Asian Paints: Giving its business model a fresh coat of paint

A temporary ban on paint imports during World War II resulted in an opportunity for domestic production. Sensing a similar opportunity, 26-year-old entrepreneur Champaklal H Choksey and his three friends — Chimanlal N Choksi, Suryakant C Dani, and Arvind R Vakil — set up Asian Paints in Mumbai.

By 1967, Asian Paints had become the largest paint company in India — a position it holds until this day (excerpts from The Unusual Billionaires by Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers).

Asian Paints, which controls a significant chunk (over 40 per cent in decorative paints) of the paint market in India, has done so by working on various strategies through the years to keep its growth intact whilst also remaining competitive in the industry.

In the first phase of growth, it went on to become India's largest paint company in 1967. In its second phase, Choksey decided to bring in professionals to grow the company. Among his early hires was P M Murty, who joined Asian Paints in 1971 and rose through the ranks to become managing director and chief executive officer in 2009.

Murty was one of the big hires that Choksey made when he decided to bring professionals on board. K B S Anand, who joined the paint major in the 1970s, was at the helm between 2012 and March 31, 2020.

From working on its weaknesses and leveraging its strength in distri­bution to closing in on the gaps in the industry, Asian Paints became the second-most valuable paint company in the world by market capitalisation. From having the highest number of tinting machi­nes to increasing its dealer count, along with macro factors, the firm has grown consistently over the years.

Rising aspirations and shortened paint cycles at homes, from seven/eight years to four-five years, have helped both the company and the decorative paint industry grow in volumes. These macro factors have been one of the major growth drivers for the company in the last few years, said Sachin Bobade, vice-president (V-P)-research, Dolat Capital. The other government initiatives to convert ‘kuchha' homes into 'pucca’ have also helped the company grow.

Another key growth driver was bringing paints under the 18 per cent goods and services tax slab, compared to the earlier 28 per cent. This, too, helped Asian Paints, said Vishal Gutka, V-P-research, PhillipCapital.

Gutka said that if paints had continued to remain under the higher tax slab, it would have had an impact on not just its financials, but on the industry at large.

Over the past seven decades, Asian Paints has built India’s largest paint dealer network of more than 70,000, from the 35,000 dealers in 2013-14 (FY14). The game changer for the paint industry was the intro­duction of tinting machines in the early 1990s. While the technology of tinting machines was brought into the country by Jenson & Nicholson, Asian Paints and Berger Paints replicated the same in no time. While Berger Paints introduced the concept in 1995-96, Asian Paints soon caught up.

Dolat Capital, in its report last year, showed that tinting machines for the firm have grown from 27,000 in FY14 to 46,000 in 2019-20 (FY20); its competitor was far behind at 20,000 in FY20. Tinting machines help paint dealers offer a variety of colours, which was earlier restr­icted. A tinting machine uses a base of three colours and 16 colourants to produce 5,000 colours instantly.

Gutka also explained that over time, Asian Paints has ironed out the kinks. It has products across price points. “The company had a weak standing in the economy paint segment, which it covered by the launch of products to help it combat players in the unorganised segment and also pushed for the use of its putty aggressively through its existing network.”

Asian Paints gives a warranty on the full use of its products, which has helped the company push all its products. On the financial front, the company has the highest margins in the industry, compared to its peers. In FY21, its operating marg­ins stood at 23.9 per cent, while its peers (Berger Paints, Kansai Nerolac, AkzoNobel, and Indigo Paints) saw their margins in the range of 15-18 per cent.

In the first half of the year, which was largely governed by high raw material prices, its operating margins were at 16.2 per cent, while other players saw their margins at 12.2-15.5 per cent. It initiated rounds of price hikes through the year to mitigate the impact of higher raw material prices. Gutka said the firm has taken price hikes to the tune of 20-22 per cent (year-to-date) and will take another round of price hikes in January. 

On the revenue front, Asian Paints is more than 3x larger than India’s second largest paint maker (Berger) in FY21. Despite the bigger size, its revenue grew at a comp­ound annual growth rate (CAGR) of 6.2 per cent over the last three years (same as Berger’s). Same on the net profit front (CAGR of 20.7 per cent). However, it is gro­wing at a faster pace compared to Kansai Nerolac (FY21 sales of Rs 5,074 crore) and AkzoNobel (Rs 2,421 crore).

Indigo Paints is the only competitor whose revenue grew at a CAGR of 16.2 per cent over the last three years and net profit at 62.4 per cent. However, it’s a much smaller player, given its FY21 sales were just Rs 723 crore.