The Good Quality of Management at Asian Paints

Written by Eashan Trehan

In a previous article, we discussed an example of the poor company management at AT&T, so it makes sense to juxtapose that example against a polar opposite company with a good management. Asian Paints is an Indian company that predominantly sells paints for decorative and industrial use. This article explores why Asian Paints has an effective management team while also offering an example to readers on how to analyse a company’s management. For starters, Asian Paints has a market share of approximately 40%, with its closest peers languishing well below with market shares of close to 10%. The company, although not as old as AT&T has a rich history in India and has been the consistent market leader throughout several periods of uncertainty and turbulence.

Starting from a purely quantitative perspective, the company has an inventory turnover ratio of about 6x, which indicates that they are able to sell-off their inventory in a timely manner and a 32-day long average period of “debtor days” which further tells us that the company is able to recover dues post-distribution fairly quickly and thereby maintain better levels of capital. A quick glance at Asian Paints’ historical Return on Capital Employed (ROCE) shows that it has been consistently above 30%, an impressive figure that indicates that the management is deploying the company’s capital very effectively. The Return on Equity (ROE) is also impressive at above 20%, reflecting that shareholders’ money is being put to good use. Asian Paints’ Profit After Tax (PAT) growth has again been satisfactory at double digits over the previous 5 years. On the expenses front, Asian Paints has been able to keep materials cost below 50% of its overall expenses by effectively utilising the concept of “economies of scale” i.e. the company is using its status as the biggest in the Indian paints industry to keep costs low, again showcasing that the management is able to make the most of the company’s position. Operating profit margins are also healthy at about 20% and in spite of the need to maintain an inventory, spend on capacity expansion, advertising and distribution, Asian Paints has a comfortably low Debt to Equity (D/E) ratio of less than 0.10. However, even though the company has low levels of debt, the Interest Coverage Ratio (ICR) of Asian Paints stands well into the double digits, highlighting its ability to service its low levels of debt with ease.

Moving on to a more qualitative assessment of Asian Paints’ management's performance and decision making, it is notable that the management has correctly identified that tier 2 and tier 3 Indian cities can be the next source of volume growth and have moved swiftly to improve their distribution strength and dealership count in these areas. The offerings have also been expanded to meet the needs of these relatively economically weaker regions by offering lower end products like enamel, primer and putty, once again showcasing that the executives know their customer well. They have also kept a close eye on government policies and leveraged recent policies aimed at making housing more affordable and building smart cities. Furthermore, the management also keeps watch on related industries that share a connection with their paints business, such as real estate. The Indian real estate industry has performed quite poorly over the past decade and this has also had a negative spillover effect onto the paints industry, leading to revenue growth dropping from double digits to the high single digits in recent years, however, Asian Paints’ management has still managed to deliver consistent double digit PAT growth as aforementioned, due to their timely maneuvers aimed at improving operational efficiency and margins, in order to offset the impact of lower revenue growth. The company has also expanded its offerings in tier 1 cities which appeared to be nearing saturation to offer more different types of higher end renovation service. In fact, during past instances of crisis as well, Asian Paints has actually emerged stronger owing to the fact that the management has used these periods of weakness to expand market share by continuing to advertise and also improving operational efficiencies at the same time, something that we can expect from them during the ongoing pandemic as well. The recent acquisitions and expansions of the company have also been shrewd, as they have boasted appropriate levels of synergy with either their existing customer, supply-chain or manufacturing base.

Now, taking a closer look at the personnel that make up the ranks of Asian Paints’ senior management. Mr. Amit Syngle, the present CEO, has spent about 30 years at Asian Paints in various capacities across Sales, Marketing, Supply Chain & Research and Technology. Mr. Syngle joined the company as a Management Graduate at a very young age, spending eight years in Sales and heading the North and Central parts of the country before taking charge of the Kasna Plant in North India. In 2001 he donned the mantle of General Manager - Marketing. He soon headed the Sales & Marketing for the Decorative Business as Vice President. He became the President in 2012 and was responsible for not only the Sales & Marketing at Asian Paints but also headed the Research & Technology function across the organization. Before being elevated to CEO, he was the COO of Asian Paints and therefore is well accustomed to the operational know-how of the business. Hence, we can clearly infer that the CEO has the right credentials and understanding of the business. Executive compensation at Asian Paints has outpaced the median salary growth and profit growth over the past decade, but is in line with the share price growth. Looking at the Glassdoor reviews one notices that the CEO has an 88% approval rate, 83% would recommend the company to their friends and the pay scale and free insurance benefits in particular have been praised by employees. One negative factor however is that almost 12% of the company promoter’s equity stake is pledged.

Therefore, Asian Paints gets a thumbs up for the good quality of its management. Its shareholders have enjoyed great returns and good performance, the management’s decision making has been on-point so far, their past professional experience highlights that they are the right people for steering the ship and the employee reviews also suggest an optimistic outlook.

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Asian Paints Reviews

Asian Paints CEO's salary has nearly doubled in last five years while the company average was 50%

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