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Asian Paints Vs Nerolac: Which is better? - Views on News from Equitymaster
 
 
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  • Apr 12, 2013

    Asian Paints Vs Nerolac: Which is better?

    The Indian paints industry is dominated by two large players namely Asian Paints and Kansai Nerolac. In this article, we take a look at how these two companies stack against each other. First, we will discuss the business operations. Then we will have a look at the financial performance and lastly the valuations of both these companies.

    Business Overview

    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.

    Financial Performance

    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%.

    EBITDA Margins FY08 FY09 FY10 FY11 FY12
    Asian Paints 14.9% 12.3% 18.4% 17.0% 15.7%
    Kansai Nerolac 14.1% 11.5% 15.5% 13.6% 12.5%

    Data Source: Company reports & Equitymaster

    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.

    RoE FY08 FY09 FY10 FY11 FY12
    Asian Paints 41.6% 33.1% 48.9% 38.5% 36.0%
    Kansai Nerolac 20.2% 15.1% 21.4% 22.5% 20.3%
    Data Source: Company reports & Equitymaster

    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.

    Valuations

    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.

    Valuation Ratios EV/EBITDA P/E P/BV
    Asian Paints 17.5x 29.4x 10.8x
    Kansai Nerolac 12.4x 20.7x 4.0x
    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.

     

     

    Equitymaster requests your view! Post a comment on "Asian Paints Vs Nerolac: Which is better?". Click here!

    24 Responses to "Asian Paints Vs Nerolac: Which is better?"

    mukesh kumar

    Apr 11, 2017

    I recently did putty in my house and I am very confuse between either using Asian or nerolac
    After so much suggestions m watching nerolac but kindly give me suggestions..

    Like (10)

    Jitendra Jain

    Feb 15, 2017

    After watching all the reviews I am totally confused which one is best for home interior and exterior. Please suggest me for the same

    Like (3)

    sachin

    Jan 10, 2017

    I think Asian paints is much better in overall and customer services also.....It was a very bad experience with narolac pearl......as I use narolac pearl on my home walls after some days the white spots appear on all wall....then I register my complaint but they ignore us and their executive make us fool give dates and totally ignore my case from 3 months.....please don't buy narolac products as their service is very bad.....now I'm going to switch with asian paints

    Like (1)

    Ravi

    Oct 3, 2016

    Nerolac paint is better than asian paints.nerolac pearl emulsion is only enough to deafet royal shyne at lower price.nerolac cement putty nd every thing in nerolac gud quality.even nerolac never hides anything about there product.every shadecards shows coverage nd quality of tht product clearly.

    Like (4)

    HARISH Yadav

    Jun 11, 2016

    Asian paint,nerolac paint which one is best?

    Like (14)

    rajkumar gautam

    May 3, 2016

    Nerolac paint better than asian paints

    Like (8)

    sheikh mubashir

    Oct 13, 2015

    nerolac is no where close to Asian paints..
    don't go for shahruk khan tv aid its all about
    money..... asian paint is better than nerolac
    paint and prices are all most same..

    Like (3)

    Ashish

    Aug 16, 2015

    PLease suggest which is better for interior.

    Like (14)

    devendra Pradhan

    Jun 19, 2015

    Nerolac paint is far better than Asian paint

    Like (12)

    ravi

    Feb 11, 2015

    Equitymaster requests your view! Post a comment on "Asian Paints Vs Nerolac: Which is better?". Click here!

    Like (61)
    Equitymaster requests your view! Post a comment on "Asian Paints Vs Nerolac: Which is better?". Click here!
     

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