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Paints: A verdict on margins - Views on News from Equitymaster
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  • Oct 9, 2000

    Paints: A verdict on margins

    Which company in the paint sector has the best margins? Here is an attempt to compare a pure decorative paint company, Asian Paints, versus Goodlass Nerolac, an industrial paint company (more than 55% of sales).

    First of all lets take sales growth. Historically, decorative segment has been outpacing industrial segment as demand for paints (especially exteriors) has been growing sharply in rural markets. This is also aided by healthy growth in housing development as well as excise reforms. However, industrial paints segment, off late, has gathered momentum thanks to a slew of new car launches from auto giants like Hyundai, Daewoo, Honda and Toyota. Going forward, the ratio between decorative to industrial paints is expected to come down from 70:30 to 50:50.

    The next area of focus is realisations. While average realisations per unit have been growing for Goodlass Nerolac in past three years, the same is not the case for Asian Paints. However, per unit realisation for Goodlass has dropped from 7.4% in FY99 to 0.5% in FY00.

      Asian Paints Goodlass Nerolac
    (Rs m) FY98 FY99 FY00 FY98 FY99 FY00
    Paints, enamels varnishes (MT) 116,839 131,284 162,110 52,057 55,002 64,933
    % growth 12.0% 12.4% 23.5% 3.0% 5.7% 18.1%
    Avg. realisation 77,711 78,760 75,333 88,657 95,186 95,659
    % growth -1.1% 1.3% -4% 4.8% 7.4% 0.5%
    Total 9,080 10,340 12,212 4,615 5,235 6,211

    Going forward, realisations are expected to drop further for both companies. On one hand, Goodlass cannot increase paint prices because both Maruti and Telco are initiating cost cutting measures. Asian Paints, on the other hand, can afford to increase prices partially so as to commensurate increasing raw material prices. But this may affect sales volume.

    Coming to the margins, the table below reveals that Asian Paints has better operating margins as compared to Goodlass Nerolac. Asian paints seems to have better control over operating costs, as it is evident from the fact that net working capital to sales for Asian Paints is as low as 12.6% in FY00 compared to 19.8% of Goodlass. This is creditable given the working capital intensive nature of the industry. Going forward, this is expected to drop further, as both companies have implemented state-of-art supply chain management systems to integrate their vendors and stock keeping units.

      Asian Paints Goodlass Nerolac
    (Rs m) FY98 FY99 FY00 FY98 FY99 FY00
    Gross sales 9,496 10,559 12,408 4,724 5,270 6,049
    % growth   11.2% 18.0% 5.7% 11.6% 14.8%
    Gross profit 984 1,016 1,573 457 456 539
    GPM (%) 10.4% 9.6% 12.7% 9.7% 8.7% 8.9%
    Net working capital to sales (%) 18.5% 16.1% 12.6% 21.0% 23.9% 19.8%

    Our verdict! On a comparative basis, margins are better in decorative segment. This is because industrial paints segment is more technology intensive as compared to the decorative segment. Besides, decorative paint companies have control over prices, which their peers do not have.

    Rs m ASPN GNPL
    Market Price 214 124
    Number of shares 67 15
    Market Capitalisation 14,308 1,897
    EPS 12 20
    Market cap/sales 1.2 0.3



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