INDUSTRY ANALYSIS-PART 2

Submitted By:Ankita Agarwal

Khushboo Bengani
Tejdeep Bindra
Onkar Deshpande
Harsimran Singh
Vivek K

FINANCIAL ANALYSIS OF INDIAN PAINT INDUSTRY

1.RATIO ANALYSIS

SHOWING
INDUSTRY
THE LAST 5

Year

2013

2012

2011

2010

2009

2008

DEBT EQUITY RATIO

LONG TERM DEBT EQUITY RATIO
CURRENT RATIO
FIXED ASSET TURNOVER
INVENTORY TURNOVER
DEBTOR TURNOVER
INTEREST COVER
EBITDA MARGIN
EBIT MARGIN
RETURN ON CAPITAL EMPLOYED
RETURN ON NET WORTH

0.15
0.14
1.35
3.40
5.78
10.18
63.78
15.46
14.2
35.12
27.55

0.15
0.1
1.27
4.09
6.36
12.51
54.12
15.31
14.02
37.32
29.6

0.21
0.12
1.02
4.41
7.78
13.6
42.55
15.16
13.71
40.19
33.63

0.3
0.17
1.04
4.02
8.43
11.95
40.82
15.62
14.19
39.4
35.4

0.31
0.16
1.14
3.98
8.09
10.85
19.39
11.14
9.69
27.87
23.92

0.41
0.23
1.14
4.12
7.58
10.09
24.01
13.05
11.56
33.7
31.39

TABLE
KEY
RATIOS FOR
YEARS

The above ratios bring out following points: Seeing the last 5 years, the paint industry has shown a decreasing trend in using debt in the capital structure of the company.
Macroeconomic factors having an impact on the interest rates of debt in the country may have had an influence
The industry has shown stable current ratio over past years which has slightly increased in the last 2 years which reflects
balanced short term solvency position of the industry as a whole
Decreasing Inventory turnover ratio over the years reflects some problems in converting inventory into sales. The ratio shows
that industry is able to convert inventory into sales only 5-6 times in a year which has decreased as compared to last 5 years

 Decreasing Debtor turnover ratio reflects inefficiency in converting the receivables into
cash. The industry has shown great efficiency in churning over the receivables but come
2013,a slight leniency has been observed in accommodating the customers and clients
which is reflected through lower debtor turnover
The increased profits combined with no relative further increase in debt have ensured
that interest coverage ratio has a magnifying increase. It ensures security of lenders with
regards to the annual interest payments
The industry has shown tremendous improvement in EBITDA margins after 2009, making
a landmark jump from 11.14% to 15.62% reflecting strong performance in companys
core operations and since then the industry has been able to maintain the EBITDA margin
thereon
Also as far as Return on Capital Employed is concerned, the industry has performed well,
improving ROCE from 28% to 39% but after those years despite the increase in absolute
profits, the increase has not been on the same lines as incremental investment in total
average assets, with ROCE settling at 35% for the year ending 2013

SUMMARY : Overall, the industry has shown tremendous growth and profitability after year 2009
The industry has established stable margins by
1 Lesser use of debt (Decreasing debt equity ratio)
2. Better utilisation of fixed assets in generating sales/turnover (Increasing Fixed
Assets Turnover)
3. Providing sense of security to the lendors (Increased Interest Cover)
4. Enhanced performance in core business operations (reflected through solid
EBITDA margins)

INDUSTRY RISK-Captured through Beta of 2 companies taken

as Paint Industry Proxy

0.80
0.70
0.60
0.50
0.40

ASIAN PAINTS

0.30

BERGER

0.20
0.10
0.00
1

Year
ASIAN
BERGER

2011
2012
2013
0.488164 0.472597 0.564998
0.68233 0.661513 0.495185

1. If we extrapolate the beta analysis of these 2 companies to overall industry, we can

say that paint industry as a whole has been risk averse so far and has a low to
moderate risk profile
2. The Beta of 2 companies have been in the range of 0.47 to 0.66 which means with
1% percentage change in market index, there will be 0.47% change in the stock
price of company share
3. The normal risks inherent In paint industry are its seasonality, rising inflation and
high raw material costs
4. But that has so far been offset by robust demand across both industrial and
domestic customers
5. Berger paints riskiness has reduced over past 3 years as compared to Asian paints
which shows marginal increase in beta over the 3 years

WACC OF THE INDUSTRY-ASIAN PAINTS AND BERGER PAINTS LTD. TAKEN AS

PROXY

14.00
12.00
10.00
8.00
BERGER
6.00

ASIAN

4.00
2.00
0.00
2011

2012

2013

YEAR

2011

2012

2013

BERGER

11.92

11.43

9.97

ASIAN

11.97

11.63

12.62

1. Taking these 2 companies as industry representatives, we can say that on an

average the paint Industry has been able to raise funds at an average WACC of
around 11-12%
2. This indicates industrys ability to raise funds at a cheaper cost both through debt
as well as equity
3. Asian paints and Berger Paints Ltd, have a relatively similar WACC over the years,
despite having un-identical capital structure.
4. Berger Paints is comparatively highly leveraged as compared to Asian Paints Ltd.
who has a debt element of only 7-12% in the overall capital structure.

MARKET STRUCTURE OF PAINT INDUSTRY

The market for paint industry is divided into two:
1. Decorative Paints Segment
2. Industrial Paints Segment
1. Decorative Paints Categories

DECORATIVE PAINTS

Interior Paints

WallEmulsion
&
Distemper

Wood

MetalEnamel

Exterior Paints

Emulsion

Texture

Cement

MARKET LEADERS
Asian Paints is an Indian chemicals company headquartered in Mumbai, India. It
manufactures a paints for decorative and industrial use. Asian Paints is India's largest paint
company and Asia's third largest paint company, with a turnover of Rs 96.32 billion.
Besides Asian Paints, the group operates around the world through its subsidiaries Berger
International Limited, Apco Coatings, SCIB Paints and Taubmans. Asian Paints dominates
the Indian paint industry with a market share of 53%. Also, its strong brand equity allows
the company to have higher margins. The company has outpaced industry growth in last
ten years. International business contributes around 19% of its total sales which is
significant.

Berger Paints India Limited is an Indian paint company which operates chiefly in India
headquartered in Kolkata, India. It has come a long way since its inception in the year
1923. Indias second largest decorative paint player, Berger Paints is headquartered in
Kolkata and services the market through a distribution network of 82 stock points and
12,000+ paint retailers. Berger is a mid and mass segment player with a 20% market share.
Since a high proportion of its sales come from the decorative business in the mass
segment.

2.) INDUSTRIAL PAINTS SEGMENT

Industrial Paints Segment

Auto
Paints(45%)

MARKET LEADER

Protective
Coatings(25%)

Power
Coatings
(15%)

Other
Industrials
Coatings(15%)

Kansai Nerolac Paints Ltd (formerly known as Goodlass Nerolac Paints Ltd) is largest in
industrial paint based in Mumbai. It is a subsidiary of Kansai Nerolac paints, JAPAN.[6] It is
engaged in the industrial, automotive and powder coating business. It develops and
supplies paint systems used on the finishing lines of electrical components, cycle, material
handling equipment, bus bodies, containers and furniture industries. The company has
around 18% market share. Around 45% of its revenue comes from the industry segment,
mainly auto industry and it is the leader in this segment.

COMPETITION OUTSIDE AND WITHIN THE INDUSTRY

Competition from outside is in the category of Wallpapers and in the rural areas
lime wash is conventionally used as substitute for paints.
To reduce the threat of substitution, all major players have their own wallpaper
units, which is to cater the growing interior designing market in India.
Share of small scale industries in india is roughly about 25% in the hand of some
2000 small scale units.
The unorganized industries market share is decreasing because of their inability to
provide services and improve their technology which the big players have done
successfully. Their distribution network is very weak and small, which is leading to
low volume and sales.

STABILITY OF THE COMPANIES ENGAGED IN THE INDUSTRY

QUANTITATIVE FACTORS (2012-13)
COMPANY

NEROLAC

BERGER

SHALIMAR

AKZO NOBEL

Interest
Coverage Ratio
Debt to equity 0.015

641.17

11.60

1.945

32.35

.047

0.3078

1.174

0.00

Gearing
0.015
ratio(Leverage)

0.0449

0.2353

0.54

0.00

ASIAN
PAINTS
50.60

High interest coverage ratio of all the companies shows that their ability to meet
interest expense is very good.
The low debt to equity denotes, lower dependency on debt for financing and more
on equity. Shalimar Paints uses more of debt than equity.
The leverage ratio for all the companies is stable.

QUALITATIVE FACTORS
STABILITY OF ASIAN PAINTS
The decorative paints segment demonstrates low risk characteristics due to its
steady growth and low volatility. In addition, the operating margins are steady with
players demonstrating their ability to pass on cost increases to their customers.
Therefore, Asian paints which is the market leader in this category has stable sales .

STABILITY OF GOODLAS NEROLAC

Industrial paints segment to be comparatively riskier due to the volatility of the
end-user segment (primarily automobiles). However, Goodlas Nerolac - which
derives nearly 55% of its revenues from this segment - has demonstrated its ability
to manage this risk.

 POLITICAL STABILITY
Strikes and lockouts can increase the production cost as Paint industries have to
maintain high volume of inventory, which can increase the cost. But high political
stability in India leads to stability in the manufacturing sectors

REAL ESTATE
Real estate prices have a multiplier effect on the stability of Indian paint industry.
During recessionary periods when the prices of real estate went up, the demand for
paint in the decorative sector went down.

CURRENT MARKET SHARE OF EACH MAJOR PARTICIPANT (2012-13)

Market Share(% Sales)

2.99%
16.16%
ASIAN PAINTS
50.76%

17.12%

AKZO NOBEL INDIA

BERGER PAINTS INDIA

12.62%

KANSAI NEROLAC INDIA

SHALIMAR PAINTS

HISTORICAL CHANGES IN RELATIVE MARKET SHARE (% SALES)

YEAR

2008-09
2009-10
2010-11
2011-12
2012-13

ASIAN
PAINTS

KANSAI
NEROLAC

AKZO
NOBEL
INDIA

BERGER
PAINTS
INDIA

SHALIMAR
PAINTS

50.60
52.10
52.40
50.83
50.76

16.30
17.35
17.73
16.58
16.16

10.76
9.62
9.09
12.46
12.62

17.93
17.17
17.41
17.01
17.12

4.39
3.73
3.36
3.10
2.99

100
M
A
R
K
E
T

90

S
H
A
R
E

40

80
70
60

Shalimar Paints

50

Berger Paints India

Akzo Nobel India

30

Kansai Nerolac

20

Asian Paints

10
0
2008-09

2009-10

2010-11

2011-12

2012-13

YEAR

REASONS FOR CHANGES IN MARKET SHARE

In 2011-12 the amalgamation of Akzo Nobel Car Refinishes India (Private) Limited,
Akzo Nobel Chemicals (India) Limited and Akzo Nobel Coatings India (Private)
Limited led to an increase in Akzo Nobels total revenue from Rs 11,955 million in
2010-2011 to Rs 21,001 million in 2011-2012, which is an increase of 43.07%.
This led to an increase in market share of Akzo Nobel from 9.09% in 2010-11 to
12.46% in 2011-12.

Market trends, supplier base, pricing strategy :

Asian Paints:
Supplier Base:

Mostly the Alkyd resin used in the manufacturing of paints is manufactured by

Asian Paints itself, but as the quantity manufactured by it is not enough, the
company outsources it from many other companies, one of it is Piyanshu Resins
Pvt. Ltd, Hyderabad.

Baba Containers is one of the suppliers of 20 lit tins to the company.

Asian Metals Containers is one of the suppliers of the printed tins to the company

Titanium Dioxide is the largest consumed raw material for manufacture of paints. It
is available in two grades, - rutile (imported and mainly used by the Indian Paint
industry) and anatese (manufactured domestically).Travancore Titanium Products,
Kerala & Kerala Minerals and Metals Ltd, are some of the major suppliers.

The other petroleum based raw materials are mostly supplied by HPCL and BPCL.

Sudarshan Chemicals is major suppliers of pigments.

Alpha Chem is the supplier of driers to the co.

Vimal Minerals and Himalaya Minerals are the supplier of Extenders to the co.

Indofil Chemicals, Pidilite Industries, Fine Organics ltd, are the few suppliers of
additives to the company.

But majority of the other raw materials for Asian Paints is being imported from
other countries.

The company has succeeded in establishing themselves in rural parts of India by a large
distribution network as well as retail outlets.
Vertical Integration:
Vertical Integration has seen it diversify into products such as Pentaerythritol and Phthalic
anhydride (PAN), which are used in the paint manufacturing process.
Asian Paints ventured into Phthalic Anhydride manufacturing as a part of backward
integration endeavours.

Asian Paints along with PPG Inc, USA, one of the largest automotive coatings manufacturer
in the world is in a 50-50 joint venture, Asian PPG Industries to service the increasing
requirements of the Indian automotive coatings market.
Another wholly owned subsidiary, Asian Paints Industrial Coatings Ltd has been set up to
cater to the powder coatings market which is one of the fastest growing segments in the
industrial coatings market.
This wholly owned subsidiary of Asian Paints has entered into a tie up with Canada based
Protech Chemicals which is one of the top ten powder coatings companies in the world for
technological know-how in the area of powder coatings.
Consumer Behavior and Preferences:
In order to identify the consuming behavior of paints and how the paint industry operates,
a secondary market research was done, wherein the dealers gave the following insights
about the industry:

Margin of profits to the dealer is about 3% (very low compared to Berger)

Cash rebates are more prevalent in the suburbs than in the cities as it is slow
moving.
Peak season is usually during December-January and during non peak seasons,
dealers are encouraged to sell more by giving exciting offers like LCD tvs and
Foreign tours.
Royale play seems to be the revenue garner and usage of emulsions has become a
norm.

Berger Paints:
It has well established operations & supply chain network spanning throughout the country
with 7 manufacturing facilities, 85 depots, besides 4 facilities overseas.
Supplier base:

Berger Paints Ltd and ICI Ltd are in a 50-50 joint venture to manufacture auto and
industrial coatings at Rishra, West Bengal.
In 2006, Berger entered into a Joint Venture agreement with Nippon Bee Chemical
Co Ltd of Japan for the purpose of formation of a company for the manufacture and
sale of coatings for plastic substrates used in automobiles and parts thereof in India
Berger Paints is a lone supplier of protective coatings to Nuclear Power Plants.
Berger paints is in collaboration with Herbert Sons Gmbh for auto coatings, Valspar
Corp Inc. for heavy duty coatings and also, Teodur BV for powder coatings.

Berger also has a tie up with Becker of Sweden, to manufacture coil coatings for
steel furnaces.

PRICING STRATEGY:
In the paints industry price is used only as a differentiator between the various segments in
the same product line. The prices of different brands in the same segment remain more or
less similar, with just a difference of 30 to 40 paise per sq feet. Some of the specialty
products, not produced by all brands, are priced at a higher price.
Pricing decisions in the paint industry largely depend on the price of the inputs like
petroleum products, other raw materials most of which are imported, excise duties and
taxes. Most of the paint companies offer a 5 % margin to the dealer. Due to internal
competition, the dealers pass on this advantage to the customers by reducing their own
margin to 2-3%. This is a cause of concern for the paint companies because they have to
keep a constant check on the prices offered in the market. Paint companies also offer a lot
of discounts like cash discounts, volume discounts, seasonal discounts and allowances.

Behavioral Traits of Competitors

Major/Niche Players:
1) Asian Paints
2) Kansai Nerolac Paints Ltd
3) Berger Paints India Limited
4) Shalimar paints
5) Jenson & Nicholson (I) Ltd

Mavericks: Asian Paints- The Indian Paint Industry Giant

In P/E terms, Asian Paints most expensive on Nifty-Economic times

:
Trading at 40.07 times to its 2013-14 price to earnings (P/E) multiple and 34.06 times to its
projected earnings in 2014-15, the stock is the most expensive in the 50-share NSE
benchmark index, the Nifty.
Plus, they continue to strive in trying out new technology, implementing out-of-the box
strategies in their approach and planning

Characteristics of Competitors
Berger Paints
Berger's shift to high growth and margin emulsion products, backward integration efforts for its
emulsion requirements and expanding distribution network will enable it to hold on to its market
share because of the following reasons:
1. It has built a robust distribution network
2. Strong relationships with dealers-painters
3. Wide product portfolio
4. It is now targeting premiumisation of its product portfolio with a renewed focus on advertising
and promotional activities.
In addition to premiumisation, Berger also has the second-best distribution network amongst paint
manufacturers.
Its distribution network is estimated to be around 42 percent higher than that of Kansai Nerolac's a major edge over peers.
Asian Paints Berger enjoys a strong foothold in Tier-II and Tier-III cities , which will aid its growth in
future.
Analysts believe Berger needs to increase its distribution efficiencies significantly to start gaining
market share from Asian Paints.
What is more, Berger also needs to strengthen its brand for its sub-brands such as Silk, Rangoli,
Bison and Jadoo to.

Asian Paints
Asian Paint produces PAN (Phthalic Anhydride) and PET(Pentaerythritol)
Reduction in production costs by 35%
Competitors are importing these processes

Benefits: Backward Integration

Immunizes Asian Paints to the fluctuation in the prices.

Equips the company with the ability to meet sudden surges in demand
1/3rd production is sold to other companies.This gives strategic edge to Asian paints

Inventory Cost

Lowest inventory Cost in industry

Average inventory levels of 28 days sales against industry avg of 51 days
Translates into 45% lower inventory costs
Stock of finished goods is only 7% of net sales half the industry average

Improved Processes

Strategy changed to manufacturing bases rather than shades, thus providing economies of
scale
Using i2 Master planner to decide the raw material and packing materials and which plant
to manufacture what product depending on:
Capacity Constraints
Enironmental Constraints
Key Raw Materials

Reduced Finished Inventory cycle from 56 to 30 days

Increase in the number of shades from 50 to 1300
Achieved an 87-90 percent service levels for SKU sales at the location level

Paint Industry as a Whole

Major players will be reluctant to enter the decorative segment as it is not
technology-intensive

Industrial paints are slated to grow at an annual rate of 10 to 12 per cent per
annum for the next few years

Industrial paint manufacturers would benefit from the burst in the passenger car
sales

Reduction of excise duties from a high of 40 per cent to 16 per cent in the last five
years, has made the numerous small-scale units unviable, as they no longer have a
price advantage over the organized sector

Indian paint companies with a strong technical alliance, better distribution network
and an ability to compete in the global markets would emerge victorious in the
paint war in future