Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities and debt programmes of Asian Paints Limited (Asian Paints; part of the Asian Paints group) continue to reflect the leadership position of the group 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 key raw material prices and limited pricing flexibility.

 

Revenues for the first half of fiscal 2022 grew by 53% year on year to Rs. 12,681 crore from Rs.8273 crore in the corresponding period previous fiscal, following sharp recovery during the second quarter of current fiscal after covid related localized lockdowns partly impacted off-take in the first quarter. The recovery was led by strong demand from urban/ rural/semi urban areas as well as industrial segments. However, sharp increase in key crude linked raw materials and Titanium Dioxide (TiO2), and only phased pass on of the same, impacted operating margins in the first half by almost 700 basis points (bps). Price of key raw materials have stabilized currently and with price of paints raised by 10-15% in November and December’2021, operating margins are expected to improve, but still be lower at 14-15% in fiscal 2022, compared with ~19% registered in fiscal 2021. The benefit of recent price hikes will result in better operating profitability in the next fiscal.

 

Asian Paints’ financial risk profile remains strong driven by low debt on its balance sheet and sizeable liquid surplus estimated at about Rs 3,400 crore as on September 30, 2021; the company remains net debt free. The company recently completed large capacity addition at Visakhapatnam (Andhra Pradesh) and Mysuru (Karnataka) and annual capital expenditure (capex) over the next two fiscals is expected to be around Rs 700-750 crore. This can be comfortably funded from annual accruals expected at over Rs 1600 crore.

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 9% in revenue over the past five fiscals through 2021. 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 16-19% 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. While operating margins are expected to decline to ~14-15% in the current fiscal due to impact of sharp increase in input prices during the first half of the fiscal, they will revert back to long term average of 16-19% over the medium term.

 

Strong financial risk profile: Gearing was below 0.1 time over the past five years due to negligible debt and is at 0.05 time as on March 31, 2021. Expected annual cash accrual of Rs 1,600-1,800 crore will be more than sufficient to fund regular capex and incremental working capital requirement while liquid surplus of over Rs 3400 crore as on September 30, 2021, 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. The adverse impact of sharp rise in raw material prices was visible during the first half of current fiscal. However, with price hikes now being taken, impact is expected to reduce over the medium term and operating profitability is expected to improve over the medium term.

 

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 materially increase margins is limited.

Liquidity: Superior

Cash accrual is expected at Rs 1600-1800 crore each in fiscals 2022 and 2023 which will be sufficient to meet annual capex spend of Rs 350-400 crore and incremental working capital requirements. Asian Paints also had liquid surplus of over Rs 3000 crore as well cushion in working capital limits of Rs 1000 crore which was sparingly utilized. 

 

ESG Profile

CRISIL Ratings believes that Asian Paints’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The paint (chemical) sector has a significant impact on the environment owing to high water consumption and waste generation and also Green House Gas (GHG) emission.. The sector’s social impact is characterized by health hazards leading to higher focus on employee safety and well-being and the impact on local community given the nature of its operation.

Asian Paints has continuously focused on mitigating its environmental and social risks

 

Key ESG highlights:

• Asian Paints has reduced its absolute scope 1 emissions by 54% and scope 2 emissions by 39% by increasing its renewable electricity consumption by 57% from baseline year (FY 2013-14)
• The company has reduced its hazardous waste disposal by 56% by increasing waste recycling and decreasing hazardous waste generation from baseline year (FY 2013-14). Also, for FY 20-21 it has recharged 184.5% of the total water that is used in its manufacturing facilities.
• Gender diversity at Asian Paints, over 6% is comparatively better than peers. Lost Time Injury Frequency Rate has been higher compared to peers.
• Asian Paint’s governance profile is marked by 47% of its board comprising independent directors, split in chairman and CEO position and strong investor grievance redressal cell. It also has extensive disclosures.

There is growing importance of ESG among investors and lenders. Asian Paints’ commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor.

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

• Sustained decline in revenue by over 15% or sharp decline in market share in the domestic paints industry, due to steep competition, resulting in operating profitability declining below 10-12%
• Large, debt-funded acquisition or capex that may impact the financial risk profile and debt metrics (gearing in excess of 1 time)
• Material reduction in liquid surplus

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

Particulars	Unit	2021	2020
Revenue*	Rs.Crore	25,460	23,308
Profit After Tax (PAT)	Rs.Crore	3,207	2,774
PAT Margin	%	12.6	11.9
Adjusted debt/adjusted networth	Times	0.05	0.05
Interest coverage	Times	NM	NM

*Operating income

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size  (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Bill discounting	NA	NA	NA	250	NA	CRISIL A1+
NA	Bill purchase discounting facility^	NA	NA	NA	449.79	NA	CRISIL A1+
NA	Cash credit & working capital demand loan	NA	NA	NA	100	NA	CRISIL AAA/Stable
NA	Letter of credit	NA	NA	NA	140	NA	CRISIL A1+
NA	Bank guarantee	NA	NA	NA	60	NA	CRISIL A1+
NA	Standby Letter of Credit	NA	NA	NA	0.21	NA	CRISIL A1+
NA	Non-convertible debentures#	NA	NA	NA	10	Simple	CRISIL AAA/Stable
NA	Short-term debt#	NA	NA	7-365 days	50	Simple	CRISIL A1+

^Interchangeable with invoice/cheque discounting facility

#Yet to be issued