There is no doubt about the fact that India is one of the fastest-growing economy in the world and the Indian economy is bound to grow for the next 20-30 years to become the 3rd largest economy in the world after US and China.
Now when Indian economy would grow, every sector in the economy would grow. Be it banking, auto, paint, utility, healthcare, IT, etc.
Now, there are many top notch companies in each sector and the biggest challenge for the investor is to pick the right stock from each sector.
For example, in IT sector should you invest in TCS or Infosys or HCL or Wipro, in banking should you invest in HDFC or ICICI or Kotak or Axis, in tyre should you invest in MRF or Balkrishna, in gas distribution, should you invest in IGL vs MGL vs Gujarat Gas, in paint, should you invest in Asian Paints or Berger Paints or Kansai Nerolac. In FMCG should you invest in HUL or Nestle or Dabur or Marico or ITC.
Likewise, there is a long list of comparisons. So we have started a series on the stock comparison. In this article, we have compared Asian Paints, Kansai Nerolac and Berger Paint.
Paint sector in India
Key Trends and future growth
- The Indian paint industry is over 100 years old. Its beginning can be traced back to the setting up of a factory by Shalimar Paints in Calcutta (now Kolkata) in 1902.
- The domestic paint industry is estimated to be a Rs 500 billion industry with the decorative paint category constituting almost 75% of this market. The decorative paint market includes multiple categories depending on the nature of the surface like exterior wall paints, interior wall paints, wood finishes, enamels as well as ancillary products like primers, putties, etc.
- The industrial paint category constitutes the balance 25% of the paint market and includes a broad array of segments like automotive coatings, marine coatings, packaging coatings, powder coatings, protective coatings and other general industrial coatings.
Overall, both the domestic and industrial paint sector are expected to grow at a very good rate. Factors like increase in disposable income, rising urbanization, increasing trend of nuclear families, reduction in average repainting cycle, improving lifestyles, need for unique and personalized home or office space, increasing premiumization and government initiative towards infrastructure building including homes and industries would continue to drive the growth for paint sector in India.
- Established in 1942, Asian paints is in the business of manufacturing, selling and distribution of paints, coatings, products related to home décor and providing paint related services.
- Its decorative coatings segment, which is the largest contributor to the company’s revenues features a comprehensive portfolio including paints, painting tools, water proofing solutions, wall coverings and adhesives.
- It has also entered into the home improvement space including two categories of kitchen and bath-fitting comprising ranges of modular kitchens and sanitary ware.
- Asian Paints operates in 15 countries and has 26 paint manufacturing facilities in the world servicing consumers in over 60 countries across four regions viz. Asia, Middle East, South Pacific and Africa.
- Asian paints has the market leadership in paint sector in India for the last 50 years!Asian paints is 3 times bigger than the 2nd competitor which is Berger paints.
- Established in 1920, Kansai Nerolac Paints Limited is the largest industrial paint and third largest decorative paint company of India based in Mumbai. It is a subsidiary of Kansai Paint of Japan.
- Their industrial paint has huge application in automotive industry including passenger car, commercial vehicle, auto, 2 wheeler, etc. Their products are also used for coatings on refrigerators, washing machine, AC, etc.
- Established in 1923, today, Berger Paints India Limited is the second largest paint company in the country. Berger Paints India is headquartered at Kolkata, with 16 strategically located manufacturing units across India.
- The company has the second largest distribution network of ~11,500 active dealers and ~12,000 tinting machines. Company derives ~80% of revenue from decorative paints and the rest from industrial paints of which Automotive accounts for 8%, powder coating accounts for 2% and other industries accounts for 10%.
- Market Cap: Asian paints has a market cap of ~ Rs 2.4 lakh Crore, it is followed by Berger Paints with market cap of Rs 72,600 Cr and then Kansai Nerolac with a market cap of Rs 33,000 Cr. So in terms of market cap, Asian paints is #1 followed with Berger Paints and Then Kansai Nerolac is #3.
- Last 5 year stock returns: In the last 5 years, Asian paints share price has jumped from Rs 900 to current level of Rs 2500. That’s almost 3 times return in 5 years. Berger Paint share price has jumped from Rs 190 to current level of Rs 750. That’s almost 4 times return in 5 years. Kansai Nerolac share price has jumped from Rs 160 to current level of Rs 610. That’s almost 4 times return in 5 years. So in terms of returns in last 5 years, Kansai Nerolac and Berger paints have given 4 times return and Asian paint has given 3 times return.
- Revenue: Asian Paints revenue for FY20 stood at Rs 20,211 Cr. Kansai Nerolac revenues are Rs 5280 and Berger Paint revenues stood at Rs 6366 Cr. So Asian paint is the clear leader followed by Berger Paints and then Kansai Nerolac.
- Revenue growth in last 5 years: In terms of revenue growth in the last 5 years, Asian Paints revenues have grown at a CAGR of 8.2%, Berger Paints revenues have grown at a CAGR of 8.8%, Kansai Nerolac revenues have grown at a CAGR of 8.58%. So in terms of revenue growth all these are at the same level.
- Profits: Asian Paints profits for FY20 stood at Rs 2705 Cr. Kansai Nerolac profit are Rs 521 and Berger Paint profits stood at Rs 658 Cr. So Asian paint is the clear leader followed by Berger Paints and then Kansai Nerolac.
- Profit growth in last 5 years: Asian Paints profits have grown at a CAGR of 14.16%, Berger Paints profits have grown at a CAGR of 19.95%, Kansai Nerolac profits have grown at a CAGR of 13.71%. So in terms of profit growth Berger Paint is #1 followed with Asian Paints and then Kansai Nerolac.
- ROE: Asian Paints ROE for FY20 stood at 26.7%. Kansai Nerolac ROE is 13.86% and Berger Paint profits stood at 24.74%. So Asian paint is the #1 company in terms of return on equity. It is followed by Berger Paints and then Kansai Nerolac.
- ROCE: Asian Paints ROCE for FY20 stood at 33.2%. Kansai Nerolac ROCE is 17.47% and Berger Paint profits stood at 27.14%. So Asian paint is the #1 company in terms of return on capital employed. It is followed by Berger Paints and then Kansai Nerolac.
- Debt to equity: Asian Paints debt to equity for FY20 stood at 0.11. Kansai Nerolac debt to equity is 0.05 and Berger Paint debt to equity is 0.29. So all 3 companies are comfortably placed in terms of their debt to equity ratio.
- Promoters shareholding & % change in promoters shareholding : Asian Paints promoters shareholding for FY20 stood at 52.79%. Berger Paints promoters shareholding stood at 74.99% and Kansai Nerolac promoters shareholding stood at 74.99%. So all 3 companies have good amount of holding from promoters which shows the trust of promoters in the company. Please note that there is no change in promoter shareholding in all 3 companies in the last 3 years. Asian paints has a pledged shares of 11% and Berger paint and Kasai nerolac have no pledged shares.
- Valuations: Currently, Asian paints is trading at the level of Rs 2500 with a PE ratio of 85. If you look at the historical 3-5 year PE of Asian Paints, it has been trading at a median PE range of ~ 60. So definitely the current valuation is on the higher side. One of the reasons for higher PE of 85 is due to poor earnings in June and Sep quarter because of COVID. Hence, due to fall in earnings, the PE multiple increased. Having said this, Asian Paint valuation is on the higher side. If we look at the vaulations of Berger Paints, it is trading at Rs 750 with a PE ratio of 139. The last 3-5 year median PE of Berger paint has been between 60-65. That means the valuations are very expensive. But again, one factor is due to 2 poor quarter earnings during COVID lockdown. Kansai Nerolac is trading at Rs 610 with a PE ratio of 87. If you look at the historical 3-5 year PE of Kansai Nerolac, it has been trading at a median PE range of ~ 52. So again the current valuations are on the higher side and one of the reasons is due to poor earning during lockdown. Overall, all 3 stocks are available at expensive valuations.
Based on the analysis, all 3 companies are strong players in Indian paint category. Asian paint is the leader in terms of market share, revenues and profits. In terms of revenue growth in the last 5 years, all 3 companies are at par. However, in terms of profit growth in last 5 years, Berger is #1 followed with Asian paints and then Kansai Nerolac. In terms of profitability including ROE and ROCE, Asian paints is #1 followed with Berger paints and then Nerolac. Finally, in terms of valuations, all 3 companies are at expensive valuations. The better strategy would be to buy when the valuations become a little less expensive.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.