Annual review – asian paints

I typically review the annual reports of my holdings to get a sense of how the business is doing and to recalculate changes in the intrinsic value.
Asian paints is a long term holding for me. I have not looked at the asian paints annual report for quite some time and hence decided to review the 2007-2008 report for the time being and to also compare it with the 9 month results (ending dec 2008).

Background
I have had a long and personal association with this company. I started my career with this company in mid 90s as a sales manager. I have held the stock of this company for almost 8-9 years now. Why the personal background ? – Consider it as additional information to discount my analysis as it is likely to be more baised than that for other companies.

I have worked with several other companies since then, and have also analysed a long list of companies . However my admiration for asian paints remains intact. The reasons for the admiration go beyond the mere fact that my work experience with them was great and have also been rewarded as a shareholder

A few key points (not apparent from the annual report)
- The company enjoys enormous competitive advantage in its business. It has a big mind share of the consumer, strong brands, great distribution network and finally good management.
- The company has a high amount of lockin at the dealer and painter level. I have personally witnessed how this works. Once the company achieves a high market share in a local market, it is difficult for any other company to move into that market. In addition, the dealer coloring machines add to this lockin (once the dealer invests in the coloring machine, he is unlikely to sell too much of competitor products)
- The company management has always been rational, focussed and shareholder friendly. Their compensation structure is rational, there is low related party transactions and the management has made good capital allocation decisions in the past (The ROE is now at 50%).

Annual report points
- The company has doubled the topline in the last 5 years and almost tripled its net profits during the same period.
- The ROE has gone up from 29% to around 50%, where as the debt: equity ratio has improved during this period too.
- The dividend levels have doubled in the last 5 years .
- The company continues to do well in the domestic market and continues to have a leading position in the decorative paints segment (which is almost 70% of the indian paints market). 2008 has however not been as good due to the slowdown in the economy and increase in the RM prices
- The international business had a turnaround in 2008 and has continued to grow well in 2009. The profitability of the international business has also improved susbtantially and was the reason why the company was able to reduce the drop in net profits in the current year.

Valuation – My personal estimate of intrinsic value is around 1200-1300 per share. The stock is available at a discount of 25-30% to its intrinsic value.

Q&A
- The company has done badly in 2008 due to the bad economy and 2009 looks bad too
True. The company’s business is cyclical to a small extent and the company’s revenue and profits have suffered in the past (to a small extent) during slow downs in the economy. However the competitive advantage of the company has always grown and now with the international business, the cyclicality of the company’s performance is also lower. If one is a long term investor and not too concerned with short term swings, then these ups and downs should not be much of a problem

- The company’s stock hasn’t done too well ?
It depends on the time period you are looking at. If one is looking at the last 6 months or 6 days then that may very well be the case. For the long term investor the company has returned almost 18% per annum (in the last 10 years) excluding dividends (which add to another 2-3%).

- This is such a dull company and dull business. They just have this 15-20% profit growth year after year …. I cannot double my money in a few months !!!
I personally love such dull businesses which give me good returns year after year. I don’t speak for others, but I personally think 18% returns per annum for a long period (10 years +) are extremely good returns and can make a person fairly well off in due course of time.

As always please read my disclaimer