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In this blog we will go through the quantitative analysis on certain parameters of Top Paint Sector in India.
Introduction: Top Paint Companies in India
The Paint Industry in India is witnessing exceptional growth in consumer space. With the growing demand from construction sector along with infrastructure development is helping the paints sector in India to grow at greater pace.
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
Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on a quantitative basis. No suggestions are being made to directly make any investment 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.
Paint Industry in India: Quantitative analysis of paint industry
The Paint Industry in India is worth around Rs. 55,000 crores.
The Paint Sector is basically divided into 2 categories: Decorative Paints & Industrial Paints.
Market share of Decorative Paints in India is estimated to be around 75% and rest 25% of the market share accounts to Industrial Paints.
Decorative Paints are usually used for Residential & Commercial Purposes. Whereas Industrial Paints are used by Automotive and other industries.
Paint Sector Quantitative Analysis
Companies selected for Analysis: There are only 5 main companies in this sector:
Market Capitalization of 5 Paint Stocks: Paint Industry Market Share in India
Procedure of Analysis and its Interpretation
These 5 Companies are analysed on following 17 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
Here, 1 means that the company has scored lowest points and 5 means the company has scored highest points.
At the end, we have added all the points together and companies are ranked accordingly.
Parameters of Quantitative Analysis: Indian Paint Industry Analysis
1) Price to Earnings (PE): Competition in Paint Industry
Paint Companies PE
PE of a company’s means how much investors should pay for the stock on the basis of their current earnings. Lower the PE Ratio better it is and hence full points to that company.
Paint Sector generally trades at premium valuation, for instance PE of Indigo Paints & Berger Paints is above 100 and hence given 5th & 4th rank respectively. Whereas, Akzo Nobel with the lowest PE ratio of 54.3 tops the list and gets the full marks.
2) EV/EBITDA:
EV/EBITDA is another important valuation ratio which helps in assessing overall performance of the firm.
Again, from this valuation viewpoint also, Akzo Nobel tops the chart with the lowest EV/EBITDA of 22.76 and hence given 5 points.
Indigo Paints has the highest EV/EBITDA of 137.02 and hence ranked accordingly.
3) ROCE:
Paint Companies ROCE
RoCE indicates how the company is allocating its capital. The higher the RoCE of the company, better is considered.
RoCE is Earnings before Interest and Taxes (EBIT)/ Total Capital Employed (Debt + Equity).
RoCE is an important ratio for fundamental analysis of a company and it becomes crucial in the case of capital-intensive industries just like the Paint Industry.
With the highest RoCE of 35.8%, Asian Paints is rewarded with 1st rank and 5 points. And, Kansai Nerolac has the lowest RoCE of 18.4% and hence rewarded with 1 point only.
4) RoE:
Paint Companies RoE
Another pivotal ratio from a fundamental analysis perspective is RoE which stands for Return on Equity.
RoE measures how much profit a company generates with the money invested by shareholders. It is calculated by Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).
Here also, the company with higher RoE, is considered to be strong and vice versa.
In terms of RoE, Indigo Paints grabs the first position and hence full points by delivering the highest return on equity of 31.4% and Kansai Nerolac with the lowest RoE of 14.4% is given last rank.
5) Debt-to-Equity Ratio:
Companies Debt-to-Equity Ratio
Debt-to-Equity ratio simply indicates the usage of leverage by a company.
Companies with Higher D/E ratio are considered risky and hence will be given low points and companies with lower D/E ratio will be provided with higher scores.
Being a zero-debt company, Akzo Nobel in our analysis enjoys the first position and full points whereas with the highest D/E ratio of 0.26, Indigo Paints is ranked and scored the least of all.
But there’s a special point to notice in Indigo Paints D/E & RoE. With the highest D/E among its peers and contrarily delivering the highest RoE, which means the company is efficiently using its debt and further adding great value to the existing shareholders.
6) Interest Coverage Ratio (ICR):
Paint Companies Interest Coverage Ratio
Interest coverage ratio is Earnings before Interest and Taxes (EBIT)/ Interest expense.
Interest Coverage Ratio indicates the ability of companies to pay interest from its operating profit.
Unlike D/E, companies with higher Interest Coverage Ratio are considered good and vice versa.
Yet again, Akzo Nobel with the highest Interest Coverage Ratio of 35.75 gets the first rank with 5 points. Asian Paints here gets the second rank along with notable D/E of 0.04.
Indigo Paints has the lowest Interest Coverage Ratio of 13.05 and hence ranked and scored accordingly.
7) Percentage of Promoters Shares Pledged:
Paint Companies Pledged Share Percentage
Market reacts negatively to those companies whose promoters have pledged their shares.
In this case, Asian Paints have the highest pledged share i.e., 10.67%, but they are bringing down this number on a regular basis. For this fact, Asian Paints is given 1 point and hence last rank.
The other companies like Berger Paints, Nerolac Indigo & AkzoNobel do not have any pledged share and hence given equal ranks and scores as well.
8) Institutional Holding (DII + FII):
Paint Companies Institutional Holding
Asian Paints with the highest institutional holding of 28.2% tops the list and secures 5 points
Whereas Indigo Paints fails to attract any institutional investors. Thereby, 1 Point & 5th rank is awarded to Indigo Paints.
9) Material Cost as a % of Operating Expenses:
Paint Companies Material Cost
Raw materials like Crude Oil & Crude Derivatives, etc. plays a crucial role in the operating profit and operating profit margins of the company.
We will reward the highest rank and full point to those companies which will have low material cost and vice versa.
Asian Paints with lowest Material Cost of 48% among its peers receives the full point and first rank. On the other hand, Kansai Nerolac has the highest material cost of 55% and hence ranked and marked accordingly.
10) Operating Profit Margin (%):
Paint Companies Operating Profit Margin (%)
Operating Profit Margin can be calculated by dividing Operating Profit by Total Revenue. It is sometimes also called as EBIT (Earnings before Interest and Tax) Margin.
Operating Profit Margin is very important for any capital-intensive industry and so applicable for this industry as well.
As discussed above, Asian Paints has the highest OPM (%) of 26.3% due to the lower material cost of 48%. Therefore given full points.
Since, Asian Paints is a market leader in terms of sales volume and therefore gets benefited from Operating Leverage and hence has higher margins.
With the lowest OPM (%) of 17.4%, Akzo Nobel is rewarded with 1 point and last rank.
11) Sales and Net Profit Growth- 5 Year CAGR:
Paint Companies Sales & Profit Growth – 5-Years CAGR
Indigo Paints has a strong position in terms of Sales and Net Profit growth in the last 5 years. Company’s Sales and Net Profit growth are 47.3% & 47.1% respectively and hence is rewarded with first position and five points.
In terms of Sales, Asian Paints has recorded the lowest sales growth in the last 5 years and hence given only a point in this analysis.
On PAT Growth basis of the last 5 years, Akzo Nobel has scored the lowest point and fifth rank as the company has PAT growth of -4.3%.
12) Sales & Net Profit Growth: 3 Year CAGR:
Paint Companies Sales & Profit Growth
Paint Companies Sales & Profit Growth – 3-Years CAGR
Here also, Indigo Paints wins the race and grabs the first position with highest Sales and Net Profit Growth in CAGR terms in the last 3 years. Indigo Paints have witnessed sales growth of 29.3% & PAT or Net Profit growth of 44.4% in the last 3 years.
Akzo Nobel remains in losses in terms of Sales & Net Profit Growth also. Due to negative Sales Growth & PAT growth, Akzo Nobel is awarded with the 1 point and last rank on both fronts.
13) Sales & Net Profit- Consistency in 5 Year & 3 Year CAGR Growths:
Paint Companies Sales & Profit Growth Consistency – 3-Years & 5-Years CAGR
In terms of Sales & Net Profit Growth in the last 3 years and 5-years, Indigo Paints looks strong with great Sales & PAT Growth figures.
Key Drivers of Robust Growth numbers of Indigo Paints:
High growth visibility due to low base effect.
Bottom-up approach in Business Expansion: Focus on rural Areas, Tier-3/Tier-4 cities due easy market penetration.
Gradually started focusing in Tier-1/Tier-2 cities and Metros.
Appointing M.S. Dhoni, as a Brand Ambassador. This step has certainly helped the company to set up its brand name and increase its sales.
All this strategy led towards profitability growth of the company.
Key Focus on differentiated products with higher margins due to lower presence in peer companies’ product portfolio.
14) Inventory Turnover Ratio:
Paint Companies Inventory Turnover Ratio
Inventory Turnover Ratio is Cost of Goods Sold/ Average Inventory. Average Inventory is (Starting Inventory + Ending Inventory)/2.
It gives us an idea of the shelf life of the company product and also gives an overview about how the company is stocking up its inventory as well as how many times the company has sold its inventory in a given period.
Higher the Inventory Turnover Ratio, better it is for the company and vice versa.
Here, first position is grabbed by Indigo Paints with the highest Inventory Turnover Ratio of 8.55 and Berger Paints scores the lowest point due to its lowest Inventory Turnover Ratio of 5.07.
15) Cash Conversion Cycle:
Paint Companies Cash Conversion Cycle
CCC refers to no. of days a company takes to sell its inventories and collect its receivables.
The shorter (even negative) the cash conversion cycle of a company is, the better it is considered and vice versa.
With the lowest Cash Conversion Cycle of 12.22 days, Indigo Paints receives the first position and first rank as well.
Kansai Nerolac has the Cash Conversion Cycle of 59.31 days, highest among its peers and hence ranked and scored accordingly.
15) Market Share in Decorative Paint Industry:
The size of the Decorative Paint Industry is Rs. 40,300 crores. Out of which, 42% of market share is owned by Asian Paints and hence rewarded with 5 points in this segment.
The lowest market share in this industry is of Indigo Paints and hence scored and ranked accordingly.
16) Final Score:
Summing up the marks scored by the paint sector market players in the above parameters, we will conclude our analysis.
Asian Paints with the highest score of 62 points secures the first position. Being a market leader, Asian Paints enjoys a great sales volume and hence benefited by Operating Leverage.
Indigo Paints with strong growth visibility prospects and the developing market size of the company helps the company to get 56 points and grabs the second position.
Kansai Nerolac due to weak performance and poor financials mainly due to downfall in auto sector ranks last with only 42 points.
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