Paint Industry Analysis

1. Past Sales and Industry performanceDefining 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:

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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.2009-102010-112011-122012-132013-14

Asian Paints6821.447790.289739.6511053.0912849.03

Berger Paints1931.532430.933053.53424.783945.83

Akzo Nobel India1131.913522152.52358.12474.6

Kansai Nerolac1830.022278.742743.952872.943164.68

Earnings of Major players

PAT in Rs. cr.2009-102010-112011-122012-132013-14

Asian Paints883.91881.351020.581159.521262.76

Berger Paints120.39150.09180.1218.4249.39

Akzo Nobel India159.3176.6201.8218.8150.2

Kansai Nerolac165.5205.98215.88292.18206.57

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 paintsAkzo 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

CompanyPE ratio

Asian Paints48.66

Berger Paints48.11

Kansai Nerolac37.91

Akzo Nobel117.72

InDUSTRy P/e*47.54

*Source: Moneycontrol, Indiainfoline

Analysis of Financial StatementsProfitability RatiosProfitability Ratios2009-102010-112011-122012-132013-14

Gross Profit Ratio45%42%41%42%42%

Cash Operating Margin23%19%19%19%19%

Operating Margin21%18%18%17%17%

Net Margin15%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 RatiosLiquidity Ratios2009-102010-112011-122012-132013-14

Current Ratio0.921.461.291.291.43

Quick Ratio0.400.820.690.660.83

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 RatiosCapital Structure Ratios2009-102010-112011-122012-132013-14

Debt Equity Ratio0.040.030.020.020.01

Fixed Asset to Long Term Debt15.8619.0130.9346.5751.89

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 Ratios2009-102010-112011-122012-132013-14

Total Asset Turnover1.641.641.661.581.54

Fixed Asset Turnover4.715.784.944.145.02

Current Asset Turnover3.822.582.922.932.59

Inventory Turnover3.723.403.743.493.57

Average Holding Period9810798105102

Debtor Turnover Ratio16.6819.5717.4915.7416.20

Days Sale Outstanding2219212323

Avg. Payment Period93808692

Length of Cash Cycle34414535

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 RatiosReturn Ratios2009-102010-112011-122012-132013-14

Return on Assets24.41%20.66%20.34%19.17%18.21%

Return on Equity49.74%39.24%38.52%34.74%32.47%

Return on Capital Employed47.06%39.17%38.41%35.28%33.43%

PAT774.5775.15958.391,050.001,169.06

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.

2009-102010-112011-122012-132013-14

Interest Burden0.990.990.980.980.98

Interest Coverage79.4474.1245.2250.6066.66

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 RatiosGrowth Ratios2009-102010-112011-122012-132013-14

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 RatiosMarket Ratios2009-102010-112011-122012-132013-14

Price to Book Value12.5812.2712.4815.6014.56

Price Earnings Ratio25.3031.2732.4044.8844.83

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.