 prices is structural. Post the financial crisis in 2008-09, TiO2 prices
had remained stubbornly high due to lack of new capacity. As the global demand for
paints has been weak, the high TiO2 prices were unnatural and a correction was
inevitable.
TiO2 constitutes ~25% of APNT’s raw material costs. Hence, the correction in TiO2
prices augurs well for APNT’s gross margin. However, we note that the prices of other
crude-based raw materials remain firm. We factor in 70/100bp expansion in gross/
EBITDA margin in FY14.
APNT’s gross/EBITDA margin trend
TiO2 down 25% from peak
Source: Bloomberg, Company, MOSL
Competition intensifying but not a major threat
Competitive intensity in the paints industry has been rising in the last three years.
APNT’s key competitors, Berger, Akzo Nobel and Kansai have significantly increased
their investments in capacity addition.
3
2 April 2013

Asian Paints
In its recent analyst meet, Akzo discussed its target of becoming the second largest
player in decorative paints segment. It is strong in the premium segment and now
intends to enhance its offerings in the mid-to-lower-end segments. It has recently
launched
Promise
and
Magic.
Berger recently acquired Sherwin Williams’ decorative
paints division to augment its presence in South and West India.
However, we believe that APNT enjoys a very strong first mover advantage with the
trade and is unlikely to be impacted significantly. At ~32k, its dealer network is twice
as large as its nearest competitor, Berger. APNT has a proven track record of being not
only the market leader in paints but also the thought leader (pioneered the tinting
machine concept, services foray through Home Solutions, Color Idea Stores, etc).
Our dealer checks suggest strong preference for APNT’s brands despite the company
offering lower dealer margins than its competitors. This, we believe, is because of
APNT’s unparalleled brand equity and strong relations with key decision influencers
like painters, carpenters, etc.
APNT's dealer network twice as large as nearest competitor
Capex spends by competitors have gone up (INR m)
Source: Company, MOSL
Outlook for industrial paints lackluster
Owing to weak capex spending and slowdown in the investment cycle, outlook for
the industrial paints segment remains lackluster. Slowdown in auto sales portends
incremental challenges ahead. However, this segment constitutes just 7% of APNT’s
revenue.
Auto sales growth has decelerated sharply
YoY growth in gross capital formation (GCF) remains weak
Source: Company, MOSL
2 April 2013
4

Asian Paints
Long-term story still attractive
Notwithstanding the near-term cyclical challenges, we believe that the long-term
story for decorative paints remains attractive. Rising incomes, shortening repainting
cycle and higher urbanization are the key long-term drivers of branded decorative
paints.
We note that the unorganized segment still contributes 35-40% of paint volumes in
India. This provides strong upgrade potential, given that incomes are rising and
organized players are increasing investments to grab share from the unorganized
segment.
Paints industry projections (INR b)
630
95
Source: Industry, MOSL
Per capita consumption of paints (liters)
Source: Akzo Nobel, MOSL
Segment-wise break-up of paints industry
Segment size (INR b)
Coatings
Decoratives
Auto Refinish
Powder Coaitngs
Coil Coatings
Protective Coating
2010
167
110
11
6
3
18
Segment size evolution
2011
2012
2013
200
140
12
7
3
20
230
160
13
8
4
23
250
180
15
10
5
24
2015
330
240
18
14
7
33
CAGR(%)
2020 2010-13 2013-20
630
14.4
460
17.8
39
10.9
28
18.6
10
21.9
78
10.1
Source: Akzo Nobel,
14.1
14.3
14.6
15.8
9.0
18.3
MOSL
2 April 2013
5

Asian Paints
Current valuations unsustainable; downgrading to Neutral
APNT has outperformed the broader markets by 25%/44% in the last 6/12 months. It is
currently trading at all-time high valuations of 33.6x FY14E and 26.8x FY15E EPS. APNT’s
valuation premium vis-à-vis the Sensex has widened from ~20% in FY08 to ~75% in
FY12 and is at ~140%, currently. It is now the third most expensive stock in our universe.
We had recently upgraded the stock to Buy, citing correction in raw material prices
and consequent positive impact on margins. However, the 15% appreciation in two
months is faster than we had expected. We now believe that while the current
valuations adequately factor in the positives associated with raw material price
correction, they do not reflect the near-term risk to paint volumes. We downgrade to
Neutral
with an unchanged target price of INR5,000.
APNT is the third most expensive stock in our universe
P/E (x)
Valuation premium to Sensex at all-time high
Source: Company, MOSL
1-year forward P/E
1-year forward P/BV
2 April 2013
6

Asian Paints
Financials and Valuation
Income Statement
Y/E March
Net Sales
Change (%)
Raw Materials
Gross Profit
Margin (%)
Operating Expenses
EBITDA
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income
Profit before Taxes
Change (%)
Margin (%)
Tax
Deferred Tax
Tax Rate (%)
PBT Before Minority
Minority Interest
Adjusted PAT
Change (%)
Reported PAT
FY11
77,223
15.6
44746
32477
42.1
19196
13,281
17.2
1,131
232
680
12,597
0.3
16.3
3,502
282
30.0
8,813
381
8,432
1.0
8,432
FY12
96,322
24.7
57770
38552
40.0
23465
15,088
15.7
1,211
410
1,074
14,541
15.4
15.1
4,274
61
29.8
10,206
319
9,887
17.3
9,887
FY13E
111,243
15.5
65828
45415
40.8
27685
17,730
15.9
1,561
504
1,647
17,312
19.1
15.6
4,934
346
30.5
12,032
496
11,536
16.7
11,536
FY14E
130,786
17.6
76524
54262
41.5
32115
22,147
16.9
2,089
576
1,978
21,460
24.0
16.4
6,407
450
32.0
14,603
488
14,115
22.4
14,115
(INR Million)
FY15E
154,973
18.5
90636
64337
41.5
37537
26,800
17.3
2,334
648
2,210
26,028
21.3
16.8
7,418
521
30.5
18,090
395
17,694
25.4
17,694
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Other Liability
Minority Interest
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2 April 2013
FY11
959
20,915
21,874
581
1,745
1,099
25,299
20,249
7,151
13,099
433
4,290
28,284
13,054
5,731
6,262
3,237
20,807
10,874
4,606
5,327
7,478
25,299
FY12
959
26,526
27,485
559
1,847
1,367
31,257
21,458
8,453
13,006
6,171
3,547
36,238
15,989
7,813
6,243
6,194
27,705
12,968
8,462
6,275
8,533
31,257
FY13E
959
32,510
33,470
700
2,205
1,862
38,237
33,317
10,014
23,303
5,088
1,892
38,236
16,763
9,143
5,562
6,768
30,283
12,625
9,594
8,064
7,953
38,237
FY14E
959
39,893
40,852
800
2,704
2,350
46,706
39,990
12,103
27,887
4,062
1,973
48,072
19,708
10,750
6,539
11,076
35,287
14,676
10,883
9,729
12,785
46,706
(INR Million)
FY15E
959
49,731
50,691
900
3,270
2,746
57,606
43,354
14,437
28,917
6,362
5,130
58,375
23,777
12,737
7,749
14,112
41,179
17,382
12,351
11,446
17,197
57,606
7

Asian Paints
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
FY11
87.9
99.7
228.0
37.2
36.4
FY12
103.1
115.7
286.5
46.5
38.8
FY13E
120.3
136.5
348.9
58.5
41.6
FY14E
147.2
168.9
425.9
70.2
40.8
(INR Million)
FY15E
184.5
208.8
528.5
81.9
37.9
48.0
42.8
4.8
30.8
17.3
0.9
41.1
36.2
4.2
26.4
14.2
1.2
33.6
29.3
3.6
21.1
11.6
1.4
26.8
23.7
3.0
17.3
9.4
1.7
38.5
50.7
36.0
47.8
34.5
46.6
34.6
47.2
34.9
46.3
7
3.8
8
4.5
8
3.6
8
3.2
8
3.4
0.0
0.0
0.0
0.0
0.0
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Interest Paid
Direct Taxes Paid
(Incr)/Decr in WC
CF from Operations
Incr in FA
Pur of Investments
CF from Invest.
Incr in Debt
Dividend Paid
Min Int/ Dt
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
FY11
13,281
680
-232
-3,502
-784
9,443
-1,606
1,951
345
-1,711
-3,571
698
-4,584
5,204
1,058
6,262
FY12
15,088
1,074
-410
-4,274
-1,075
10,404
-6,946
742
-6,204
-23
-4,459
263
-4,219
-19
6,262
6,243
FY13E
17,730
1,647
-504
-4,934
-101
13,838
-10,688
1,655
-9,033
142
-5,611
72
-5,398
-593
6,243
5,650
FY14E
22,147
1,978
-576
-6,407
-3,855
13,287
-5,399
-81
-5,480
100
-6,734
51
-6,583
1,225
5,562
6,787
(INR Million)
FY15E
26,800
2,210
-648
-7,418
-3,202
17,742
-5,353
-3,157
-8,510
100
-7,856
45
-7,711
1,521
6,539
8,060
2 April 2013
8

Asian Paints
N O T E S
2 April 2013
9

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Asian Paints
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