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We like the diversification strategy – ‘riskreward’ in tiles appears to be attractive

Asian Paints is test-marketing / introduced designer tiles maintaining the template of entering at least one new business each year in last seven years. In our view, designer tiles can open up additional revenue opportunity of ~Rs30,000 per household. APNT can leverage (1) its existing brands and (2) relationships with real estate developers (initially to achieve critical size). It can also offer better value to consumers via (1) matching tiles with paints and (2) protection against damp walls. However, APNT may need to invest in distribution as there is limited overlap in paint and tile retail outlets. The skill sets, labour charges/hour of painter and mason are also different. Considering APNT’s new product template of lower investments in capex and branding, we believe success can create (potentially huge) value with negligible downside in case of failure. ADD retained.

* Launch of designer tiles: After entering waterproofing, putty, adhesives, kitchen, bath and Home Decor and strengthening presence in primers, Asian Paints has now entered designer wall tiles under the brand ‘royale with Asian Paints’. We believe it is entering multiple businesses considering (1) large opportunity in adjacent categories, (2) better utilization of existing distribution and brands and (3) rising competitive pressures in core business of paints.

* Analyzing ‘right to win’ in tiles: The entry in designer tiles opens up revenue opportunity of ~Rs30,000 per household. We believe Asian Paints has tailwinds in tiles business as (1) better service to the consumers via offering tiles matching with their paints, (2) solution to the damp walls, (3) better utilization of relationships with real estate developers (Projects business) and (4) higher revenues of tile adhesives. It will also be able to benefit from umbrella advertising. Similar to other new businesses of APNT, we expect limited investments (initially) in fixed assets.

* Likely headwinds in tiles business: There is hardly any overlap between distribution of paints and tiles and it may force Asian Paints to invest more in distribution. Also, the skill sets of a painter and mason are different. As a painter is paid more labour charges/ hour, he might be reluctant to work as a mason.

* Tiles - A growth industry with strong RoCE for incumbents: Our Building Material analyst team, Nehal Shah and Jigar Shah opines that tiles industry has grown at a CAGR of 11.1% over FY10-20. Considering the 50% share of unorganized/ smaller players and the premiumization potential, the organized players are likely to sustain healthy revenue growth in low-mid teens over FY20-30. Incumbents also generate RoCE of 15%+ (> Cost of capital) across business cycles.

* Maintain ADD: We model sales and earnings CAGR of 12.5% and 17.3% respectively, for FY20-FY23E. Maintain ADD with a DCF-based TP of Rs2,600. Lower-than-expected urban recovery and potential execution challenges in new categories are key risks.

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