Last week, Asian Paints took everyone by surprise. Their latest quarterly results were a sight to behold. Sales volumes made a strong comeback and net profit jumped by a stellar 60%. Perhaps even the most optimistic analysts weren’t expecting such numbers. So in this week's Finshots Markets, we look at everybody’s favourite paint manufacturer and see how they’ve managed to stay on top.

The Story

The company’s success is remarkable for two reasons. For starters, posting these numbers in the midst of a pandemic is an incredible feat on its own. But it’s even more impressive when you consider the market the company tends to. For instance, there has been a lot of chatter about the current state of the Real Estate Industry. It is a characteristic feature for the market to move in cycles — Described by a sustained increase in real estate prices, followed by a sustained depression in prices when there is a lull in the market. And based on the data we have in front of us, we can state with some certainty that the market isn’t exactly booming.

So if Real Estate is in such dire straits, you would assume that it would have a veritable impact on Asian Paints, considering about 90% of the products sold by the company (domestically) is used to paint homes. But their fortunes are diverging. The company continues to outperform while the Real Estate market struggles. So what gives?

The answer is rather straightforward. Asian Paints doesn’t always depend on new constructions for sales. In fact, it just so happens that a significant chunk (90%) of its revenue comes from repainting existing homes as opposed to painting new ones. The folks who are out to repaint their homes care precious little about real estate prices. They just want a new coat of paint. And unless income levels of average Indians start taking a beating, they are unlikely to stop buying. So yeah, for the most part, Asian Paints can continue to sell even if there is a lull in the Real Estate market.

But they don’t just sell. They sell really well.

For instance, one of the most challenging aspects of the business is predicting latent demand for different shades of paint. It’s perhaps next to impossible to forecast demand for thousands of shades of paint within a limited time frame. Think about it. The consumer walks into a hardware store — say a dealer who stocks a few popular shades of paint and asks for a very specific colour. What do you do when you receive a request like this? Well, in most cases, the dealer forwards this request to the nearest depot or warehouse where they mix and match the required shade of paint.

The supply is usually made available only after 10 to 20 days. Now this laborious process can put off the most patient customers and so you need a quick fix. A simple workaround is to add or change the colour at the final step i.e. to introduce the differentiation right before the customer buys it from the dealer. For instance, the dealers could use special equipment called tinting machines to mix and match colours and produce the required shade inside store premises. Granted, it requires some extra investment and nudging for dealers to comply. But Asian Paints pioneered this movement and it is now a mainstay of the paint industry. However, because Asian Paints operates at a scale far superior to its competitors it can extract more value. While Nerolac and Berger together deploy about 46,000 tinting machines through their dealer network, Asian Paints alone has 50,500 machines.

And this dealer network is quite robust. You can find Asian Paints where no other alternative is available. It’s something they’ve built over many many decades. But they are not resting on their laurels. Their new stores focus on customer personalization. These stores are outfitted with boards displaying samples of interior and exterior finishes, and there’s a consultant who provides computer visuals showing how your room will look like when painted. And it’s not to say that no one else is providing such services in the industry, but Asian Paints was the first mover. So they have an advantage here as well.

Finally, paint is relatively price-inelastic, which means any time there is an increase in the price, you don’t necessarily see a commensurate decrease in demand. When was the last time you walked into a store and declined to buy paint because it’s slightly more expensive, eh?

Precisely!!

So Asian Paints is a leader in an industry that’s mature and fairly stable. Today, the company earns Rs 20,000 crore in revenue, more than the combined revenue of the three largest incumbents. It earns the highest margins in the industry and commands a market share of more than 50%. No wonder then that people pay such high premiums for the stock.

But that’s not to say that things have always been super smooth. When the pandemic made landfall, painting homes wasn’t exactly a priority. Naturally, the company’s revenue tumbled 43% and profits fell 67% between April and June. The next three months were better. Operations normalized and sales figures started seeing some revival. But a pent-up demand during the festival season lit up the December quarter. The company saw a 30% spurt in its sales volumes and net profits grew by a phenomenal 62%. Granted, raw material prices have also been increasing of late and some might say there’s some reason to exercise caution. But hey, it’s still impressive.

Also, Grasim Industries (an Aditya Birla Group company), announced last week that it’s making a foray into the paints business with an investment of Rs 5000 crores. So talks of impending competitive threats still loom large. And perhaps this is the only thing that could disrupt Asian Paints’ dominance. Not just Grasim, but other competitors including Nerolac and Berger. Anyway, we won’t speculate on this matter much. Instead, we will pose this question to you. What do you think?

Do you believe the company’s dominance in the sector will continue? Or do you believe competitors can catch up? Let us know your thoughts on Twitter?

Until then…

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