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Acquisitions strategy to capture customer life cycle

Asian Paints announced two acquisitions to supplement its vision of becoming most inspirational home décor brand empowering the consumersto create dream homes. The two acquisitions reaffirm its core strategy moving from ‘Share-of-Surface’ to ‘Share-of-Space’ augmenting its Home décor foray last year. The decorative lighting and designer fans segment growing 18-20% and these segment being integral part of homes, APNT intends to leverage the expertise of White Teak promoters along with its own experience in offering inspirational décor to home owners. White Teak offers a unique blend of capabilities in designer and decorative lighting products with IoT enabled technology. On the other hand, Weatherseal operates in uPVC windows and doors space with Rs12bn category size, backed by robust customer-service. Given the scalability of businesses we remain positive on both the acquisition and retain our Buy rating with TP Rs3,690 (implied 67x FY24E EPS)

Acquisition of 49% stake in Obgenix Software Pvt. Ltd. (White Teak brand) for Rs1.8bn

In line with its core strategy moving from Share-of-Surface to Share-of-Space, APNT acquired 49% stake in Obgenix for a consideration of Rs1.8bn. In addition, Rs1.14bn to be paid after one-year subject to achievements of financial milestones. The remaining stake of 51% (Rs5.26bn) would be acquired in two traches by 2025-26. White Teak brand operates in decorative lighting products (Rs1.2bn) and fans segment growing at CAGR 18-20% in the premium and luxury segment with similar margin profile as of APNT. It draws ~80% of revenues from online channels in addition to retail store network in top metros. White Teak in known for its cutting-edge designs and ideas in this space bringing international standard design and quality to customers. APNT intends to scale up the operation by adding to its exiting 29 Home décor stores and 500 premium stores. Though this segment is dominated by unorganized and China imports, APNT believes to take share through sheer strength due to its customer connect network across the country.

Acquisition of 51% stake in Weatherseal Fenestartion for Rs190mn

APNT acquired 51% stake for Rs190mn in Weatherseal, which is engaged in the business of interior decoration and furnishing including manufacturing of uPVC windows and décor systems. Further, a 23.9% stake would be acquired in two tranches by FY26. Management indicated enterprise value would be 1.5x of sales, yet it has comparable EBITDA that of APNT. Weatherseal is a leading brand in South with presence in the retail and project segment operating in a Rs120bn market size wherein organized players draw only 40%. Management remained confident as this space being attractive in scaling up retail and B2B market.

Valuation and risks

We expect APNT to emerge as a strong player, moving from share of surface to share of space inside home in line with its core strategy: (1) upgrade volumes through innovations in economy/luxury emulsions, (2) scale up Home Décor business in addition to kitchen, bath, home furnishings and wardrobes, and (3) gain volume market share, yet maintain margins. We believe it is a structural growth story and step towards becoming total home solution company, capturing demand across segments and town class. We retain our BUY rating, with a DCF-based TP of Rs3,690 (implied 67.2x FY24E EPS). Key risks to our call include weak demand conditions, rise in crude oil prices, and currency depreciation.

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