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Asian Paints Vs Nerolac: Which is better?

Apr 12, 2013

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 Paints14.9%12.3%18.4%17.0%15.7%
Kansai Nerolac14.1%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 Paints41.6%33.1%48.9%38.5%36.0%
Kansai Nerolac20.2%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 Paints17.5x29.4x10.8x
Kansai Nerolac12.4x20.7x4.0x
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

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

SANJAY

Mar 4, 2019

Nerolac is best paint for home and auto mobile

Like (1)

sekar

Jan 30, 2018

sir though i am not a decorator i tried for my house both nerolac and asian paints for my interior walls of my house both the brands r excellent in one way or the other but mymind goes in favour of nerolac

Like (15)

Naveen Ramola

Oct 30, 2017

Nerolac paints is much better than Asian paint because Nerolac paints covering and Sheen is200%better than Asian Nerolac paints is very tough and strong it's very good for all extreme weather conditions nerolac paints company and all staff is very transprent,its help customers .we love Nerolac paints

Like (14)

Naveen Ramola

Oct 30, 2017

which one is better

Like (8)

Anilkumar

Sep 24, 2017

Confused

Like (4)

Ramesh K Desai

Sep 16, 2017

Asian paints is better than Nerolac

Like (4)

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 (48)

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 (26)

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 (8)

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 (7)
Equitymaster requests your view! Post a comment on "Asian Paints Vs Nerolac: Which is better?". Click here!

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