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Asian Vs Sherwin: One-on-one

Nov 22, 2000

Here is an attempt to compare the second quarter results of the domestic paints major, Asian Paints, vis--vis Sherwin Williams (SW), one of the top five paint companies in the world. Sherwin William's financials have been converted in rupee terms for comparison (1USD=Rs 47).

(Rs m)Asian PaintsSherwin Williams
Sales 3,481 67,163
Other Income 37.3 43
Expenditure 2,914 57,654
Operating Profit (EBDIT) 567 9,509
Operating Profit Margin (%)16.3%14.2%
Interest 72 783
Depreciation 78 1,266
Profit before Tax454 7,503
Tax 149 -
Profit after Tax/(Loss) 305 3,337
Net profit margin (%)8.8%5.0%
Diluted number of shares 66.9 168.4
Diluted Earnings per share* 18.3 79.3
P/E (annualised earnings) 12.4 12.9
Market cap/Sales 3.5 1.3

If we to analyse the sales growth of both these companies in the current year, Asian Paint's sales has clearly outperformed the US major. While Asian Paint's sales grew by a healthy 16% on the half yearly basis, SW's sales have more or less remained stagnant compared to the corresponding period of the previous year. What is the reason behind this? One, there is a significant difference between business models of both these companies. Asian Paints is purely a decorative paint company whereas Sherwin Williams has presence in decorative paints, industrial paints as well as automotive paint segments. Besides, there is a vast difference in the characteristics of the market in which these two companies specialise in. US is a mature market (in terms of kilolitre consumption per head). India's per capita consumption of paints is a meagre 0.5 kg per annum compared to 22 kgs in the US.

Asian Paints' operating margins have dropped by just 60 basis points for the first half of the current year compared to 200 basis points fall in margins for the US major. This is because, margins in the industrial paints segment is lower compared to decorative paint segment simply since industrial paint companies have to keep on upgrading their processes and technology (this is because automobile companies, the end users, are highly demanding and are quality conscious) which means that substantial capital expenditure is required. Though this is applicable even in case of decorative paint companies, the intensity of technology upgradation and consumer awareness is lower. This is one the reasons why Asian Paints has better operating margins than SW.

Asian Paints is trading at Rs 228 at a P/E multiple of 12.4x the annualised 2QFY01 earnings compared to SW's 12.9x the annualised 2QFY01 earnings.

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