If innovation is the key to value creation, Asian Paints (APIL) offers
a good example. Stocking paints is a nightmare. You need to keep hundreds of shades in a large number of pack sizes. Multiply the two variables and you find that you will need huge retail spaces for a product for which competition is strong. Asian Paints has introduced an innovation that has completely changed the game. It has installed paint formulation machines with its dealers, which enables them to formulate the exact shades customised for each individual’s needs in a jiffy. You choose your shade on a computer screen and the dealer arrives at the required shade by a software-driven process which tells him what stainers to mix in what proportion. You can see the automated mixer pouring out the paint you want. The stainer that comes out of the automated mixer is added to white enamel and your customised paint is ready. All the dealer needs to stock in some volume is the base material – white enamel. APIL dealers are finding this great, as it has brought down their storage requirements drastically. APIL benefits by being able to retain customers. It is innovations like these that make APIL India’s largest and Asia’s third largest paints company. APIL operates in 20 countries with 28 paint-manufacturing facilities in the world and services consumers in more than 65 countries. A strong organisation, built bit by bit (it was one of the first Indian companies to appoint graduates from IIM in large numbers), it now delivers powerful growth quarter after quarter. In pursuit of growth, it went in for inorganic expansion which appears to be paying off now. Its global presence is strengthened by its subsidiaries: Berger International Ltd, APCO Coatings, SCIB Paints and Taubmans – companies which have been acquired by APIL in the past. Its revenues have risen by an average 23% over the past five quarters, while its operating profit grew 31% over the same period. An interesting aspect of its performance has been the consistency of its margins. At the operating level, the company’s margins have been averaging at 16% not just over the past five but nine quarters, despite higher cost pressures and the highly competitive nature of its business. It ended FY08 with 21% growth in sales and 31% growth in operating profit, maintaining its 16% margin at the operational level. Asian Paints has completely bucked the trend over the six months of market carnage. Currently trading at Rs1,247, its market-cap discounts its five-quarter average sales (annualised) by 3.62 times and its operating profit by 23 times.
Ratings for bank loans, SMEs and structured financial products is likely to fuel growth going forward
One of the strongest stocks in the market today, and also one of the most expensive, is Credit Rating and Information Services India Ltd (Crisil). Crisil pioneered the debt-rating business in India but has diversified into other lucrative services such as research and advice on risk and policy. The business is driven by people – the most expensive commodity for the past two years. And yet, Crisil’s operating profit and sales for 2007-08 grew by 85% and 83%, respectively, over 2006-07. This growth has come at a time when equity has been the flavour and not debt. With rising interest rates, debt may gain more importance and with it, the rating service of Crisil. Growth opportunity in future years is huge for rating of bank loans (6,500 entities to be rated by 2010), SMEs (from 1,000 ratings in 2007 to 5,000 ratings in 2009) and structured financial products, which are used to finance infrastructure. Buoyant energy markets and infrastructure development would fuel the growth of advisory services. Personal credit rating and information also has a powerful potential for which the company will set up a joint venture. All in all, Crisil is on a good wicket. Buy the stock on severe market declines.