The Indian economy is set to be among the fastest growing economies of this decade. It’s inevitable that the country's per capita disposable income will also grow.
This means we will see discretionary spending going up.
The home improvement industry is expected to be one of the biggest beneficiaries of this increased spending. Within the home improvement industry, the paint industry is set to grow by leaps and bounds.
The Indian paint industry is valued at ₹500 bn.
Interestingly, 75% of the ₹500 bn market belongs to the decorative segment (rest belongs to the industrial segment). The decorative paint segment comprises of products applied on walls and furniture.
Asian Paints and Berger Paints are the leading manufacturers of decorative paint products in India. They have been focusing on the decorative segment for decades and have dominated the market.
This article aims to compare Asian Paints and Berger Paints on various fronts and give you a sense of which is better.
Let’s get started.
Business overview
Asian Paints is the largest paint company in India whereas Berger Paints ranks second.
These companies manufacture paint products for both decorative and industrial use. But the decorative segment is the forte of these companies.
For both companies, the decorative segment constitutes more than 70% of the total revenue.
The suite of paint products offered by both companies is quite similar. Both companies also offer home painting solutions to their customers.
Asian Paints’ foray into the home decor business has enabled it to offer more products and services than Berger Paints.
The following table shows products and services offered by Asian Paints and Berger Paints.
Asian Paints has 26 manufacturing facilities across the world whereas Berger Paints has 20.
Apart from India, Asian Paints has an international presence in 14 countries and offers products through its various brands like Apcolite, SCIB, Causeway Paints, etc.
Berger Paints is present in only four other countries other than India.
Growth continues even in times of crisis
For Asian Paints, revenue has grown at a CAGR of 9.5% over the last five years whereas for Berger, the revenue has grown at a CAGR of 10.8%.
This indicates that Berger Paints has outperformed Asian Paints in terms of revenue growth over the five-year period.
However, if you look at the table below, you will notice the revenue of Asian Paints is almost 3.5x the revenue of Berger Paints.
You may ask, why?
Well, as per the timeline, Asian Paints has had a head start of 30 years. The company started its operations in 1942.
Right from its early days, it has focused on the decorative paint segment. In fact, Asian paints earns 80% of its total revenue from its decorative arm.
Berger Paints entered the segment only in the early 1970’s. Before this shift, it manufactured paints for marine and rail applications.
It was the ex-employees of Asian Paints who were responsible for this shift to the decorative segment. Indeed, these employees turned the fate of Berger Paints.
However, although Berger is the faster growing paint company, it has yet got a lot to cover.
Stable margins aided by investment in technology
The five-year average operating margin of Asian Paints stands at 18.2% compared to Berger Paints average of 14.4%.
Clearly, Asian Paints has emerged as a leader in cost management.
However, both companies understand the importance of technology which has increased the efficiency of their manufacturing processes.
Both Asian Paints and Berger Paints have initiated Research & Development (R&D) projects to develop alternative raw materials and cost-efficient paint formulations.
In the financial year 2021, Asian Paints spent ₹826 m on R&D whereas Berger Paints spent ₹188 m.
The R&D expenditure of Asian Paints stood at 0.4% of the total revenue whereas Berger Paints’ R&D expenditure stood at 0.3%.
Robust profits
Asian Paints’ net profit has grown at a CAGR of 10% over the last five years. On the other hand, Berger’s net profits have grown at a CAGR of 9.4% in the same period.
Strong distribution network
Dealers are an indispensable part of the paint business. They are the nerves of the supply chain. Asian Paints and Berger Paints go beyond their call of duty to help their dealers.
In fact, top executives at these companies have admitted that their dealers and family members are alike.
Asian Paints brokered its first dealership at Sangli, Maharashtra and since then, the number of dealers affiliated with Asian Paints has increased multifold. Today there are over 70,000 dealers affiliated to Asian Paints.
Berger Paints too, very judiciously has built its rapport with the dealers under its network. Berger Paints has over 25,000 under its distribution network.
Phenomenal returns for investors
Return on Equity (ROE) communicates how much money a company has generated on shareholder’s funds.
For Asian Paints, the five-year average ROE stands at 25%. This means if the company deploys ₹100 then it can generate a return of ₹25.
On the other hand, the five-year average ROE of Berger Paints is 22.4%.
The ROE of Asian Paints is marginally higher than that of Berger Paints.
Dividend
A company distributes its accrued profits to its shareholders in the form of dividend.
Shareholders of Asian Paints have received an average dividend of ₹11.9 over the last five years compared to shareholders of Berger Paints who received an average dividend of ₹2.1 in the same period.
The five-year average dividend payout of Asian Paints is 46.7% which is higher than Berger’s five-year average of 36.3%.
Valuations
The price to earnings ratio (P/E) and price to book value (P/BV) are valuation ratios that help in determining whether the company’s share price is overvalued or undervalued.
The P/E ratio indicates how much an investor is willing to pay for one rupee of earnings. A high P/E ratio indicates the shares are trading at a premium.
The P/BV ratio measures the market valuation of a company to its book value. A high P/BV ratio indicates the share is overvalued.
Following table shows the valuation ratios of Asian Paints and Berger Paints.
For the financial year 2021, the P/BV and P/E ratios of Asian Paints stood at 16.3 and 65.7, respectively. The five-year average of the same ratios is 14.2 and 56.9.
In the case of Berger Paints, the P/BV and P/E ratio stood at 18.1 and 84.1 respectively while the five-year average is 14.4 and 63.1.
Both seem to trade at rich valuations but when seen relatively, Berger Paints is trading at a higher PE multiple than Asian Paints even though it has been outperformed by Asian Paints on various financial metrics.
This signifies that Berger Paints is relatively overvalued.
Response to Covid-19
The nationwide lockdown to curb the spread of the virus was a major blow to the business landscape. Several industries were affected and the paint industry was no exception.
Asian Paints and Berger Paints saw the pandemic as an opportunity to gain market share in the services industry.
These companies understood the fears and concerns of their consumers. To allay fears, these companies re-launched their services with emphasis on “safety" and aggressively marketed this service.
These measures helped these companies to gain trust of their consumers and tide over the pandemic successfully.
Future prospects
In the financial year 2019, India's per capita consumption of paints stood at 4.1 kg against the global average of 13-15 kg.
The market for Indian paints and coatings is expected to expand at a CAGR of 8.6% during the forecast period of 2019–2024. Thus, there is immense headroom for the domestic market to grow in the long term.
Both companies have said the next wave of demand would come from tier 2, 3, and 4 cities.
Therefore, these companies have been positioning themselves accordingly to grab the maximum market share. They have launched “value for money" products keeping in mind the factor of affordability.
Also, there has been a shift of value from product to service.
Today, the cost of labour in painting a home is approximately at 65% of the total project cost. It’s estimated that it would go up to 90%. Asian Paints and Berger Paints aim to tap this value through their home painting solutions.
In fact, Asian paints went a step ahead to foray into the home decor business through which it offers furniture, lighting, bathroom fittings, etc.
The company has also launched “beautiful homes" an end-to-end solution from customised interior design to execution.
The prospects of both companies look bright...
Inflation concerns still linger…
An important point to add here is paint companies have been suffering pressure of steep cost inflation and competition in recent quarters.
Over the last few quarters, the sector has been feeling the pinch in its operating margins. That is because high crude prices have resulted in a sharp increase in raw material prices (55-60% of costs). Several price hikes earlier this year have also not entirely offset this.
Crude prices affect the decorative paints business more than any other. That is because it is a raw material intensive industry with more than 300 materials needed to manufacturer paints, most of which are petroleum based. As the crude oil price is moving northwards, cost of production (of several items like titanium dioxide) is galloping.
Although the problem of higher crude prices may seem temporary, it does not end there. As per few company managements, there is also trouble sourcing items like tinplate. The tinpate is used to make metal cans that store the paint. Due to delayed shipments and non-availability of containers and vessels, there has been a shortage of tinplates leading to sharp uptick in paint packaging prices.
The most startling statement about the impact of inflation on the business came from the management of Asian Paints in the latest quarter’s conference call. The company has not seen input inflation, like the current one, in the last forty years. To counter this problem and avert the impact of price hikes on volume, the company has added 40,000 retail touch points in last 18 months.
So Asian Paints may be able to tide over the cost inflation problem with its supply chain expertise. Question is – whether other paint companies will do so too?
The prospect of big profits in Indian paint sector is so alluring that two business houses with deep pockets, Jindals and Birlas, have announced their intention to enter the sector. While JSW is already in the business since last two years, Birlas through Grasim will be setting up their first paint unit in Haryana.
Also, the existing players like Indigo Paints, which recently listed, are using their innovative strategy to gain market share.
Equitymaster's View
We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster to ask her view on both companies. Here's what she had to say...
The true colours if India’s best paint companies lies in their ability to tide over volume and margin concerns with supply chain efficiencies. Buying other players in the sector could be fraught with risk if the cost concerns linger.
Which is better?
Except for revenue growth, Asian Paints has outperformed Berger Paints in every other metric.
With respect to valuations, the P/BV multiple of both companies are same. As far as P/E is concerned, Berger’s PE multiple is higher than Asian Paints PE multiple.
Hence if seen relatively, Asian Paints is trading at a lower valuation.
A keen understanding of consumption patterns, a massive and efficient supply chain gives a competitive edge to Asian Paints over its peers.
Given its size and might, Asian Paints is well positioned to gain from an increase in discretionary spending.
On the other hand, the underwhelming performance of its new businesses could reduce its ROE in the short term.
Berger’s narrow focus on products and services revolving around paints could help it grow faster than any other company but even then, it has a lot of ground to cover.
Still confused which is better?
Use our feature-rich comparison tool which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!
Since stocks from the paint sector interest you, check out Equitymaster’s powerful stock screener to find the top paint companies in India.
This article is syndicated from Equitymaster.com
