Asian Paints is India's largest paint company. It is the market leader in decorative paints and has 24 paint manufacturing facilities. In the decorative paint category, it has presence across all the four segments namely interior wall finishes, exterior wall finishes, enamels and wood finishes.
Kansai Nerolac is the second largest paint company in India. The company is the market leader as the original equipment (OEM) paint supplier to the likes of Maruti, Mitsubishi and Tata Motors etc. Kansai Nerolac currently has five manufacturing facilities in India.
In a nutshell, the focus of Asian Paints is more on the decorative segment while that of Kansai Nerolac is on the automotive segment. The net sales of Asian Paints were Rs 96.3 bn in FY12 while that of Kansai Nerolac were Rs 26.0 bn. Thus, in terms of size, Asian Paints is almost 3.7 times Kansai Nerolac. Also, it may be noted that Asian Paints has a well diversified global presence while the focus of Kansai Nerolac is mostly limited to Indian share markets.
In the financial performance section, we will analyze the sales growth, margins and return ratios of the two companies. For the purpose of comparison, we analyze the data over the last five years. It may be noted that the data for Asian Paints is consolidated while that of Kansai Nerolac is standalone. However, it may be noted that there is very minimal difference between Kansai's standalone and consolidated numbers as it has limited subsidiaries. Thus, the performance is comparable.
Now, let us have a look at the sales performance of both these companies. Over the last 5 years Asian Paints' revenues have grown at a CAGR of 21.3% while those of Kansai Nerolac have grown at a CAGR of 16.3%. Revenue growth of Asian Paints is slightly better because it was able to capitalize on the real estate boom that was evident over the last 4-5 years. This augmented the sales from the decorative segment. Also, its overseas operations provided the company with the necessary growth support.
Now, let us see the operating performance of both these companies.
Over the last five years average EBITDA margins of Asian Paints were 15.7%. For Kansai Nerolac the same stood at 13.4%.
It can be seen from the above table that the EBITDA margins of Asian Paints are higher than that of Kansai Nerolac in each of the past 5 years. This is predominantly because Asian Paints has strong presence in the decorative segment where it can exercise its bargaining power once the raw material prices rise. However, Kansai Nerolac's bargaining power is on the lower side as it deals with large auto customers. As such, its ability to pass on the price increase is limited to a certain extent.
Now let us have a look at the return ratios of these two companies over the last 5 years.
It can be seen that the RoEs of Asian Paints are significantly higher than that of Kansai Nerolac. Du Pont breakdown reveals that this is primarily due to better net margins and asset turnover of Asian Paints. It may be noted that both the companies are virtually debt free hence leverage has had limited impact on RoEs of either of them.
Now let us have a look at the valuation metrics of both these companies. For the purpose of our analysis we compare the last 5 years trailing twelve month average P/E, P/BV and EV/EBITDA multiples.
Data Source: Ace Equity. Multiples for Asian Paints are consolidated while those of Kansai are standalone.
As can be seen from the above table, Asian Paints is more expensive than Kansai Nerolac on all the three chosen valuation metrics. Superior performance in the past has led Asian Paints to trade at a premium valuation to Kansai Nerolac.
Which is better?
In terms of margins, sales growth and return ratios Asian Paints is far ahead of Kansai Nerolac. However, since it has superior return ratios and better historical performance it also trades at premium valuations to Kansai Nerolac.
But in order to know which one is better at current levels we need to know whether the valuation gap is expected to widen or narrow. If the gap widens between them and Asian Paints trades at a further premium we need to see whether the fundamentals support the expansion of multiple. If not, than Kansai would appear relatively cheap and vice-versa. So, basically apart from financials one also needs to keep a closer look at the valuations of these companies in deciding which one is better.
Jinesh Joshi (Research Analyst) holds a masters degree in Finance and has over 8 years of experience in tracking equities. He has a keen affinity for number-crunching and is often sought after for his valuable insights on financial modeling and valuations. He has a keen eye for spotting emerging growth opportunities across sectors and market caps. Jinesh contributes to our Megatrend investing service The India Letter.
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