Competiton & Strategy

FIRM ANALYSIS REPORT

GROUP 2 – Section ‘E’

Arush Dixit 1711312

Ashvin Meena 1711314
Jinia Rao 1711323
Payal Gupta 1711337
Pushpesh J. Hemrom 1711344
Table of Contents
1. Overview: The Indian Paint Industry
2. Asian Paints
3. Asian Paints vs other players
3.1 Operating Revenue to COGS Ratio

3.2 Operating profit

3.3 Return on Capital Employed (RoCE)

4. Competitive Strategy
5. Activity System Analysis
5.1 Raw Material and Procurement outlays

5.2 Manufacturing and Supply chain management

5.3 Branding and Marketing

6. VRIN Analysis
7. Future Opportunities
8. Recommendations
9. Appendix
1. Overview: The Indian Paint Industry
Indian paints industry has a market size of Rs 170Bn in value and is highly fragmented.1 It is divided
into 2: organized sector controlling around 65% of the total value and rest by unorganized sector.
~87% of the organized sector is dominated by 3 players viz Asian Paints, Kansai Nerolac and Berger
Paints. [Exhibit 1]

This sector is raw material intensive with cost of goods sold(COGS) constituting ~60% of total
income.2 This sector also displays uniqueness as despite being a commodity product, strong brand
identity has led the top 3 players capture a large part of market.

Owing to high economies of scale, high brand differentiation, large capital requirements and an
inadequate supply of distributors, new entrants pose relatively low threat in this industry.

Due to unavailability and low demand of substitutes such as lime wash, glass and wood in India, the
threat of substitutes is moderate. Power of suppliers is moderate as certain key inputs are controlled
by few players while rest have fragmented markets. Due to low switching costs and price sensitivity
among buyers, power of buyers is high.

The oligopolistic nature of Indian paint industry, strong brand identity and high growth rates keeps
the intra-industry rivalry low and enabling the incumbents to fight for growing market shares. The
current environment of low crude oil prices has raised the profitability of the paint companies.

2. Asian Paints

Asian Paints is India’s leading paint manufacturer company with a net revenue from operations of Rs
12.65 Bn.2 They operate in 65 countries and own 24 paint manufacturing facilities.3 It has two
operating segments, namely, Paints and Home Improvements. In Paints, they offer wide variety of
product in both, decorative and industrial segment. Products for industrial use are manufactured by
its subsidiary, Asian Paints Industrial Coatings Ltd and joint venture company, PPG-Asian Paints(PPG-
AP). It has registered a net profit growth of 11.1%2 in 2016-17 and has launched innovative products
to augment its growth. Over the years, Asian Paints has backward integrated to produce key raw
materials: Phthalic Anhydride and Pentaerythritol and forward integrated to start their service arm
Asian Paints Ezycolour Home Solutions. They are market leader in decorative paints segment with
52% market share and their joint venture, PPG-AP holds second position in Industrial coatings
market.[Exhibit1]

3. Asian Paints vs other players

Metrics for comparison

Sales turnover of Asian Paints is more than 3 times that of its main competitors, Kansai Nerolac and
Berger Paints. Financial ratios such as operating margin and Return on Capital Employed(RoCE) form
important metrics for evaluation of performance w.r.t. its competitors as paint industry is raw
material and capital intensive.

3.1 Operating Revenue to COGS Ratio

1 Paints - February 03, 2. (2017). Indian Paints Industry Report - Paints Sector Research & Analysis in India - Equitymaster.
[Accessed 20 Nov. 2017].
2 Asian Paints financial report 2016-17
3 Advantage.marketline.com. (2017). MarketLine.[Accessed 23 Nov. 2017].
Due to raw material and capital-intensive nature of paint industry, it is imperative to look at the
recovery of raw material cost in terms of income through sales. Asian Paints has operating revenue
to COGS ratio of 2.08 which is comparable to 2.00 of Kansai Nerolac and 2.39 of Berger Paints
indicating comparable conversion of materials to revenue. However, this ratio has declined as
compared to last year due to lower sales in post demonetization period.[Exhibit 3]

The net sales of Asian Paints registered a marginal 7.7% growth rate as compared to 14.5% in 2015-
164. This has been observed across industry (applicable for both Kansai Nerolac and Berger Paints)
which can be attributed to macroeconomic factors such as demonetization, low activity in real
estate and slowdown in capital investments in the year 2016-17.

Inventory turnover of all the 3 companies is comparable, hence a high profit margin indicates that
Asian Paints utilizes its competitive advantage to generate higher profit margins and operating
revenue per unit of material cost.

3.2 Operating profit

Operating profit measures the efficiency of a company’s daily operations. This indicates the excess of
the sales revenue to the variable costs incurred in the manufacturing process. The ratio of operating
return hence becomes a significant metric in highly capital-intensive industry.

Asian Paints has more cost-effective operations and thus contribute to high profit margins as
compared to its competitors.

3.3 Return on Capital Employed (RoCE)

RoCE measures efficiency of a company with which it employs its capital to earn profits. The paint
industry is a lot of capital intensive as it is raw material and capital intensive. Asian Paints has a RoCE
of 41.82% as opposed to 23.64% of Kansai Nerolac and 31.49% of Berger Paints.[Exhibit 3] However,
RoCE of Asian Paints has declined drastically over last year which can be owed to demonetization
effects.

It is evident that Asian Paints has employed its capital to better use for making profits.

Based on the above factors, we can classify Asian Paints as the market leader in paints industry as it
efficiently uses the capital employed to generate substantial profits and has efficient operations to
contribute to increased revenue from sales.

4. Competitive strategy

This section is used to analyse Asian Paints’ business tactic and its competitive advantage which has
helped it become the market leader in decorative segment.

Asian paints have changed its strategies along with the market and been always a trendsetter in the
paint industry. Asian paints tackled the risk of commoditization of paint with marketing and
positioning itself as a premium brand. It has renovated its stores to attract more customers and
made strategic investments in the supply chain by directly supplying to retailer for reaching the end-
customer faster. They have focus on volumes and not on increasing gross margins which has
promoted healthy competition and focus on marketing and production efficiencies in the industry.

Asian paints have a good manufacturing base and have been continuously improving their
capabilities by starting and acquiring plants and increasing the capacities of old plants. It has

4
Asian Paints financial report 2016-17
vertically integration its operations by producing chemical products used in paint manufacturing and
has expanded its portfolio in décor. This has helped Asian paints to utilize the synergy between the
resources and hence, provide a customized solution on a mass scale.

From the early 2000s, Asian paints started shifting its focus from being a product company to a
customer-centric service company. It has done acquisitions to enter new segments. It acquired Sleek
Group in 2013 which paved its entry in the modular kitchens segment and Ess Ess Bathroom in 2014
to venture into the bath fitting segment.

Decorative paints hold a major market share of the paint industry. Being a 75-year-old company
does not affect the agile, reinventing culture of Asian Paints. Asian paint has been the market leader
in the home solution for over three decades and continuously pushes itself up in the value chain.
Currently, Asian paint is offering a wide range of services and products, paints and painting tools,
consultancy services to help customer make better choices, offering multiple décor solutions and
covering different segments such as home, projects etc.

The dynamics in industrial segment are far more technical and has continuous demand when
compared to decorative segment. Kansai Nerolac is the market leader in industrial coatings segment.
Asian Paints has not performed well in this segment as compared to decorative segment as Kansai
has used technological superiority as a competitive advantage and its strong relationships with
global auto majors has warranted its dominance in Indian industrial coatings segment.

Over the years the role of branding has changed significantly. Asian Paints started with the mascot
“Gattu” which was created by cartoonist RK Laxman in 1954. The mascot helped AP create brand
recall and become the market leader by appealing to the masses. However, during rebranding
exercise, “Gattu” was phased out to given more premium appeal to AP. They also began celebrity
endorsements to create an emotional affinity for the brand. Deepika Padukone(AP), Shahrukh
Khan(Nerolac) and Katrina Kaif(Berger) started endorsing these major players to increase acceptance
within audience.

In the path of being a service company, Asian paints is investing heavily in IT. It has launched online
consultancy service, color shastra, 3-D visualization of home décor. It is educating and engaging
customers by deploying robots which will help customers to take better decisions. Their latest
venture ‘Ms. Know-it-wall’ is helping Asian Paints to understand customer’s dreams and aspirations
and help express them with the help of colours.

5. Activity System Analysis

Despite being the market leader and differentiator, Asian Paints does not have unlimited room to
raise the prices. This can be owed to the commoditized nature of paint industry which despite of
branding has left no room to increase the prices. Therefore, companies set their prices in tandem
and cannot keep them significantly more than their competitors. This distinctiveness makes cost
effectiveness imperative in this industry. In order to get a comprehensive understanding of the
industry and compare the cost structure of the major incumbent players, the activity system was
analysed with comparison of various costs.
5.1 Raw Material and Procurement outlays

The most substantial component of the overall costs in paint industry is attributed to raw materials.
[Exhibit 3] Titanium dioxide (TiO2) and the crude oil by-products Phthalic Anhydride and
Pentaerythritol comprises of 50% of the input costs.5

Cost of goods sold as a proportion of total income is 58.5% for Asian Paint, compared to 59.93% of
Nerolac and 60.86% of Berger Paints as of March 2017.6 This advantage has arisen over years due to
backward integration adopted by Asian Paints. It is integrated backward into the production of both
Pentaerythritol and Phthalic Anhydride which are byproducts of crude oil. This has protected the
company from the volatility in the raw material prices.

5.2 Manufacturing and Supply chain management

Asian Paints has a complex value chain partly owed to industry dynamics and partly it being the
oldest and 3rd largest paint manufacturer in Asia. As of Mar’17, it has 7 paint manufacturing facilities,
3 R&D centres and test sites, 2 chemical plants, 128 sales locations, 35 administrative offices, 11
distribution centres and 5 other offices including registered office in India. Pan-India offices has
given Asian Paints an unparalleled reach and strengthened its ability to tap into unchartered rural
and semi-urban marketplaces. Asian Paints has double the number of dealers than Berger Paints,
second major player in decorative segment market.

Asian Paint pioneered to achieve full vertical integration in its supply chain with the help of hi-tech
ERP and outbound logistics software in liaison with i2 technologies. This helped them to achieve
efficient inventory management and optimized freight costs. This superior inventory management
can also be owed to lucrative offers and discounts offered to its distribution partners.

5.3 Branding and Marketing

As discussed earlier, branding and marketing activities have become vital to retain position in
industry due to branding of commodity products. Asian paints started carrying out effective
marketing campaigns which has helped it to increase its brand recall and recognition as India’s
leading brand. Over time it has evolved its image from an industrial paint manufacturer to a
consumer brand that can be trusted to advise consumers on home décor. Their new Colour flagship
store which is set out to motivate people to engage in colour decoration process, has positioned
Asian Paints brand as the ‘ultimate home décor and colour experts’.

Advertising expense of Asian Paints over last 3 financial years has been 3.94% of its net sales when
compared to 5.72% of Kansai Nerolac and 5.74% of Berger Paints.[Exhibit 3]

6. VRIN Analysis

We carried out VRIN analysis for Asian Paints, keeping under consideration the various resources
that have developed owing to years of experience within the industry. The rationale behind
conducting a VRIN analysis is to analyze whether any of these resources have morphed into
sustainable competitive advantages for Asian Paints. The resources along the value chain of the
company are analyzed, to ensure that any critical resource is not missed out. A couple of
competitive advantages that were identified with absolute certainty are the phenomenal R&D
capabilities, efficient distribution network and other value-added services. Other appreciable efforts

5 Paints -. (2017). Indian Paints Industry Report - Paints Sector Research & Analysis in India - Equitymaster. [Accessed 20
Nov. 2017].
6 Asian Paints (2017). Company Website: Corporate Information.
include the backward integration by Asian Paints. However, based on the analysis we concluded that
the factor instrumental in Asian Paints success is its valuable brand equity and strong distribution
network. A comprehensive VRIN analysis was carried out, the results of which have been detailed in
the [Exhibit 4].

The findings of the VRIN analysis are much in line with the overall business strategy of Asian Paints
that envisions itself as being a broad differentiator, enabled by its strong brand recall and
complemented by its efficient distribution network. These two factors have also enabled the rapid
penetration into the tier-2 and tier-3 urban markets.

7. Future Opportunities

Today the market has exploded with demand of wide variety of paint products for many industries
such as automotive, aerospace, transportation, packaging, protective and general industrial use.
Recently there has been a rich inflow of investments to produce and launch newer, efficient and
effective products with many upcoming M&As, which have contributed to a lot to the growth of the
industry. With the booming middle-class population in India, the paints industry is deemed to
witness growth moving forward.

By expanding their product portfolio catering to numerous applications, Asian Paints plans to
explore and invade newer markets by M&A. Asian Paints ventured into the kitchen solution space by
acquiring Sleek International Pvt Limited and into bathroom products with the acquisition of Ess Ess.
These market strategies have increased their market share. With its zeal to provide world class
consumer experience, it has always been ahead of the market. It has set up Signature stores in
metro cities to educate consumers on colours and how to revamp their homes. Its ‘Colour
Experience’ stores have augmented their image in the domain of colour and décor which has given
the brand a new innings to perform. This has helped Asian Paints to be now perceived as India’s
décor and colour experts.

Projections by Indian Paint Association (IPA), show that the market is anticipated to be valued at Rs.
70,875 crores by 2020. According to a report by the apex body, the segment for decorative paints is
predicted to observe CAGR of 12.7% and the segment for industrial paints a CAGR of 9.5%.7

8. Recommendations for Asian Paints

Asian Paints have been doing exceedingly well in the consumer space. The increased focus on the
service arm as well as its strategic acquisitions has helped AP become the one-stop shop for home
decor. However, when it comes to the industrial segment, Asian Paints is not able to carry on the
same lead. Hence we suggest Asian Paints to try become the one-stop shop for industrial segment as
well by acquiring Everest Industries in the Industrial Walls and Ceiling space.

8.1 Considerations for Acquisition

The below 4 top Indian cement product manufacturers were taken into consideration.

• Ramco Industries
• HIL
• Visaka Industries
• Everest Industries

7 India, P. (2017). Indian paints industry to grow to Rs 70,875 cr by 2019-20.[Accessed 24 Nov. 2017].
These companies were then rated on their profitability, brand and size of distribution network. Out
of the 4, HIL and Everest Industries directed special focus towards industrial walls and ceilings while
the other 2 companies had a diversified portfolio so they weren’t taken into consideration.

Of the two remaining companies, HIL’s P/E ratio was less than half of the industry average of 32.9
whereas Everest industries was slightly above average [10]. The low P/E of HIL is a cause of concern as
the company has remained profitable for the past 5 years. On the other hand, Everest forms a good
target for acquisition as the stock is not merely overpriced. The company has remained profitable for
the last 5 years and is expected to be in the future as the operating revenue has been increasing
steadily whereas HIL’s net operating revenue has been declining for the past 3 years [10]. All these
considerations taken together makes Everest Industries the prime target for acquisition.
The acquisition has to be financed to cover the Everest’s market cap of INR 839 Cr with debt. Debt
can be used to finance the acquisition as the total long-term debt of Asian Paints is only INR 41 Cr
and a long-term debt to equity ratio of only 0.015 [10]. As both Asian Paints and Everest have a stable
positive cash flow, paying off the debt should not be a concern. Also, Asian Paints has a CRISIL credit
rating of AAA, hence it can easily raise low cost debt from the market.

8.2 Key Advantages

Adding a cement product company to its portfolio will help Asian Paints to take its first step towards
providing complete interior solutions to industrial customers. Traditionally Indian construction
involved building brick walls which required paints to protect the walls from abrasion, corrosion.
However, slowly the industrial sector is moving towards drywall constructions made of gypsum
plasters which does not require paints. Hence by foraying into the drywall industry will help Asian
Paints capture the industrial market and also provide it with an opportunity to cross-sell industrial
paints solutions.

The Indian Cement Boards Industry is 3,50,000 MT and showing rapid growth across various
segments. The primary reason for this growth in the Boards and Panels market is the increasing
acceptance of dry wall construction method, speed of construction, lack of water and sand at sites
and a dearth of skilled masons. Even then the Fiberboard consumption is extremely low at 0.28kg
per person. [8] This is extremely less when compared to the western countries and even developing
countries like China. (EXHIBIT 10) Hence there is immense scope of growth in this industry.

Asian Paints is also aggressively focussing on capturing the rural market and consolidating its
position throughout India. The most economical and longest lasting roofing technique in rural India
is Fibre Cement roofing[8]. Everest Industries has pioneered several products like ‘Everest Super’
using its R&D which specifically cater to this rapid growing demand in the rural areas. Venturing into
the rural areas can also help in building a presence in rural areas and provide another avenue to sell
its low-cost offerings like Utsav which are specifically developed for this segment.

8.3 Key Disadvantages

The key disadvantage with an acquisition suggested above will be the financing. Asian Paints will be
required to take debt in some amount for funding the acquisition. Though the exact form of funding
mechanism will be quite complex, but it is a reasonable assumption that some form of debt will be
added to the balance sheet.
Apart from the regular acquisition challenges of transitioning in the new industry, an acquisition in
the industrial segment can also potentially shift the focus of the company from the core decorative
paints segment where Asian Paints is the market leader.

8 Everest
Industries (2017). Annual Report FY 16-17. (Accessed: 25 November 2017)
9 Edelweiss
(2009). Asian Paints-The Growth Palette. (Accessed: 20 November 2017)
10 Moneycontrol (2017). Everest and HIL Financial Performance (Accessed: 27 November 2017)
Appendix
Exhibit 1
Market share of organized sector

19%
12% 30%
19% 20%

Asian Paints Kansai Nerolac Berger Paints ICI Others

Exhibit 2

Current Business structure of Asian Paints (Source: Asianpaints.com. (2017). Asian Paints -
Corporate Information.)
Asian Paints

Decorative Industrial Chemical Home

Paints Paints Products Improvement
and Decor

Interior Enamels PPG Asian Asian Paints Sleek ESSESS

wall Paints Pvt. PPG Pvt. Ltd. Kitchens
Ltd.
Exterior Wood
wall finishe Automotive Industrial Modular Bath fitting
coating coating and kitchen

Exhibit 3

Financials and key ratios of Asian Paints and its competitors (Source: Company financial reports
and Moneycontrol.com. (2017). [Accessed 26 Nov. 2017].

Asian Paints (Rs in crores)

3 year
FY 16-17 15-16 14-15 average
Net Sales 12,448.81 12,458.65 11,485.67 12,131.04
Operating Revenue 12,647.11 12,645.88 11,648.83 12,313.94
EBIT 2,658.05 2,443.10 1,947.10 2,349.42
Capital Employed 7,338.33 5,298.31 4,515.38 5,717.34
ROCE = (EBIT/Capital Employed) 36.22% 46.11% 43.12% 41.82%
Material costs and Purchases of stock in trade
(COGS) 6,090.92 6,366.71 6,572.28 6,343.30
Op. Revenue/Mat. Costs and Pur of stock in trade 2.076387 1.98625 1.772418 1.95
Average Inventory 1,902.11 1,706.15 1,733.62 1,780.62
Inventory turns = COGS / Average Inventory 3.2022 3.731624 3.791084 3.57
Operating Margin 21.12% 19.60% 17.25% 19.32%
Operating Expense 9,975.67 10,166.32 9,638.31 9,926.77
Depreciation & Amortization 295.43 238.36 223.11 252.30
Operating Income 2,376.01 2,241.20 1,787.41 2,134.87
Current Ratio 1.41 0.95 1.09 1.15

Asian Paints (Rs in crores)

16-17 15-16 14-15 3 year average
Net Sales 12,448.81 12,458.65 11,485.67 12,131.04
Raw Material Costs 5566.13 6019.72 6286.46 5,957.44
As a percentage of sales 44.71% 48.32% 54.73% 49.25%
Finished Goods Inv. 1,381.31 923.64 1154.9 1,153.28
As a percentage of sales 11.10% 7.41% 10.06% 9.52%
Freight & Handling Costs 829.41 716.23 628.82 724.82
As a percentage of sales 6.66% 5.75% 5.47% 5.96%
Employee Benefits 742.83 666.83 606.94 672.20
As a percentage of sales 5.97% 5.35% 5.28% 5.53%
Advertising expenses 516.5 465.84 -- 491.17
As a percentage of sales 4.15% 3.74% -- 3.94%

Kansai Nerolac (Rs in crores)

FY 16-17 15-16 14-15 3 year average
Net Sales 3,988.17 3,819.29 3,532.41 3,779.96
Operating Revenue 3,999.07 3,830.22 3,549.06 3,792.78
EBIT 759.42 529.37 398.90 562.56
Capital Employed 2,909.97 2,418.98 1,738.96 2,355.97
ROCE = (EBIT/Capital Employed) 26.10% 21.88% 22.94% 23.64%
Material costs and Purchases of stock in trade
(COGS) 2,004.35 2,012.49 1,989.11 2,001.98
Op. Revenue/Mat. Costs and Pur of stock in
trade 2.00 1.90 1.78 1.89
Average Inventory 631.51 556.69 593.67 593.96
Inventory turns = COGS / Average Inventory 3.17 3.62 3.35 3.38
Operating Margin 18.27% 14.94% 12.53% 15.25%
Operating Expense 3,268.38 3,257.90 3,104.24 3,210.17
Depreciation & Amortization 69.49 67.79 67.69 68.32
Operating Income 661.20 504.53 377.13 514.29
Current Ratio 2.53 1.85 1.67 2.02

Kansai Nerolac (Rs in crores)

16-17 15-16 14-15 3 year average
Net Sales 3,988.17 3,819.29 3,532.41 3,779.96
Raw Material Costs 1920.81 1899.98 1874.3 1,898.36
As a percentage of sales 48.16% 49.75% 53.06% 50.32%
Finished Goods Inv. 388.48 344.14 321.17 351.26
As a percentage of sales 9.74% 9.01% 9.09% 9.28%
Freight & Handling Costs 195.03 168.56 150.5 171.36
As a percentage of sales 4.89% 4.41% 4.26% 4.52%
Employee Benefits 198.12 177.65 143.3 173.02
As a percentage of sales 4.97% 4.65% 4.06% 4.56%
Advertising 271.01 234.38 149.54 218.31
As a percentage of sales 6.80% 6.14% 4.23% 5.72%

Berger Paints (Rs in crores)

FY 16-17 15-16 14-15 3 year average
Net Sales 4,107.57 4,120.08 3,792.42 4,006.69
Operating Revenue 4,121.53 4,132.62 3,806.51 4,020.22
EBIT 607.03 536.99 396.25 513.42
Capital Employed 1,988.67 1,561.73 1,340.75 1,630.38
ROCE = (EBIT/Capital Employed) 30.52% 34.38% 29.55% 31.49%
 Material costs and Purchases of stock in trade
(COGS) 1,721.25 2,012.49 1,989.11 1,907.62
Op. Revenue/Mat. Costs and Pur of stock in trade 2.39 2.05 1.91 2.12
Average Inventory 786.20 667.36 632.60 695.39
Inventory turns = COGS / Average Inventory 2.19 3.02 3.14 2.78
Operating Margin 16.08% 14.69% 12.48% 14.42%
Operating Expense 3,458.69 3,525.15 3,331.11 3,438.32
Depreciation & Amortization 97.07 87.97 78.62 87.89
Operating Income 565.77 519.50 396.78 494.02
Current Ratio 1.23 1.27 1.08 1.19

Berger Paints (Rs in crores)

16-17 15-16 14-15 3 year average
Net Sales 4,107.57 4,120.08 3,792.42 4,006.69
Raw Material Costs 1785.85 1868.09 1897.16 1,850.37
As a percentage of sales 43.48% 45.34% 50.03% 46.28%
Finished Goods Inv. 511.56 392.37 376.12 426.68
As a percentage of sales 12.45% 9.52% 9.92% 10.63%
Freight & Handling Costs 320.86 296.94 267.32 295.04
As a percentage of sales 7.81% 7.21% 7.05% 7.36%
Employee Benefits 227.92 281.29 253.13 254.11
As a percentage of sales 5.55% 6.83% 6.67% 6.35%
Advertising 214.32 185.2 284.62 228.05
As a percentage of sales 5.22% 4.50% 7.50% 5.74%

Exhibit 4: Buisness strategy of top 3 players in Indin Paints industry

 Exhibit 5: Asian Paints product portfolio by economic class

Interior Paints Exterior Paints Metal Finishes

Tractor Acrylic Distemper Ace Emulsion Utsav Enamel
Tractor Emulsion Apex Exterior Emulsion Tractor Enamel
Value for Money Tractor Emulsion Shyne
Tractor Aqualock
Tractor Sythetic Distemper
Apcolite Premium Gloss
Apcolite Premium Emulsion Apex Ultima Enamel
Apcolite Premium Satin
Premium Apcolite Advanced Emulsion Enamel
Apcolite Premium Satin
Emulsion Premium Semi‐Gloss
Interior finish lustre
Royale Glitter Apex Duracast Finetex Royale Luxury Enamel
Royale Lustre Apex Duracast RoughTex
Royale Luxury Emulsion Apex Duracast CrossTex
Luxury Royale Shyne Apex Duracast PebbleTex
Royale Atmos Apex Duracast SwirlTex
Royale Luxury Enamel Apex Ultima Protek
Royale Matte
Super Luxury Royale Aspira
Source: Asianpaints.com. (2017)Interior Wall Paint Comparison Chart - Asian Paints.[Accessed 28 Nov. 2017].

Exhibit 6: Activity System of Asian Paints in India

Procurement/Raw Manfacturing Outbound logistics Marketing

Material

• Raw • Plants • 11 Distribution • Spends 5.3% of

Materials(300+): • 2 Chemical facilities Centers (DCs) net sales on
• Titanium Dioxide • 7 Manufacturing Units • 128 sales location marketing
• Pentaerythritol* • 3 R&D centres • 72 depots • Integrated
• Phthalic • 35 admin offices Marketing
Anhydride* Campaign (IMCs)
• 35,000 dealers
• Strong Brand
• 1000s of retailers
Equity
• Fully integrated
supply chain

*Backward integrated

Source: created with the help of Asian Paint financial report 2016-17

Exhibit 7: Dealer network of Asian paints and other major players

Firm Number of Dealers Number of Tinting Machines

Asian Paints 35000 27000
Berger Paint 16500 12000
Kansai Nerolac 15000 7500

Source: Edelweiss (2014). Asian Paints-The Growth Palette.

Exhibit 8: VRIN Analysis

Resource Valuable Rare Inimitable Non-Substitutable Sustainable

Backward Integration     
Distribution Channels     
Value added services     
Brand Equity     
R&D (Innovation)     
Raw Material and Backward Integration

The backward integration efforts by Asian paints include venturing into the production of crude oil
derivatives Phthalic Anhydride and Pentaerythritol owing to high raw material costs. Apart from the
cost advantages, the backward integration efforts have also helped them counter the uncertainty
owing to the volatility in the crude oil prices. This resource is very valuable because the competitors
still rely on importing these inputs primarily because most of them do not have enough resources to
develop these capabilities. However, due to limited availability of resources which can be gained in
the due course of time, this resource is neither inimitable nor non-substitutable. Thus, currently it is
serving only as a temporary cost advantage and is not sustainable for the longer run.

Distribution Channels

Being the pioneer in the individual consumer market in India, Asian Paints fundamentally changed
the way paints were sold and distributed in the country. Unlike the foreign players at that time,
Asian paints did not limit its horizon to just tier-1 cities, but also penetrated within the tier-2 and
tier-3 Indian cities. With the largest number of dealers and the highest amount of colour tinting
machines, Asian Paints continues to have the strongest distribution network within the country. The
presence of colour tinting machines facilitates retention of dealers by enabling lower inventory
levels and a wide customer offering. Fully integrated with technology, it has a state-of-art ERP
software which complements their extensive distribution network and years of experience within
the industry.

Considering all these factors, we concluded that the muscle strength of the distribution network of
Asian Paints is completely unparalleled and is extremely difficult for any competitor to imitate.
Because of its path dependence, the advantage is non-substitutable. Thus, we can conclude that this
contributes to sustainable competitive advantage.

Brand Equity

To fight the pressures of commoditization, the paint industry has relied heavily on marketing and
branding efforts to differentiate its products and build customer loyalty. Asian Paints also reaps the
benefits of its first movers advantage with its clever marketing campaigns that enabled them to
build strong emotional connect with the individual buyers. Beginning from their mascot ‘Gattu’ in
1954 to their recent Atmos campaigns with leading celebrities like Deepika Padukone, they have
surely have come a long way. However, it is imperative to understand that emotional connect alone
cannot serve the purpose for higher brand loyalty. They also need to deliver quality products to their
customers which they have delivered time and again. This brand loyalty that they have built over 50
years is extremely path dependent and hence very difficult to imitate. Therefore, it can be concluded
that the brand equity that Asian Paints has built over the years serves as its sustainable competitive
advantage.

Value Added Services

Other than paints, Asian paints have also diversified into a lot of other business operations such as
colour consultancy, home painting services, experience retailing, budget calculator etc. However,
these services are not exclusive to Asian Paints, several competitors have forayed into similar
ventures and are doing exceedingly well. Though in the short term, these services might add value to
the firm, they do not serve as a unique competitive advantage.

R&D (Innovation)

Asian Paints has featured on the Forbes list of innovative companies several times with innovation
indexes going as high as 59.8% in the 2016. From being a company that enabled customers to pick
colours and patterns for the first time, Asian Paints with their premium offerings like Teflon surface
protector, Microbial protection and its latest Royal Atmos, has positioned itself as an innovator that
aims to serve every consumer segment with multiple product lines.[Exhibit 5] Although initiatives
like these are very well received by the customers, however their R&D capabilities and rapid
innovation has not provided them with any significant sustainable competitive advantages because
of the availability of cheaper replicas across the competitors. This is the reason why R&D
capabilities, as fancy as it might sound is not serving as a sustainable competitive advantage for the
company.

Exhibit 9: PESTLE Analysis for Indian Paint Industry:

Political analysis:

In the recent years the nation has witnessed a very stable political situation. The incumbent
government is driving the economy at a fast pace. Key developmental programmes such as Make in
India and a variety of Infrastructure schemes have propelled the industry and paved way for the key
players to exploit. The housing sector has been receiving a lot of momentum and fiscal incentive
from the government, which will reward the key players in the long run.

Economic analysis:

Post demonetization the company witnessed its growth slowing down. Raw material prices had been
low in the past couple of years, but with increase in the input prices the margins began to shrink.
Recently, the company recovered from the disruptions of demonetization and GST, and posted net
profits and margins that outperformed the estimates by analysts. Revenue for the quarter rocketed
to 576 crores, 21% more than the same quarter previous year. The company also witnessed a very
lukewarm business for its industrial segment whereas its home improvement operations observed
6.3% growth.8

Social analysis:

8
Bloomberg Quint. (2017). Asian Paints Beats Estimates In Q2 As GST Impact Fades.[Accessed 28 Nov. 2017].
Several factors such as increase in disposable income, improved education, rapid urbanization and
progress of rural market have led to proliferation of the paints industry and its dominant players as
well.

With the widespread controversy surrounding air pollution, Asian Paints came up with its new
product Royal Atmos. It aims to apprise the audience of the fact that indoor air is five times more
polluted than the air outside. This premium product aids in purifying the indoor air and hence
combating air pollution.

Technological analysis:

All the major players in the industry have association with global leaders within the industry for
technical prowess and expertise. Asian Paints has established a joint venture with PPG Industries,
which is the world’s largest paints and coatings company, in order to facilitate the automotive OEMs
(Original Equipment Manufacturer). Presently, manufacturing of automotive paints remains
technologically infeasible for the incumbent players. Technological incapability also hinders
establishing manufacturing units outside India. Asian Paints has integrated internet with their
services and initiated click and mortar services with their ezycolour online consultancy. Renovation
and modification of newer products such as waterproof paints, corrosion resistant paints,
antimicrobial paints, Teflon coating etc. will help the company widen its spectrum.

Environmental analysis:

Gases emitted by various solids and liquids, known as Volatile organic compounds (VOC) can have
adverse effects on health of an individual. Traditionally, paints contain considerably high quantities
of VOCs. Lower levels of VOC in paints result in improved quality of indoor air and help to reduce
urban smog levels. Low VOC paints inherently provide various benefits such as clean air, low odor,
sublime washable finish and revamped durability. Asian Paints complies with the Green Seal (GS)-11
standards to limit VOCs.

Lead and Heavy metals traditionally used up in manufacturing paints have received a lot of flak due
to their noxious and toxic nature at increased levels of exposure. For almost a decade now, Asian
paints has committed to its ‘Lead and Heavy Metal Free Guarantee’.

Legal analysis:

Asian Paints has to abide by several stringent laws and standards so that it does not land itself in
trouble. One of them is the Green Seal Standard which establishes environmental, health and
performance requirements for architectural paints and coatings prepared to be used on-site, for
stains, sealers and finishes.9 The firms in this industry faces numerous pollution control, health &
safety and environmental laws.

9
Greenseal.org. (2017). Green Seal > Green Business > Standards. [Accessed 28 Nov. 2017]
Exhibit 9: Past campaigns and forward integrated stores of Asian Paints
Exhibit 10: International Consumption of Fibre Boards

Country Kg/person

Australia 12.5

Thailand 5

USA 3.4

Vietnam 1.1

Indonesia 0.6

India 0.2
Source: Everest Industries Annual Report FY 2016-17

Exhibit 11: Financial Reports Everest Industries

1. Income Statement
Particulars FY 13 FY 14 FY 15 FY 16

Total Income* 10,229 10,476 12,417 13,263

Total Expenses 9,163 9,955 11,493 12,311

EBITDA 1,066 521 924 952

EBITDA
Margin 10.40% 5.00% 7.40% 7.20%

Depreciation 221 267 254 256

Interest 56 126 187 191

PBT 789 128 483 505

Tax 264 38 141 161

Profit After Tax 525 90 342 344

PAT Margin 5.10% 0.90% 2.80% 2.60%

EPS 34.7 5.94 22.46 22.61

2) Financial Performance

Source: Everest Investor Presentation 2016-17

Exhibit 12: Industry Analysis for the Cement Board Industry

Threat of Entrants
The analysis will be done considering two types of new entrants, new players foraying into the cement
industry and existing players in cement industry entering into the cement board product segment.

The cement industry is extremely capital intensive with a capital cost of around Rs 7200 per tonne. The
raw material sources like limestone and gypsum are limited and tough government clearances make it
even more difficult for new companies. On top of the these, large producers enjoy economies of scale,
all of which combined lead to very high barriers for entry for new players in the cement industry. [1]

When it comes to existing cement manufacturers, it is quite easy for them to venture into cement board
manufacturing as they have necessary licenses for control over the raw materials and can leverage the
existing distribution networks. Hence the barrier for entries in the cement board industry is low for the
existing cement manufacturers.

The Power of Suppliers

Suppliers tend to have high power over the cement manufacturers as the raw material form a significant
part of the manufacturing process. The major raw materials are limestone, clay, silica, coal and sand/ash.
[2] The suppliers tend to enjoy power over the manufacturers due to mining restrictions posed to these
natural resources leading to fewer sources of supply. However, the cement industry has countered this
by doing backward vertical integration and it is not uncommon for the manufacturers to also own the
raw material source.[3] Therefore the overall power of suppliers is moderate.

The Power of Buyers

The majority of the cement board buyers buy it in bulk, eg. big real estate construction firms, corporate
offices etc. Being bulk buyers give them power over the manufacturers to bargain for prices. The power,
however, is limited as the roofing does not take a large portion of total costs. Also, there are limited
number of substitutes available for roofing in drywall construction. Acrylic sheets still do not pose a
threat to cement boards owing to the higher cost and limited benefit provided. The number of players
in this industry are also limited. Considering all these factors together, we can say that overall power of
buyers is low to moderate.
Threat of Substitutes
The biggest substitute in roofing for cement fibre blocks are the traditional brick and mortar walls. The
biggest disadvantage of the brick walls are the weight and the slow pace of construction. Dry walls
enable extremely fast pace of construction as a major portion of construction i.e building the blocks can
happen in the factories itself instead of on the construction site.
Within drywalls, other synthetics like acrylic fibre sheets also are trying to compete in the industry but
they are still expensive than the cement boards. Metals like steel are also used by factories for roofing
and walls.
Overall, even with the inherent advantages of dry wall construction, brick walls and ceilings is still the
largest threat to dry walls and roofs. But within dry walls, cement based boards do not have any viable
substitutes. Hence the overall threat of substitutes is moderate.

Intra-Industry Rivalry
There are very few players in the organized industrial ceiling market and have a majority of the
production capacity. This indicates high intra-industry rivalry. Owing to the reforms in real estate and
a strong economic growth of India, the construction industry is seeing a boom and increases the total
market size, thus lowering the rivalry. The industry is also placed under 18% GST slab, significantly
lower than the previous tax rate of 28%. This will help the industry to increase its margins and lowering
the rivalry further. Hence the overall intra-industry rivalry is moderate.
The five forces together points to an overall moderate attractiveness of the industry.

[1] Safal Niveshak (2017). Indian Cement Industry. (Accessed: 27 November 2017)
[2] Understanding cement (2017).Raw materials of Cement (Accessed: 27 November 2017)
[3] IHRA (2017).Limestone Mine Owners (Accessed: 27 November 2017)