April 23, 2009

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

14 comments:

Anonymous said...

Hi Rohit,
Thanks for bringing that insider perspective from the distribution stand point. We would greatly benefit if you can let us know the inputs for this intrinsic calculation. Is it DCF valuation? what is the CAP and the discounting used? I alwas get a very low figure when I do a consolidated figure estimation. May be I am too conservative with my estimation.
Regards
Ravi

Anonymous said...

Hi,

Sorry ..wrong place to post this here.But I could not resist posting the results of Baupost group from 1990 to 2001.
Well known guru could NOT beat S&P 500 consecutively for 11 years...I really dont know why we are wasting time to pick individual companies instead of indexing.

Here are the results for Baupost
http://www.sec.gov/Archives/edgar/data/865827/000107261301500662/0001072613-01-500662.txt

Regards
Vishnu

Vic said...

thanks Rohit for providing with the updated view on Balmer and Asian Paints.

I assume since you have already done your initial analysis and have been following these for while, would be easier to update. I guess this is another advantage of Value Investing.

Vikas

income.portfolio said...

Rohit,

I love Asian paints too. You motivated me to present my quantitative analysis. I will do it next week.

Regards,

Rohit Chauhan said...

Hi ravi
due to my comfort with the competitive advantage of the company, i have assumed a CAP of around 13 yrs, 10% growth and discounting of 10%. the PE comes to around 25-27. ofcourse the CAP period is the catch ..i personally feel the company has enormous competitive advantage which are sustainable and hence a high CAP.

regards
rohit

Rohit Chauhan said...

vishnu
the period you have picked for blaupost was bad for value investors. seth klarman, if i am not mistaken has performed very well since then.
in addition, i dont think there is anyone who is able to beat the market every year ..year in year out
if one can beat the market on cumulative basis, then i think active investing is worth it
ofcourse index funds are a great idea for most investors ...but not always
regards
rohit

Rohit Chauhan said...

Hi vic
yes, these are long term holding for me ..so this more of annual health check :)

regards
rohit

Rohit Chauhan said...

Hi income.portfolio
let me know when you do so ..look forward to seeing it
regards
rohit

Pebbler said...

Hi Rohit,

since you know the company so well, can you shed some light on how it can tackle high oil prices. though it did so in the past few years, there was also an economic high around. say if oil jumps to more than 200$, can it pass on to the customers? this recession has indicated that people postpone painting and decorating jobs. So, demand is not inelastic. Actually, this is my concern about all such companies which have the oil complex as basic RM. The other company I am trying to figure out the same (in order to gauge the wideness of the moats) is Pidilite.

Thanks
Pebbler

Rohit Chauhan said...

Hi pebbler
I was working in the company in the 90s when RM prices rose substantially. the company is able to increase prices moderately due to its substantial competitive advantage though in steps. Actually one of the tests of competitive advantages is the ability of the company to pass on price hikes (look at the case of steel companies in constrast).

that said, there is limit to the above too. If there is a dramatic rise or a input price shock (oil crossing 200$), then there will be demand destruction due to inflation and also due to rise in paint cost etc.

In such a scenario even companies like asian paints and pidilite will be affected in the short term. In the long run they will adjust and survive ..that may not be the case with a lot of marginal commodity type companies

regards
rohit

Ravishankar said...

Rohit,
I too have found Asian Paints a well managed company but I would like to know why their USP/distribution model cannot be replicated?

An interesting article link
Why I Fired My BrokerThanks
Ravishankar

Dilip Lillaney said...

good company ... but expensive

Rohit Chauhan said...

Hi dilip
asian paints will usually sell at a premium to the market. it may be diffcult to buy it at a big discount

regards
rohit

Mahesh said...

Hello Rohit,
I have invested in this stock and got good 20% return in very short term. But now I look at it and I see PE of almost 36!
Does it justify to keep holding this stock with such high PE. Will this company grow 15-20% year after year for next five years?
Mahesh