Top 5 Paint Stocks- Quantitate Analysis

Introduction:

The paint industry in India is witnessing exceptional growth in consumer space. The growing demand from the construction industry along with infrastructural development is helping the paints sector in India to augur at a greater pace.

The domestic paint industry is estimated to be a Rs 500 billion industry with the decorative paint category constituting almost 75% of the 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.

Within the Indian decorative paint segment, Asian Paints and Berger Paints are the two largest players, with the segment contributing more than 80% of their overall revenues.

Certain Key drivers for Paint Industry in India:

• Highly Competitive Environment
• Rise in Disposable Income especially in rural areas.
• Launching of Innovative Products
• High Demographic Dividend in India

Please note that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on a quantitative basis. No suggestions are being made to directly go and invest in the top-scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.

Paint Sector Quantitative Analysis

Companies selected for Analysis:

We have selected the following five Paint companies for our Quantitative Analysis.

• Asian Paints
• Berger Paints India
• Kansai Nerolac Paints
• Indigo Paints
• Akzo Nobel India

Market Capitalization of 5 Paint Stocks:

• Asian Paints- Rs. 2.81 Lakh Cr.
• Berger Paints India- Rs. 77,796 Cr.
• Kansai Nerolac Paints- Rs. 31,634 Cr.
• Indigo Paints- Rs. 12,099 Cr.
• Akzo Nobel India- Rs. 10,360 Cr.

The procedure of Analysis and its Interpretation

• These 5 Companies are analyzed on the following 17 parameters and ranked and scored accordingly. For example, the company with a higher PE ratio is provided a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
• Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.
• In the end, we have added all the points together and companies are ranked accordingly.

Parameters of Quantitative Analysis:

1) PE Ratio:

• PE of a company means that how much investors should pay for the stock based on their current earnings.
• A company with a lower PE Ratio is considered to be undervalued and has a huge potential to unlock its value. Hence, full points will be rewarded to that company.
• With the lowest PE Ratio of 28.4, Akzo Nobel India gets the first position and 5 points. And Indigo Paints with the highest PE of 170.8 among peers is awarded 1 point only.

2) EV/EBITDA:

• EV/EBITDA ratio measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This ratio assesses the overall financial performance of the firm.
• EV/EBITDA of value below 10 is considered healthy.
• Here also, Akzo Nobel India bags the first position among the Top 5 Companies with the lowest EV/EBITDA ratio of 28.4. Indigo Paints with the highest EV/EBITDA ratio of 96.3 receives the last position and one point only.

3) Return on Capital Employed (ROCE):

• ROCE signifies that how the company is using its capital to generate a return for the company and investors. The high ROCE, the better it is for the company.
• In this parameter, Asian Paints outperforms other peers by scoring the highest ROCE of 35% and hence obtains the 1^st position as well as 5 points.
• Kansai Nerolac Paints get the last position and 5^th rank due to the lowest ROCE of 17.8%.

4) Return on Equity (ROE):

• RoE signifies how well the company generates the return on shareholders’ investment. Company with higher RoE are considered good.
• In this parameter, Asian Paints again beat other peers by scoring the highest ROE of 27.4% and hence obtains the 1^st position as well as 5 points.
• Kansai Nerolac Paints with the lowest RoE of 13.6% receives the last rank.

5) Debt-to-Equity Ratio:

• The debt-to-equity ratio is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
• Accordingly, the lesser is the debt, the better it is for the company and vice-versa.
• Indigo Paints is nearly a debt-free company with a total D/E of 0.02 and hence rewarded with full points and given the first position.
• Berger Paints India has the highest D/E ratio among the peers of 0.19 and hence is given 5^th rank. Akzo Nobel India, Kansai Nerolac Paints, and Asian Paints have the D/E ratio of 0.05, 0.06, and 0.08 respectively.

6) Interest Coverage Ratio:

• The Interest Coverage ratio is in direct relation with the D/E ratio. It can be calculated by dividing EBIT from Interest Expenses.
• This ratio gives the ability of the company to pay interest from its operating profit.
• Asian Paints maintain a good Interest Coverage Ratio of 48, highest among peers, gets the first rank.
• Due to the lowest Interest Coverage Ratio of 23.2, Berger Paints India is ranked and scored accordingly.

7) Pledged %:

• Only Asian Paints have pledged their shares which is 9.44%, hence, ranked at last. But we can see that the pledge has been reduced from the previous quarter.
• All the other companies in the list have not pledged their share and hence are rewarded with full points and first rank.

8) Institutional Holding (FII + DII):

• Institutional Investors (FII + DII) as a % of Free Float has the highest stake in Kansai Nerolac Paints, collectively of 66.3% and hence Kansai Nerolac Paints is rewarded with full points and first rank.
• FIIs and DIIs also hold around 58.6% stake in Asian Paints and hence it secures the 2^nd position in this criterion and scores 4 marks.
• Indigo Paints has the lowest stake of institutional investors of 30% in the Company’s shareholding pattern and hence is given 1 point only.

9) Material Cost as a % of Operating Expenses:

• Material Cost as a % of Operating Expenses signifies that how much Material Costs the company is incurring concerning its Operating Expenses.
• The lower the number, the better it is for the company.
• Here, Indigo Paints is at 1^st position with Material Cost as a % of Operating Expenses of 52% which is lowest among peers. The company has done proper cost management to keep its costs intact.
• Kansai Nerolac Paints is at the last position with Material Cost as a % of Operating Expenses of 62% which is highest among peers.
• The overall costs have risen due to the effect of raw material inflation in the markets.

10) Operating Profit Margin (%):

• Higher the Operating Profit Margin (%) of a company, better the operational efficiency of a company and vice-versa.
• Asian Paints efficiently post the OPM of 19.8% and secures 1^st position but due to raw material inflation, the margin has fallen.
• With the lowest OPM of 17.4%, Akzo Nobel India scores the last rank among its peers.

11) Sales and Net Profit Growth- 5 Year CAGR:

• In terms of Sales Growth, Indigo Paints post the highest figure of 42.3% and hence gets the full points. Here, Akzo Nobel India got the 5^th position with sales growth in 5-year CAGR of negative (1.7%).
• Berger Paints India has registered the highest Profit after Tax (PAT) growth on 5 years CAGR basis of 12.9% and hence is rewarded with the first rank. Here Indigo Paints got 5^th rank.
• Asian Paints is looking consistent in both the factors.

12) Sales & Net Profit Growth: 3 Year CAGR:

• On a 3-Years CAGR basis, Indigo Paints outscores the other players with 20.7% Sales Growth and receives the first position and 5 points as well. Akzo Nobel India delivered poor performance and post negative Sales Growth of (6.6%) and hence is rewarded the last rank.
• About Sales Growth on a 3-years CAGR basis, Berger Paints India, Asian Paints, and Kansai Nerolac Paints are ranked 2^nd, 3^rd, and 4^th respectively.
• While Indigo Paints again ranks first with the highest PAT growth of 187.1% on a 3-Years CAGR basis due to low base effect in previous years. With the negative PAT growth of (19.6%), Akzo Nobel India is ranked 5^th and given 1 point.

13) Operating Performance Ratios- Inventory Turnover Ratio (Higher the Better):

• Inventory turnover signifies a parameter that measures how fast the inventory is sold or consumed in the given period, the higher the better.
• Here Indigo Paints secured the 1^st rank with the highest Inventory turnover of 8.55 and get full 5 points. Indigo Paints is aggressively expanding its geographical footprints and increasing its brand salience
• Berger Paints India got the last rank due to a poor Inventory turnover ratio of 5.07, hence only 1 point given.

14) Operating Performance Ratios- Cash Conversion Cycle (CCC):

• Again Indigo Paints secured the highest rank among its peers with the lowest CCC of 12.22 and get full 5 points.
• Here Kansai Nerolac Paints again got the last rank due to the highest CCC of 59.31, hence only 1 point given.

15) Market Share in Decorative Paint Industry:

• Asian Paints is at 1^st position with a market share of 42% in the decorative paints industry, hence, 5 points given.
• Akzo Nobel India has a market share of only 5% in the decorative paints industry, hence, 5^th rank given.

16) Final Score:

• After analyzing and summing up all the marks scored by the Top 5 Paint Sector Companies, Asian Paints is the front runner thereby conquers the first position in our analysis. Asian Paints scores 62, highest among all 5 companies.
• Indigo Paints, Berger Paints India, and Akzo Nobel India scored 57 points, 50 points, and 48 points respectively and hence secured 2^nd, 3^rd, and 4^th rank.
• Due to poor performance in the majority of parameters, Kansai Nerolac Paints gets the lowest score of 44 points.
• On account of healthy scores, Asian Paints appears to be a strong Paint Company.