Paint Sector — Performance Analysis

The paint industry in India is witnessing exceptional growth in the consumer space. The growing demand from the construction industry along with infrastructural development is helping the paints sector in India to augur at a greater pace.

The domestic paint industry is estimated to be a Rs 500 billion industry with the decorative paint category constituting almost 75% of the market. The decorative paint market includes multiple categories depending on the nature of the surface like exterior wall paints, interior wall paints, wood finishes, enamels as well as ancillary products like primers, putties, etc.

Within the Indian decorative paint segment, Asian Paints and Berger Paints are the two largest players, with the segment contributing more than 80% of their overall revenues.

Certain Key drivers for Paint Industry in India:

· Highly Competitive Environment

· Rise in Disposable Income, especially in rural areas.

· Launching of Innovative Products

· High Demographic Dividend in India

Top 5 paint sector companies for quantitative analysis:

· Asian Paints

· Berger Paints India

· Kansai Nerolac Paints

· Indigo Paints

· Akzo Nobel India

These 5 Companies are analyzed on the basis of 6 parameters and ranked accordingly

Parameters of Performance Analysis:

Is the Business Profitable?

We have used Growth Profit Margin, Operating Profit Margin, and ROCE ratios to determine whether a business is profitable. An increase in profit is usually identified with generating more cash (please note that profit does not always equal cash under accrual accounting).

An increase in profit can be due to a rise in revenue, a decrease in expenses, or a combination of both. The market likes it when a company can make more profit, leading to an increase in its share price.

1. Growth Profit Margin (%)

• The profit margin formula measures the company’s amount earned (earnings) concerning each rupees of the sales generated.
• This ratio compares the gross profit earned by the company to the total revenue, which reflects the percentage of income retained as the profit after the company pays for the cost of production.
• In this parameter, Asian Paints outperforms other peers by scoring the highest Gross Profit Margin of 53.59% and hence obtains the 1st position.
• Kansai Nerolac Paints get the last position and 5th rank due to the lowest

Gross Profit Margin of Asian Paints is

2) Operating Profit Margin (%)

• Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
• Asian Paints efficiently post the OPM of 19.8% and secures 1st position but due to raw material inflation, the margin has fallen.
• With the lowest OPM of 17.4%, Akzo Nobel India scores the last rank among its peers.

3) Return on Capital Employed (ROCE):

• ROCE signifies how the company is using its capital to generate a return for the company and investors. The high ROCE, the better it is for the company.
• In this parameter, Asian Paints outperforms other peers by scoring the highest ROCE of 38.55% and hence obtains the 1st position.

Kansai Nerolac Paints get the last position and 5th rank due to the lowest ROCE of 18.35%.

Is the Business Financially Stable?

Financial ratios are one way to analyse the stability of a business. We have used Total Debt and Interest Coverage Ratio to make comparisons between different aspects of a company’s performance, revealing information such as whether the business has accumulated too much debt or has bought too much stock in bulk.

4) Total Debt

• Total Debt is the addition of short term debt and long Term Debt
• Accordingly, the lesser the debt, the better it is for the company and vice-versa.
• Indigo Paints is nearly a debt-free company with a total Debt of 0.02 and hence rewarded with full points and given the first position.
• Berger Paints India has the highest total Debt among its peers at 0.19 and hence is given 5th rank.
• Akzo Nobel India, Kansai Nerolac Paints, and Asian Paints have the Debt of 0.05, 0.06, and 0.08 respectively.

5) Interest Coverage Ratio

• This ratio gives the ability of the company to pay interest from its operating profit.
• Asian Paints maintain a good Interest Coverage Ratio of 58, the highest among peers, and gets the first rank.
• Due to the lowest Interest Coverage Ratio of 26, Indigo Paints India is ranked and scored accordingly.

Is the business generating cash?

We have used these two parameters to be aware of the firm’s cash position at all times. These cash flow ratios are often the best measures of the liquidity, solvency, and long-term viability of a business firm.

6) Cash Conversion Ratio

• The cash conversion ratio (CCR) compares a company’s operating cash flows to its profitability and measures a company’s efficiency in turning its profits into cash
• Operating cash flows, also known as cash flow from operations, convert net income to cash income. EBITDA is earnings before interest, taxes, depreciation, and amortization
• A high CCR often indicates good working capital management, whilst a low CCR indicates poor working capital management or could suggest poor underlying business performance.
• In this parameter, Asian Paints outperforms other peers by scoring the highest CCR of 113% and hence obtains the 1st position.
• Berger Paints India Ltd gets the last position and 5th rank due to the lowest CCR of 99%.

The Bottom Line

Asian Paints secures the first position in our performance analyses. Being a market leader, Asian Paints enjoys a great sales volume and hence benefited from Operating Leverage.

Indigo Paints with strong growth visibility prospects and the developing market size of the company helps the company grab the second position.

Kansai Nerolac due to weak performance and poor financials mainly due to downfall in the auto sector ranks last in our analyses.

Please note that we have done this analysis with the only purpose of screening good companies. The analysis is entirely on a quantitative basis. No suggestions are being made to directly go and invest in the top-scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.