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Asian Paints Vs…

Apr 21, 2003

If one were to pick the top player in the Indian paint sector (in terms of market share, product portfolio, distribution strength), the exercise is not a difficult one. Asian Paints scores high over its peers like Goodlass, Berger and ICI India. But how does Asian Paints compare with international players like Sherwin Williams of US and Kansai Paints of Japan (the promoter of Goodlass Nerolac in India). Here goes...

A comparative view…
Parameter(x)Asian Paints*Sherwin Williams**Kansai Paints**
Operating ratios
SalesUS$ m 322 5,185 1,476
CAGR-5 years(%)13.2%1.2%-0.6%
OPM(%)16.9%10.7%3.9%
NPM(%)8.8%2.5%2.2%
Sales/NFA(x) 3.4 1.5 3.8
Working capital to sales(%)5.2%8.1%19.0%
Return ratios
RONW(%)28.4%23.2%3.7%
ROIC(%)25.2%16.4%4.1%
ROA(%)12.9%46.7%1.9%
Valuation ratios
P/E(x) 14.6 13.2 NA
P/BV(x) 4.4 3.1 NA
Market Cap/Sales(x) 1.3 0.8 NA
*on FY03E earnings, **Jan-Dec'02

At the first glance, it is very obvious that in terms of size, Asian Paints is nowhere near the other two multinational majors. Both Kansai and Sherwin have strong presence in automotive and industrial paint segments whereas Asian Paints is largely a decorative player. For instance, the revenue mix of Kansai in 2002 was 23% from decoratives, 31% from industrial coatings and 46% from the auto segment (as a supplier to OEMs). Similarly, Sherwin generates 23% from decoratives, 64% from sale of industrial paints & paint stores and 8% from automotive segment. Asian Paints, on a standalone basis, is concentrated in the decorative category (93% of sales) with industrial category accounting for the rest. But the company has a 50:50 joint venture with PPG of USA and supplies automotive paints to the likes of Hyundai and Ford in India.

However, when one goes a step further to analyse the growth rate in turnover over the last five years, Asian Paints has outperformed the MNCs by a significant margin. That said, it needs to be remembered that both Sherwin and Kansai operate in developed economies where consumption levels are on the higher side. To put things in perspective, the per capita consumption of paints in India is around 0.5 kg as compared to an estimated 30 kgs in US. Since companies like Kansai generate 78% of revenues from Japan, growth prospects are limited. This is one of the reasons why Asian Paints has posted impressive growth numbers in the last five years as compared to the global peers. Infact, the likes of Kansai are increasingly focusing on developing economies like India, Thailand and Taiwan. Keeping in the mind the growth prospects in India as well as the acquisition of Berger International, we expect Asian Paints to post strong growth in the next five years as well.

In almost all the other parameters, be it, operating margins and return ratios, Asian Paints has an upper hand. The lower margin for international players could be due to the significant presence in industrial paints and automotive coatings. Typically, in a downturn, auto majors tend to squeeze suppliers for reducing prices. Therefore, the bargaining power of suppliers to OEMs is weak. This is also one of the reasons why Goodlass Nerolac in India has operating margins of 8% as compared to 17% for Asian Paints (Goodlass generates an estimated 45% of revenues from the automotive paint sales).

At Rs 326, the domestic major trades at a P/E multiple of 14.6x FY03E earnings, which is at a premium to Sherwin Williams. But this also factors in the growth potential and superior return ratios of the company. As far as the near-term (i.e. 1 year) growth prospects of the company are concerned, it is a challenging environment. The poor performance of the agriculture sector in FY03 and the recent rise in basic raw material costs are expected to have a bearing on the company's performance in the domestic market in FY04. On a consolidated basis, the restructuring post the acquisition of Berger International will take atleast a year's time to reflect in terms of increased profitability (consolidated returns could suffer in the short run). This could keep the stock in a narrow range.


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