Paint Industry Analysis

1. Past Sales and Industry performance

Defining the Industry: As per the NAICS association paint manufacturing industry is classified under the
code 32551. This industry comprises establishments primarily engaged in mixing pigments,
solvents and binders into paints, stains and other coatings; and manufacturing related
products.
Industry growth:

http://www.informationresearch.co.uk/uploads/CUBE_press_release/2012-07-16/PaintsIndia_Press%20Release_NB_KT.pdf

India is the second largest (First China) paint market in Asia. Indian paints industry size was estimated at
2,205,000 tonnes in 2011. 78% is market size of the decorative paints industry and the industry has seen
a continuous overall growth since 2002 and has grown at an average 15% per annum over the last
decade. Revenue and earnings of major players has also grown continuously in the last five years.

Revenue of Major Players

Revenue in Rs. cr. 2009-10 2010-11 2011-12 2012-13 2013-14
Asian Paints 6821.44 7790.28 9739.65 11053.09 12849.03
Berger Paints 1931.53 2430.93 3053.5 3424.78 3945.83
Akzo Nobel India 1131.9 1352 2152.5 2358.1 2474.6
Kansai Nerolac 1830.02 2278.74 2743.95 2872.94 3164.68





Earnings of Major players

PAT in Rs. cr. 2009-10 2010-11 2011-12 2012-13 2013-14
Asian Paints 883.91 881.35 1020.58 1159.52 1262.76
Berger Paints 120.39 150.09 180.1 218.4 249.39
Akzo Nobel India 159.3 176.6 201.8 218.8 150.2
Kansai Nerolac 165.5 205.98 215.88 292.18 206.57


2. Sensitivity to business cycle

Demand for Industrial paints is prone to business cycles and depends on industrial and economic growth.
Major end user industries include shipping, capital goods, white goods and heavy industries.

Demand for decorative paints is seasonal with bulk of sales taking place during the festival seasons from
September to December. Besides sales remain slack during the monsoon months from June to August.

3. Competitive conditions and barriers to entry

About 80% of the market share is of the following four players:

Asian Paints: Overall Market leader due to cost leadership in decorative paint market.
Kansai Nerolac: Market leader in Automotive Industrial Paint segments, also into decorative paint.
Berger Paints: Major revenue from decorative segment, also into industrial paints
Akzo Nobel: Major revenue from decorative segment, also into Automotive segment

Barriers to entry: Brand, distribution network, working capital efficiency and technology play a crucial
role. Smaller companies and small scale sector units are losing market share as bigger players are
investing in advertisement campaigns and building a strong distribution network. Entry barriers in terms of
technology and investment required are low in this sector.

4. Stock prices relative to earnings

COMPANY PE RATIO
ASIAN PAINTS 48.66
BERGER PAINTS 48.11
KANSAI NEROLAC 37.91
AKZO NOBEL 117.72
INDUSTRY P/E* 47.54
*Source: Moneycontrol, Indiainfoline



Analysis of Financial Statements
Profitability Ratios
Profitability Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
Gross Profit Ratio 45% 42% 41% 42% 42%
Cash Operating Margin 23% 19% 19% 19% 19%
Operating Margin 21% 18% 18% 17% 17%
Net Margin 15% 12% 12% 12% 11%

All the profitability ratios have decreased from 2009-10 to 2013-14 by approximately 3%. This indicates
that the cost of producing the goods have increased for enterprise, however it is not in the position to
pass on the increased cost to customers due to competitive pressure. It can also indicate that the
company has intentionally cut down the margins to capture market share and is using it as competitive
strategy.
The difference between gross profit ratio and cash operating margin is due to other operating expenses.
The depreciation effect is captured in difference between cash operating margin and operating margin.
The difference between operating margin and net margin is due to interest charges. As there is gap of
only 6% between operating and net margin, we can say that the company is not relying on borrowed
funds very heavily.

Liquidity Ratios
Liquidity Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
Current Ratio 0.92 1.46 1.29 1.29 1.43
Quick Ratio 0.40 0.82 0.69 0.66 0.83

The liquidity ratios have increased over the years indicating enterprises increasing ability to meet its
short term obligations through short term assets. In 2009-10 the ratios were less than 1 (inability to
meet obligations) but now company is strong in this end.
In 2011-12 and 2012-13 the current ratios are same, however the quick ratio differ because the
inventory has increased from 2011-12 to 2012-13.


Capital Structure Ratios
Capital Structure Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
Debt Equity Ratio 0.04 0.03 0.02 0.02 0.01
Fixed Asset to Long Term Debt 15.86 19.01 30.93 46.57 51.89

The debt to equity ratio of the company is very less (less than 1) and is decreasing over the years, which
indicates that the company relies very less on borrowed funds. The company can be criticized on the
point that it is not taking benefits of financial leverage which have positive effects on return to equity.
The fixed asset to long term debt ratio of the company is high and is increasing over the years, which is
a positive sign indicating that the company is capable to meet its long term borrowing needs.

Asset Utilization Ratios

Asset Utilization Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
Total Asset Turnover 1.64 1.64 1.66 1.58 1.54
Fixed Asset Turnover 4.71 5.78 4.94 4.14 5.02
Current Asset Turnover 3.82 2.58 2.92 2.93 2.59
Inventory Turnover 3.72 3.40 3.74 3.49 3.57
Average Holding Period 98 107 98 105 102
Debtor Turnover Ratio 16.68 19.57 17.49 15.74 16.20
Days Sale Outstanding 22 19 21 23 23
Avg. Payment Period 93 80 86 92
Length of Cash Cycle 34 41 45 35

The total asset turnover ratio though greater than 1 has decreased in 2013-14 when compared to 2009-
10 by 6.1% which indicates that the company is able to generate relatively less sales relative to total
assets over the years. Further scrutinizing the situation we see that while fixed asset turnover has
remained more or less consistent and have in fact increased in last year, current asset turnover has been
declining indicating amounts are blocked in inventories and debtors (poor working capital
management).

The average holding period has increased from 98 to 102 indicating that company is not maintaining its
inventory appropriately. It should use techniques like Just-in-Time and supply chain management to
reduce inventory.
The debtor turnover ratio is high and has remained more or less consistent over the years. Days sale
outstanding is consequently low and has increased from 22 days to 23 days over the years.
Avg. payment period is high indicating favorable credit terms enjoyed by the company. The companys
length of cash cycle is 35 which mean not much money is blocked in inventories and debtors.

Return Ratios
Return Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
Return on Assets 24.41% 20.66% 20.34% 19.17% 18.21%
Return on Equity 49.74% 39.24% 38.52% 34.74% 32.47%
Return on Capital Employed 47.06% 39.17% 38.41% 35.28% 33.43%
PAT 774.5 775.15 958.39 1,050.00 1,169.06

All the return ratios have declines indicating that returns are not increasing at the same rate as the
assets deployed, equity infused and capital employed.
For e.g. it can be seen that PAT for year 2013-14 is greater than that of year 2009-10. However due to
greater increase in shareholders fund ROE has declined.


2009-10 2010-11 2011-12 2012-13 2013-14
Interest Burden 0.99 0.99 0.98 0.98 0.98
Interest Coverage 79.44 74.12 45.22 50.60 66.66

Interest Coverage ratio is very high for the company throughout the past 5 years indicating that
company has enough resources to meet its interest obligations. However its interest meeting
capabilities has been declining over the years due to greater increase in interest charges relative to
increase in EBIT.


Growth Ratios
Growth Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
YOY Growth (Sales)

23.63% 25.70% 11.88% 15.60%
YOY Growth (PAT)

0.08% 23.64% 9.56% 11.34%

The decline in growth rate of sales is cause of concern. The profit growth is also volatile with wide
fluctuations. The management need to analyze the same and arrest declining growth in sales.

Market Ratios
Market Ratios 2009-10 2010-11 2011-12 2012-13 2013-14
Price to Book Value 12.58 12.27 12.48 15.60 14.56
Price Earnings Ratio 25.30 31.27 32.40 44.88 44.83

P/E ratio is increasing for the company indicating that investors are ready to pay higher price in relation
to earnings of the company. It may be due to better future prospects of the company. An increase in
price to book value also indicates better future prospects and high profitability.