Unusual billionaires-I
The following text will be on how Asian paints became the world's largest paint-tech franchise, How unusual it is to become a billionaire? You will undergo a series of miracles and astonishments after knowing how good friends can pull you up. Note: Don't take breaks.
Out of time, Scroll to the bottom for a summary
A temporary ban on paint imports during World War II resulted in an opportunity for domestic production. Spotting this opportunity, a 26-year-old entrepreneur, Champaklal H. Choksey(CC), and three of his friends - Chimanlal N. Choksi, Suryakant C. Dani, and Arvind R. Vakil—set up Asian Paints in Mumbai By 1967, Asian Paints had become the largest paint company in India—a position it holds until this day. CC was no more from 31 July 1997, also the last day of his family holding a stake in Asian Paints.
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Tactics: During the Pongal festival in Tamil Nadu (January) and the Pola festival in Maharashtra (August), villagers worship their bulls. CC noticed that these festivities brought with it a unique demand for painting the horns of bulls, where the paint was required in bright colors and in small quantities (50–100 ml packs). Similarly, the bottom panel of the front doors of homes in Tamil Nadu has small stripes painted in red and yellow which are considered auspicious.
In 1967, twenty-five years after commencing operations, Asian Paints became India’s largest paint company by revenue. During 1952–62, all the financial parameters were more than a CAGR of 20% ( 98% of companies grow at a CAGR of 10%). In the early 1970s, Asian Paints bought its first mainframe computer. As far as India is concerned, this was the first supercomputer among the Indian market players.
Paints have nurtured the use of data analytics to forecast demand and consistently improve its supply chain efficiency—the single largest driver of competitive advantage for Asian Paints to date. 'All the other companies couldn’t react adequately to what was happening inside Asian Paints, thus taking the company beyond the reach of competition.’
In 1982, two years before Atul became the managing director, Asian Paints had done its initial public offering (IPO) on stock exchanges to raise capital which partly funded this expansion of manufacturing units. Asian Paints entered into a technical collaboration with Nippon Paints for automotive finishes and powder coatings, joint ventures for paints in Fiji, Tonga, Vanuatu and Queensland, PPG Industries Inc., USA, to manufacture automotive paints and certain industrial products.
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Eventually, Atul sold his 9 percent stake in Asian Paints to its competitor ICI India, a subsidiary of ICI UK. However, this sale was blocked by the board of Asian Paints. Finally, after eight months, ICI sold half its stake to a domestic mutual fund and the remaining stake to Asian Paints’ promoter families. Thus, Atul exited the company in 1997 and went on to head Apcotex Industries Ltd, one of the leading producers of performance emulsion polymers in India, and a division of Asian Paints until 1991.
After this episode, Asian Paints hired management consultants Booz Allen Hamilton to guide them on the way forward. Major improvements in organizational structure across three business units— domestic decorative, international, and industrial paints were made.
All credit to the directors that they understood that if we have to keep the flag flying, we had to have a relook at several aspects of the business, like technology, formulations, etc.
The demand forecasting offered by i2’s software helped them a lot. Earlier, there was manual demand forecasting with the manual interpretation of data, whereas here, there was a demand planner with analysts, who were trained to look at demand patterns more systematically’. Through these initiatives, the firm saw a significant reduction in working capital cycle days and improvement in ROCEs.
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Asian Paints identified and understood the twin drivers for growth— supply chain efficiencies and brand power. Asian Paints is the only paints company in the sector that has not seen a change in its controlling shareholders (promoters) over the past seventy years.
First, product innovation: Asian Paints understands its customers better than its competition. This strength was possibly ingrained from its early days (the 1940s and ’50s) when the promoters of Asian Paints deeply inculcated a culture of staying close to its customers. This proximity helped the company understand what product types (for instance, the launch of washable distemper in the 1950s), color shades (deep shades rather than pastel shades), and pack sizes (smaller packs to help paint the horns of cattle and spokes of bullock carts) are in demand in various parts of the country.
Second, supply chain management: In the 1950s and ’60s, large multinational corporations (MNCs) used to offer at least 180 days of credit period to their distribution channel and allowed the channel to extend the credit period to as long as one year in some cases.
This hampered entry into the market for the smaller players, given the high and rising working capital requirements for them to deal with the channel partners at a time when the cost of capital was as high as 18 percent. In that era, Asian Paints started the practice of offering regular payment performance discounts.
For example, a shopkeeper would get a 3.5 percent extra discount if, without fail, he made payments on time throughout the year. If a dealer made the payment in cash, he would get a 5 percent discount on his procurement price.
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Some initiatives it has taken to strengthen this moat include being the first company to:
- Use mainframes in the early 1970s to forecast demand for better inventory management;
- Start branch billing on computers in the late 1970s;
- Import a color computer in 1979 which helped reduce tinting time from five or six days down to four hours; and
- Use GPS (Global Positioning System) for tracking movement of Trucks carrying finished goods in the channel (implemented between 2010 and 2015).
Third, empowerment of professionals: Asian Paints was unique amongst Indian promoter-led firms—it allowed professionals to take control of middle and senior management roles as early as 1969. Although many second-generation members of the four promoter families were engaged in the business in the 1970s and thereafter, they had been given strict instructions not to interfere with professionals, especially when the latter had been made responsible for a specific function.
Network of manufacturing plants and depots:
The company’s size and efficiency are visible in the fact that it has the largest number of dealers (35,000 vs 21,000 for Berger). With only around 125 depots in its supply chain, its revenue per depot is approximately Rs 100 crore, more than twice that of the next highest, which is around Rs 40 crore per depot for Kansai Nerolac. Similarly, its revenue per factory is approximately Rs 1500 crore, twice that of the next highest (Rs 700 crore).
Relationships with dealers built through non-transactional initiatives:
- The company’s relationships with its dealers have been built over decades. These deep-rooted relationships go beyond its stellar IT systems that make dealers’ lives easier. Several dealers have told us that Asian Paints has gone beyond its call of duty to help its channel partners should they face any unexpected problems.
- Jalaj Dani told, ‘Dealers are part of our family. If we find that they are affected due to unforeseen events such as riots, floods, earthquakes, etc., we ensure that the best support is provided to them in every possible manner, including extending the credit period, to help them get back on their feet.’
Anand (above) added to this, ‘Fifty percent of the dealers don’t check their accounts, despite having access to a web portal which gives them real-time updates on their accounts. They say they have faith in our fairness in dealing with them. But they check their accounts with other paint companies thoroughly and regularly.’ And finally, the founding chief investment officer of a leading equity mutual fund told me in October 2015, ‘Distributors are the bedrock of Asian Paints’ success, and their relationship is mutual. They look after Asian Paints and Asian Paints look after them.’ Investments in mainframes in the early 1970s, color computers in 1979, tinting machines in the 1990s, i2 technologies software in 1999, and ERP software in 2000.
Over the past decade, Asian Paints seems to be preparing for the future by investing in:
- businesses related to homes, such as kitchenware and bathroom fittings,
- services that could disrupt the traditional Indian model of hiring painters to paint their homes.
Summary:
Asian Paints is the only company in the history of the planet which has grown revenues at 20% p.a. consistently for 60 years, from 1952 till 2020.
The Company went public in 1982 & has given a 1800x
return till date.
Their entire business doubles in size every 3 years for past
~30 years.
Promoters worth ~$12 Billion.
Minority shareholders worth ~$10 Billion.
Paint is the only sector in India where:
- The product goes straight from – manufacturer to the dealer. (No agents)
- The dealer’s shop is replenished multiple times in the same day (4x/day & 28x/week).
- The manufacturer (Asian Paints) earns 97% of the retail #price (MRP) of the product [other products channel accounts for 30-40% of MRP].
- The distribution logistics are still unmatched by any #competitor.
- They have 70k dealers, getting paint delivered ~3 Lakh times/day. No. 2 player Berger Paints India delivers 40k times/day, No. 3 – AkzoNobel delivers 10k times/day.
How?
Answer – #Technology.
In 1970, CC, the dominant visionary founder spent ₹8 Cr buying India’s 1st Supercomputer; decades before ISRO, IIT, or any other Indian conglomerate. The world’s finest ERP implementation is done in Asian Paints.
- No other company could emerge from scratch to the top even if they have started before a decade because of,
- Unmatched consumer data
- Raw material to Cash cycle – 8 days.
They sensed data is the tech-oil before Ambani and clung with the core business for more than a century. Saurabh Mukherjea the author of Unusual Billionaires added, "The paint is of no magic" this he got from his colleague from IIT who is a chemist. Business is all about the collection of valuable ideas put into work.
Hope you make others see this.
Finnomy
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