Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Asian Paints Ltd (Asian Paints; part of the Asian Paints group).

 

The ratings continue to reflect the leading position of the group in the domestic paints industry, its healthy operating margin and a robust financial risk profile supported by strong capital structure and surplus liquidity. These strengths are partially offset by susceptibility to volatility in key raw material prices and limited pricing flexibility.

 

The company registered revenue growth of 3% in fiscal 2024 despite double digit volume growth for the year due to downtrading and price cuts across product categories curbing revenue growth in the domestic market. Q1FY25 revenues stood at Rs 8,970 crore, a slight degrowth of around 2% over Q1FY24 due to price cuts mainly in the last quarter (~3.5% in 4Q), an unfavorable product mix, labor shortage due to general elections, and heat waves.  However, operating margin increased to 21.4% in fiscal 2024 as compared to 18.3% in fiscal 2023 due to an increase in gross margins (from 38.5% to 43.2%) because of softening of raw material prices but coupled with increase in operating costs mainly selling expenses and employee costs. The operating margin is expected to be a healthy 18-20% over the medium term supported by the stable raw material prices and cost rationalization despite elevated marketing expenses amidst a rise in competition in decorative space.

 

The financial risk profile and liquidity were strong driven by low debt and sizeable liquid surplus, estimated at more than Rs 5,000 crore as on March 31, 2024; the company remains net debt-free. The company will undertake significant capital expenditure (capex) over the next three fiscals, including greenfield expansion, brownfield expansion across multiple facilities and backward integration for critical and import-dependent raw materials. The entire capex will be comfortably funded through expected annual cash accrual of Rs 3,500-4,000 crore.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Asian Paints and its subsidiaries and associates, collectively 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 has a share of around 50% in the organized domestic paints market (the second-largest player has a market share of around 16%). In the decorative paints segment, which comprises 80-85% of the Indian paints industry, the group has a share of around 60%. It also has a healthy position in the automotive industrial coatings segment with a market share of about 20%. The leading market position helped the group achieve compound annual growth rate of 13% in revenue over the five fiscals through 2024. Strong brand equity, extensive distribution network and wide product portfolio will sustain the strong market position over the medium term.

 

Healthy operating margin: The operating margin was at 15-19% as market leadership enables the group to command a premium and pass on raw material price increases partly to customers. While the operating margin increased to 21% fiscal 2024 owing to decrease in input prices, it is expected to moderate to 18-20% over the medium term.

 

Strong financial risk profile: Gearing remained below 0.1 time over the past five fiscals and stood at 0.06 time as on March 31, 2024. Expected annual cash accrual of Rs 3,500-4,000 crore will sufficiently cover capex and working capital requirement while liquid surplus over Rs 5,000 crore as on March 31, 2024, should sustain over the medium term.

 

Weaknesses:

Susceptibility to volatility in raw material prices: While the group has the flexibility to pass on rise in input prices to customers in the decorative business, this is limited in the industrial paints segment. As material cost accounts for 55-60% of the cost of sales, with titanium dioxide and crude-based derivatives accounting for the majority of the raw material cost, profitability in the non-decorative segment is susceptible to volatility in raw material prices. The favorable impact of decrease in raw material prices was visible in fiscal 2024, resulting in higher gross margin. However, with input cost inflation marginally rising, the operating margin is expected at 18-20% over the medium term.

 

Limited pricing flexibility: The organized paint industry is dominated by a few large players. However, the group faces competition from strong regional players in mass-market products. Consequently, while it has the flexibility to pass on cost increases, its ability to absorb cost benefits and materially increase margins is limited.

Liquidity: Superior

Cash accrual is expected at Rs 3,500-4,000 crore per annum in fiscals 2024 and 2025, which will be sufficient to meet yearly capex and working capital requirement. Asian Paints had liquid surplus over Rs 5,000 crore as on March 31, 2024.

 

ESG profile

CRISIL Ratings believes the environment, social and governance (ESG) profile of Asian Paints supports its already strong credit risk profile.

 

The paint (chemical) sector has a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sector’s social impact is characterized by health hazards leading to a higher focus on employee safety and well-being and the impact on the local community. Asian Paints has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• In fiscal 2024, Asian Paints’ absolute Scope 1 and 2 GHG emissions reduced ~45% from its fiscal 2014 baseline. This was supported by an increase in share of renewable energy over this period to 65.8%.
• Further, it has set medium term target to achieve 100% renewable energy and reduce its specific hazardous waste (per kilolitre of finished product) by 83% from its fiscal 2014 baseline, by 2030.
• Share of female employees in workforce stood at ~10% during the fiscal 2024.
• The company’s governance structure is characterized by ~45% of its board comprising of independent directors, 27% women directors, split in chairperson and Managing Director positions on the board, high investor complaints redressal rate, and extensive financial 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. Its financial risk profile and liquidity will 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 more than 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 88% of its revenue comes from decorative paints and the remainder 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 for kitchens and wardrobes, and Ess Ess for bath fittings.

 

Asian Paints has installed paints capacity of around 2.2 million kilolitre per annum. The company has eight decorative paints plants across India in Ankleshwar, Gujarat; Patancheru, Telangana; Kasna, Uttar Pradesh; Sriperumbudur, Tamil Nadu; Khandala, Maharashtra; Rohtak, Haryana; Mysuru, Karnataka; and Visakhapatnam, Andhra Pradesh. It has an industrial paints plant in Taloja, Maharashtra, a phthalic plant in Ankleshwar, and a pentaerythritol plant in Cuddalore, Tamil Nadu. It has a strong sales infrastructure consisting of numerous stock points and a network of over 165,000 retail touchpoints with around 35,000 color tinting machines.

 

Operations span India and 14 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	2024	2023
Revenue*	Rs crore	35,500	34,548
Profit after tax (PAT)	Rs crore	5,558	4,250
PAT margin	%	15.7	12.3
Adjusted debt/adjusted networth	Times	0.06	0.06
Adjusted Interest coverage	Times	40.31	46.59

*Operating income

Any other information: Not Applicable