In this article on Top Paint Stocks in 2021 by Market Cap, we spoke about the Paint industry and analyzed of top 4 stocks of the paint sector by market cap and outlook of the paint sector in 2021.
Top 4 Paint Stocks by Market Cap in 2021
We will talk about 4 stocks that operate their business in the entire India i.e. top 4 paint stocks.
The paint industry has become important in recent times as an IPO was recently launched where a lot of people showed their interest. The name of this company is Indigo paints. We thought of discussing in detail the working of the entire paint industry and 4 important players of this industry that trade on the share market.
Paint Industry
Let's firstly talk about the overview of the entire paint industry. Let's first discuss the growth drivers of the paint industry. It is very important for any industry to have end product demand. Paint demand rises with more construction of houses and the trend of urbanization. As people move/migrate towards cities the demand for paint emerges.
Increasing population, urbanization, and demand for housing create demand in the paint industry. Whenever a demand is created in an industry then it manufactures products to fulfill the demand aroused. There are a lot of other demand drivers that create paint demand. There are different companies in the paint industry that meet the demand by manufacturing products.
Let's discuss the per capita paint consumption (one-person consumption) in India as compared to other companies. Here you will get an idea of the question- Is the same amount consumed in India as in the case of other countries? or are there chances of improvement?
The per capita consumption of paints and coatings is visible. In India, this number is 4.1kg. But in the US the per capita consumption is 15.8kg. As compared to India the number of US of 4 times more. While this figure for (developing country) China is 7.2kg. While per capita consumption for South Africa is 6.2kg. South Asian countries like Indonesia have 6kg per capita consumption. From here you can understand that India's per capita paint and coating consumption is low as compared to other countries.
One point is specifically used for the paint industry. It is barriers to entry. This means that a new player cannot take the market share of other players in the industry. Hence it is said that the paint industry has high barriers to entry.
Let's discuss the reasons behind this saying.
The first and most important reason is the distribution network in the paint industry. Assume that you live in a small town and you wish to buy decorative paint for your house. Following this, you go to a local supplier. There are chances that people will buy the company's paint that is preferred by the supplier. Hence it is important that every company that operates in this industry must have a strong distribution network.
Every supplier must have its products. Whenever any end-user visits a supplier then he/she must have the option of that company. Following this, it is said that old companies have a strong distribution network. Hence it is difficult for the new players to build a strong distribution network. Hence barriers to entry are considered high.
Let's discuss the second reason for high barriers to entry.
Paint companies supply white paint color to distributors and then color is added over there. Different machines are set up at the distributor's shop that code color. The capacity of setting up machines is quite low. Every distributor can set up only one machine.
Hence it is difficult for new players to push their product and set up their machine at the distributor's place. The marketing and advertisement cost in this industry is quite high (so that people can recall their brand) So this was the discussion regarding the industry.
Apart from the industry, there is one concept that is important for you to know. It is the impact of Covid's situation on this industry. Let's discuss this in detail. We will first see quarter 1 results to understand the covid's impact. The sales/revenue of the entire industry fell by almost 50% during quarter 1. A positive thing happened in quarter 2. The industry made a comeback in the second quarter as the total sales reported were even high on a YOY comparison.
As compared to the same quarter last FY the paint industry companies reported more revenues in the second quarter this year. This is a positive feature for the entire industry. Now let's talk about the raw material used by the industry. It is said that 300 raw materials are used in the production of the paints. Out of 300, about 150 raw materials are petro-derived i.e. they are derived from oils.
In recent times when the covid situation was at the peak, the petroleum prices fell. As the crude prices fell the cost of raw material needed in this industry also fell. This benefitted the paint industry companies. The decorative paint segment is quite important in the entire paint industry. As this segment drives 75% revenue in the total paints segment. Following this, you might have seen that a lot of companies have a major focus on the decorative paints segment.
Top 4 Paint Stocks
Now let's move to the second part of the article where we will talk about the 4 companies that emerge out of the paint industry and trade on the stock market.
Asian Paints
Firstly let's talk about Asian Paints. This is a large-cap company that has delivered a 41% return to its investors. This company was impacted by covid. But after emerging out of it this company delivered a great return to its investors.
Now I will discuss in detail the Annual report of Asian paints to show you its business performance in recent times. As you can see on my screen, Asian Paints has a US$2.8 billion revenue. It is the third-largest paint company in Asia. Here are some key highlights of Asian Paints. For the last 50 years, this company is leading the paint market and it operates in 15 countries.
From here you can understand that the scale of Asian Paints is quite enormous. This company has been a market leader for a long time. It has continued innovation in its products to maintain its leadership position. Now let's talk about Asian Paints revenue and its bifurcation in different segments.
The total revenue of Asian Paints is visible. Its 84% portion of revenue emerges out of the Decorative paints segment. (In India) Apart from this its 12% and 2% business emerges out of international and industrial sector respectively. A new thing has been added over here. Asian Paints has started expanding itself in the home improvement sector that contributes to 2% of its revenue.
The share price of Asian Paints is around Rs.2,600. Its market capitalization is around Rs.2,48,000 cr.
An interesting fact over here is that company's P/E ratio is more than 100 and it is trading at premium valuations in recent times. The operating profit margin(Sales-expenses) is considered good for a company if it is high. The operating profit margin of Asian Paints is above 20%. This is the highest number in the industry. The debt-equity ratio of Asian Paints is 0.1. This is a low number. The debt is not high as compared to equity.
Berger Paints
Now let's talk about Berger Paints. This is the second-largest company in this industry. Berger Paints has 16 manufacturing plants in India. Its plants are strategically located as they are placed according to their manufacturing needs.
This lowers their cost of production and lets them supply their end products at a low cost. Besides this Berger Paints doesn't just have a presence in India but also has an international presence. It has two manufacturing plants in Nepal, one in Holland, and one in Russia as well. From here you can understand that this company not just operates in India but is trying to expand itself in other countries.
The major products of the company are in decorative paints and industrial segment. An interesting thing regarding Berger Paints is its focus on the pricing strategy. It tries to keep the pricing of its products low in comparison to its competitors so that it can penetrate better. Let me explain this to you using an example. You might know about this product of the paint industry. Its name is Primer.
The cost of Berger Paints Primer is Rs.65. While Asian Paints primer costs around Rs.80. This company focuses on its pricing strategy to acquire a good market share in the future. Berger Paints focuses on advertisement strategies and brand building to market/position its product in a better way. If any end customer goes to buy any paint-related product then he/she can recognize their brand.
The share price of Berger Paints is Rs.777. The company's market capitalization is around Rs.75,000 cr. An interesting point is that company's P/E ratio is above 100. Its P/E ratio is around 144. (As compared to) The industry's P/E ratio this number is 72. As compared to the industry this company's P/E ratio is almost double.
In the last 1 year, this company has delivered a 38% return to its investors. This can be considered a great number. The debt-equity ratio of the company's competitors is quite low. Berger Paints also has low debt. Its debt-equity ratio is 0.3. Another interesting fact is that sales of this company of last 5 years has compounded by 8%.
Nerolac Paints
Now let's talk about the third company. Its name is Kansai Nerolac. Its earlier name was Nerolac Paints. This company has 5 manufacturing units in India. The major focus areas of this company include industrial paints where the company manufactures a lot of products.
It has been focusing on this area in recent times. It also has a focus on the decorative paints segment. The distribution network of this company is quite strong. The business of the company is spread outside India- in Nepal and Srilanka.
The share price of the company is around Rs.633. While its market capitalization is around Rs.34,000 cr. Kansai Nerolac's P/E ratio is 90. (As compared to) The industry P/E ratio is 72. This company has a slightly higher P/E ratio. An interesting fact is that this company's P/E ratio is slightly low as compared to market leaders like Berger Paints and Asian Paints.
The operating profit margin is around 16%. (I told you in the beginning)Asian Paints has the best operating profit margin in the entire industry- that is around 20%. The operating profit margin is dependent on pricing. If a company keeps high prices then its operating profit margin also remains high. This company has given a 22% return to its investors in recent times. This can be considered a great number.
As compared to market leaders this company's 1-year return is a bit low. The debt-equity ratio of this company is negligible. The debt-equity ratio of the company is 0.06. As compared to other players we find that its debt-equity ratio is the lowest.
Dulux Paint
Now let's talk about Akzo Nobel. It is a subsidiary of a Dutch company- Akzo Nobel N.V. From here you can understand that it is a foreign company's subsidiary. You might have heard about its famous brand. Its name is Dulux.
We had earlier talked about this. Earlier this company's name was ICL. This company's business focus is on coatings and decorative paints. Under the decorative paints segment, it sells its products under the Dulux brand.
The share price of Akzo Nobel trades above Rs.2,300. The company's market capitalization is around Rs.10,000 cr.
This company has the lowest market capitalization out of all 4 players. Now let's discuss about the P/E ratio. This company's P/E ratio is around 58. This is the first company that has a low P/E ratio as compared to the industry. The industry's P/E ratio is 72. While the top 2 players of this industry have a P/E ratio of more than 100. Hence this company's P/E ratio of 58 is low.
This is a positive fact regarding the company. The operating profit margin of the company is around 13.5%. As compared to other players this company's operating profit margin is a bit low. But it can be considered a healthy number. In the last one year, this company has delivered a 13% return to its investors. Here I would like to remind you that Asian Paints has given a 41% return to its investors in the last one year.
Here you must see the facts through different aspects. You must obtain a deeper understanding of the company in which you are interested. You must study the financial reports wisely so that you can make an informed decision for investment.
I hope that you liked the article.
Comment below the - Which company should one invest in - out of the four discussed. (if thinking to invest in the paint industry)
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