| Asian Paints Limited | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings on the bank facilities and debt instruments of Asian Paints Limited (Asian Paints; part of the Asian Paints group).continue to reflect the leadership position of Asian Paints in the domestic paints sector, its healthy operating margin, and robust financial risk profile because of strong capital structure and surplus liquidity. These strengths are partially offset by susceptibility to volatility in raw material prices and limited pricing flexibility.
The group was affected by the decline in demand and temporary shutdown of plants in March-April 2020 due to the nationwide lockdown to contain the Covid-19 pandemic. However, unlock measures and the festive season improved demand across the domestic and industrial segment in the second half of fiscal 2021 and helped the group revive to almost the pre-Covid level. Revenue for the first nine months of fiscal 2021 was Rs 15,061 crore while operating margin was healthy at 23.49%. Revenue for the full fiscal is projected to decline in the low single digit, mainly because of the steep fall in the first quarter, and should rebound in the next fiscal with expected revival in the decorative and industrial paints segments and improved demand for new as well as existing products. The operating margin is expected to sustain at about 20% in fiscal 2021 due to benign raw material prices in the first nine months of the fiscal and cost rationalization measures.
The financial risk profile remains strong driven by a net debt-free balance sheet and sizeable liquid surplus of about Rs 2,500 crore expected as on March 31, 2021. The group recently completed large capacity addition at Visakhapatnam (Andhra Pradesh) and Mysuru (Karnataka) and capital expenditure (capex) is expected to be nominal over the medium term. The incremental working capital requirement and any capex will be funded entirely through internal accrual, keeping the group net debt free over the medium term. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Asian Paints and its subsidiaries and associates, together referred to as the Asian Paints group.
Please refer Annexure: List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.. |
Key Rating Drivers & Detailed Description Strengths: * Market leadership in the domestic paints industry: The group enjoys a dominant share of over 50% in the organised domestic paints market (the second-largest player has a market share of about 16%). In the decorative paints segment, which comprises 80-85% of the Indian paints industry, the group has a share of about 60%. It also has a healthy position in the automotive industrial coatings segment with a market share of about 20%. The leadership position helped the group register compound annual growth rate of 5% in revenue over the five fiscals through 2020. Strong brand equity, extensive distribution network, and wide product portfolio will help sustain the strong market position over the medium term.
* Healthy operating margin: Asian Paints enjoys a healthy operating margin of 18-20% which is higher than that of peers. Market leadership enables the group to command a premium and pass on raw material price increases partly to customers. Fall in crude prices helped improved profitability despite a cut in product prices and adverse movement in the rupee.
* Strong financial risk profile: Gearing was below 0.1 time over the past five years due to negligible debt and is estimated at 0.04 time as on March 31, 2021. Expected annual cash accrual of Rs 1,800-2,000 crore will be more than sufficient to fund regular capex and incremental working capital requirement while liquid surplus of over Rs 2,000 crore as on March 31, 2020, should sustain over the medium term.
Weaknesses: * Susceptibility of margin to volatility in raw material prices: While the group has the flexibility to pass on rise in input prices to customers in the domestic decorative business, this is limited in the industrial paints segment. Given that material cost accounts for almost 50% of total cost of sales, with titanium dioxide and crude-based derivatives comprising majority of total raw material cost, profitability in the non-decorative segment is susceptible to volatility in raw material prices. Hence, operating margin fluctuated between 15% and 18% range in the past six fiscals.
* Limited pricing flexibility: The organised paint industry is dominated by a few large players. There is competition from strong regional players too, especially in mass-market products. Consequently, while paint manufacturers have the flexibility to pass on cost increases, their ability to absorb cost benefits and thereby increase margins is limited. The Asian Paints group is the most cost-efficient player and also the price leader. However, while the group is likely to maintain its healthy margin, competition will restrict improvement in profitability. |
Liquidity: Superior Cash accrual is expected at Rs 1,800-2,000 crore each in fiscals 2021 and 2022 and liquid surplus is projected at Rs 2,500 crore as on March 31, 2021. The group has access to fund-based working capital limit of around Rs 800 crore which is used sporadically, and has sufficient accrual and cash and equivalent to meet debt obligation, incremental working capital requirement, capex and investment requirements in various subsidiaries. |
Outlook: Stable The Asian Paints group will continue to benefit from its market leadership, leading to sustained revenue growth and healthy operating margin over the medium term. The financial risk profile and liquidity should remain robust because of strong cash generation. |
Rating Sensitivity factors Downward factors
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About the Group Set up in 1942, the Asian Paints group is the largest paint manufacturer in India. About 80% of its revenue comes from decorative paints and the remaining from industrial paints and overseas operations. The group produces automotive industrial coatings under PPG Asian Paints Pvt Ltd ('CRISIL AA/Stable/CRISIL A1+'), a joint venture with PPG Industries, USA. It is also present in the home improvement and décor space in India through wholly owned subsidiaries, Sleek International Pvt Ltd (‘CRISIL A/Stable/CRISIL A1’) for kitchens and wardrobes; and Ess Ess for bath fittings.
The group has an installed paint capacity of around 17.3 lakh kilolitre per annum. It has eight decorative paints plants: in Ankleshwar (Gujarat), Medak (Andhra Pradesh), Kasna (Uttar Pradesh), Sriperumbudur (Tamil Nadu), Rohtak (Haryana), Khandala (Maharashtra), Mysuru and Visakhapatnam.
The group has an industrial paint plant in Taloja (Maharashtra) and a penta plant in Cuddalore (Tamil Nadu). Sales infrastructure is strong and comprises numerous stock points and a network of over 60,000 dealers with around 46,000 colour tinting machines. Operations span India and 15 countries in South-East Asia, South Asia, Africa, the Middle East, and South Pacific Islands through subsidiaries and joint ventures. |
Key Financial Indicators
*Operating income |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^Interchangeable with invoice/cheque discounting facility #Yet to be issued |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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