Dr Girish G P
With a Market Capitalization of ₹ 2,12,356.80 Crores and over 54% market share in the Indian Paints industry, Asian Paints is arguably the best machine at compounding corporate earnings in the world. The company has no debt and has been generating a Return on Capital Employed of over 30% year on year for the last six decades.
When an investor is looking to invest in fundamentally sound stocks, filters that she should consider are:
Clean Accounts [Promoter should be aboveboard, and shouldn’t be fudging financial accounts]
Growth and Capital Allocation [Invest in those companies which generate free cash flows and re-invest in the business to fuel further growth instead of buying an F1 Team or IPL Cricket Team
Competitive advantage (high barrier to entry for competitors)
Asian Paints ticks all the boxes
Asian Paints is the best example of the successful implementation of enterprise resource planning (ERP) in the world. To help everyone understand in simple terms, Champaklal Choskey in the 1970s, promoter of Asian Paints purchased India’s first Super Computer [10 years before IIT Bombay or IISc Bengaluru and 21 years before any Company in India]! He removed distributors and supplied paint directly to dealers from the Manufacturing unit every 3 hours in a day across the country. Today, they have 80,000 Dealers across India and replenish supplies for every dealer four times a day (every 3 hours). i.e. 3,20,000 times a Day implying 22,40,000 data points a week and so on! Probably there is no other product which is replenished this many times in the entire world. What they are doing with this data reflects the sheer genius of Champaklal Choskey.The company can predict with a high degree of accuracy the sales of paint of a colour at a dealership in Bangalore at a given time. This kind of powerful intelligence honed by data is the competitive advantage which Asian Paint enjoys over its competitors. Every day the barrier is rising with additional data points and refinement of the accuracy of prediction
<aside> 💡 Return on Capital Employed (ROCE) is a financial ratio that determines a company's Profitability and the efficiency the capital is applied. A higher ROCE implies a more economical use of capital.
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Asian Paints is one of the few companies in the world which keeps 95%+ of the MRP of the product sold. (Approximately 5% goes to the dealer and there is no intermediary to eat the money). For all other products in the world, the manufacturer typically gets a share of only 50 to 60% of MRP, but for Asian Paints, it’s 95%. The Working Capital Cycle for Asian Paints is 8 Days ONLY, i.e. length of time taken for buying raw materials, manufacturing paint, supplying to dealers, selling inventories if any, collecting cash/revenue from customers quickly and paying bills. Compare this with the 2nd best player in Indian Paints industry Berger Paints having Working Capital Cycle of approximately 46 days and 3rd best player Exxon Mobil having 110 days as Working Capital Cycle.
To summarize, a company with zero debt, a market share of more than 54%, capturing 95% of the MRP of the Product as Revenue with an astonishingly low working capital cycle time of 8 days and Himalayan barriers to entry is bound to have a high valuation in the market. It will enjoy a high P/E ratio in the future too! I believe Asian Paints is arguably the best corporate earnings compounding machine in the world.