RATIO BASED COMPARATIVE ANALYSIS OF THREE COMPANIES

FROM PAINT INDUSTRY ( ASIAN PAINTS, BERGER & KANSAI NEROLAC)

SUMMARY

This report is based on the ratio based comparative analysis of the three listed companies from Paint Industry ;
Asian Paints, Berger Paints & Kansai Nerolac .

Ratios help link the three financial statements together and offer figures that are comparable between companies
and across industries and sectors. Ratio analysis is one of the most widely used fundamental analysis techniques.
For the purpose of this analysis, the commonly used ratios are grouped into five categories: activity, liquidity,
solvency, profitability and valuation. These ratios have been arrived upon from the compiled financials of each
company made from three financial statements year ended.

The aim is to arrive upon the best investment decision after completion of the analysis.

Apart from the main five ratio heads, we’ll start by looking into most basic factor:-

REVENUE GROWTH

20.00%

15.00%
Kansai Nerolac
10.00%
Berger Paints

5.00% Asian Paints

0.00%
Mar '13 Mar '14 Mar '15

Kansai Nerolac showed a bit consistency in terms of revenue growth as compared to Asian Paints that displayed
a triangle pattern but Berger paints has been constant almost in terms of Revenue growth. But other way of
analysing this is going by the MARKET CAP of the 3 companies to see the market leader & in that Berger has
shown significant growth as compared to Nerolac pertaining to the fact that both had a market cap of around
5500 crores in Mar’13 but come Mar’15; Berger stood at 15000 crore cap while Nerolac was just at 9800 crores,
but among all these the clear leader is Asian Paints that had a cap of 40000 crores by Mar’13 which grew upto
70000 crores by Mar’15. So this data clearly shows that Asian has gone way above the other two in acquiring
major market share.

A) PROFITABILITY RATIOS

Profitability ratios are arguably the most widely used ratios in investment analysis, these ratios measure the
firm’s ability to earn an adequate return. Industries that offer unique products with high barriers to entry
generally have high margins. In addition, companies may hold key competitive advantages leading to increased
margins.
1.GROSS PROFIT MARGIN

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company
controls the cost of its inventory and the manufacturing of its products and subsequently passes on the costs to
its customers.

For most firms, gross profit margin will suffer as competition increases. If a company has a higher gross profit
margin than is typical of its industry, it likely holds a competitive advantage in quality, perception or branding,
enabling the firm to charge more for its products. Alternatively, the firm may also hold a competitive advantage
in product costs due to efficient production techniques or economies of scale.

50.00%
40.00%
30.00% Kansai Nerolac
20.00% Berger Paints
10.00% Asian Paints
0.00%
Mar '13 Mar '14 Mar '15

With GP above 40% consistently; Asian Paints again proves to be best in the lot while Berger has been playing
catching up & is almost at 40% in Mar’15.

2.EBITDA (OPERATING PROFIT MARGIN)

Operating margin examines the relationship between sales and management-controlled costs. Increasing
operating margin is generally seen as a good sign, but investors should simply be looking for strong, consistent
operating margins.

20.00%

15.00%
Kansai Nerolac
10.00%
Berger Paints

5.00% Asian Paints

0.00%
Mar '13 Mar '14 Mar '15

While on one hand where Asian Paints had highest and most consistent operating margin around 17%,
interesting thing to note is that although Nerolac GP was lower but here it is almost equal or higher than Berger.
3.NET PROFIT MARGIN

Net profit margin compares a company’s net income to its net revenue. This ratio is calculated by dividing net
income, or a company’s bottom line, by net revenue. It measures a firm’s ability to translate sales into earnings
for shareholders. Once again, investors should look for companies with strong and consistent net profit margins.

14.00%
12.00%
10.00%
8.00% Kansai Nerolac
6.00% Berger Paints
4.00% Asian Paints
2.00%
0.00%
Mar '13 Mar '14 Mar '15

While Berger’s Net margin has been constantly around 7% & Asian again leading the chart with 11.5%; Nerolac
surprisingly has seen drastic reduction in Net profit margin from 10% in Mar’13 to 7% almost by Mar’15, which
is due the fact that Nerolac had an unscheduled other income of around 130 crores in Mar’13 which was not
there in other two years.

4.ROA

Return on assets is a measure of how efficiently a firm utilizes its assets. A high ratio means that the company is
able to efficiently generate earnings using its assets.

25.00%

20.00%

15.00% Kansai Nerolac

10.00% Berger Paints

Asian Paints
5.00%

0.00%
Mar '13 Mar '14 Mar '15

Asian paints proved to be the best in class with ROA at around 20% consistently while Berger being second
with 12%-14% but most fluctuation has been shown by Nerolac again.
5. ROE

While return on assets measures net income, which is return to equity holders, against total assets, which can be
financed by debt and equity, return on equity measures net income less preferred dividends against total
stockholder’s equity. This ratio measures the level of income attributed to shareholders against the investment
that shareholders put into the firm. It takes into account the amount of debt, or financial leverage, a firm uses.
Financial leverage magnifies the impact of earnings on ROE in both good and bad years. If there are large
discrepancies between the return on assets and return on equity, the firm may be incorporating a large amount of
debt. In that case, it is prudent to closely examine the liquidity and solvency ratios.

50.00%
40.00%
30.00% Kansai Nerolac

20.00% Berger Paints

10.00% Asian Paints

0.00%
Mar '13 Mar '14 Mar '15

Asian again has a very healthy ROE , Berger presenting a satisfactory report while Nerolac again has been lower
and volatile in its ROE as well.

B)LIQUIDITY RATIOS

Liquidity ratios are some of the most widely used ratios, perhaps next to profitability ratios. They are especially
important to creditors. These ratios measure a firm’s ability to meet its short-term obligations.

1.CURRENT RATIO

The current ratio measures a company’s current assets against its current liabilities. The current ratio indicates if the
company can pay off its short-term liabilities in an emergency by liquidating its current assets. Current assets are found at
the top of the balance sheet and include line items such as cash and cash equivalents, accounts receivable and inventory,
among others.

A low current ratio indicates that a firm may have a hard time paying their current liabilities in the short run and deserves
further investigation. A current ratio under 1.00x, for example, means that even if the company liquidates all of its current
assets, it would still be unable to cover its current liabilities.

A high ratio indicates a high level of liquidity and less chance of a cash squeeze. A current ratio that is too high, however,
may indicate that the company is carrying too much inventory, allowing accounts receivables to balloon with tax payment
collection standards or simply holding too much in cash.
 2.50
2.00
1.50 Kansai Nerolac

1.00 Berger Paints

0.50 Asian Paints
0.00
Mar '13 Mar '14 Mar '15

With a Current ratio of above 1 consistently, Berger is the most liquid among three , Nerolac coming second
while Asian’s current ratio going slightly below 1 in Mar’15 as its Cash reduced significantly in Mar’15.

2. QUICK RATIO

The quick ratio is a liquidity ratio that is more stringent than the current ratio. This ratio compares the cash, short-term
marketable securities and accounts receivable to current liabilities. The major line item excluded in the quick ratio is
inventory, which can make up a large portion of current assets but may not easily be converted to cash. During times of
stress, high inventories across all companies in the industry may make selling inventory difficult. In addition, if company
stockpiles are overly specialized or nearly obsolete, they may be worth significantly less to a potential buyer.

1.20
1.00
0.80
Kansai Nerolac
0.60
Berger Paints
0.40
Asian Paints
0.20
0.00
Mar '13 Mar '14 Mar '15

Clearly visible that Berger has quite healthy cash margins while Nerolac being second best with Asian lagging
drastically in this due to cash shortage when its current liabilities huge figure is considered.

C)ACTIVITY RATIO

Activity ratios are used to measure how efficiently a company utilizes its assets. The ratios provide investors with an idea of
the overall operational performance of a firm and basically are “turnover” ratios that relate an income statement line item to
a balance sheet line item.

The activity ratios measure the rate at which the company is turning over its assets or liabilities. In other words, they present
how many times per year inventory is replenished or receivables are collected.

For the sake of convenience, instead of having three different charts for Receivables, Payables & Inventories; all three have
been compiled into one as Working capital days for a short yet better picture.
1.WORKING CAPITAL DAYS

It is comprised of three main factors which we’ll understand first:

a) Inventory turnover: Inventory turnover is calculated by dividing cost of goods sold by average inventory. A
higher turnover than the industry average means that inventory is sold at a faster rate, signaling inventory
management effectiveness. Additionally, a high inventory turnover rate means less company resources are tied up
in inventory. However, there are usually two sides to the story of any ratio. An unusually high inventory turnover
rate can be a sign that a company’s inventory is too lean, and the firm may be unable to keep up with any increased
demand.
b) Receivable turnover: This ratio is a measure of how quickly and efficiently a company collects on its
outstanding bills. The receivables turnover indicates how many times per period the company collects and turns
into cash its customers’ accounts receivable. Once again, a high turnover compared to that of peers means that
cash is collected more quickly for use in the company, but very high receivables turnover ratio can also mean that
a company’s credit policy is too stringent, causing the firm to miss out on sales opportunities.

c) Payables turnover: Payables turnover measures how quickly a company pays off the money owed to suppliers.
The payables turnover increases as more purchases are made or as a company decreases its accounts payable. A
high number compared to the industry average indicates that the firm is paying off creditors quickly, and vice
versa. An unusually high ratio may suggest that a firm is not utilizing the credit extended to them, or it could be
the result of the company taking advantage of early payment discounts. A low payables turnover ratio could
indicate that a company is having trouble paying off its bills or that it is taking advantage of lenient supplier credit
policies.

Now combining all three turnover days by adding Inventory & Receivable days and reducing Payable days will
yield Working Capital days or cash conversion cycle which ideally should be as low as possible that will denote
efficiency in business management of company.

60.00

40.00
Kansai Nerolac
20.00
Berger Paints
0.00
Mar '13 Mar '14 Mar '15 Asian Paints
-20.00

-40.00

While on one hand where Berger has improved its WC days and Nerolac being worst performer; Asian paints
has excellent cash conversion cycle which will make it look invincible when it comes to management.
2.ASSET TURNOVER

Asset turnover measures how efficiently a company uses its total assets to generate revenues. A low asset turnover ratio may
mean that the firm is inefficient in its use of its assets or that it is operating in a capital-intensive environment. Additionally,
it may point to a strategic choice by management to use a more capital-intensive (as opposed to a more labor-intensive)
approach.

2.00

1.50
Kansai Nerolac
1.00
Berger Paints
0.50 Asian Paints

0.00
Mar '13 Mar '14 Mar '15

There is not much of a difference among all three in this aspect but still Berger being slightly better.

D)SOLVENCY RATIOS

Solvency ratios measure a company’s ability to meet its longer-term obligations. Analysis of solvency ratios provides insight
on a company’s capital structure as well as the level of financial leverage a firm is using.

Some solvency ratios allow investors to see whether a firm has adequate cash flows to consistently pay interest payments
and other fixed charges. If a company does not have enough cash flows, the firm is most likely overburdened with debt and
bondholders may force the company into default.

1.DEBT TO ASSETS:

The debt-to-assets ratio is the most basic solvency ratio, measuring the percentage of a company’s total assets that is
financed by debt. The ratio is calculated by dividing total liabilities by total assets. A high number means the firm is using a
larger amount of financial leverage, which increases its financial risk in the form of fixed interest payments.

0.200

0.150
Kansai Nerolac
0.100
Berger Paints
0.050 Asian Paints
0.000
Mar '13 Mar '14 Mar '15

Although the ratio is healthy for all three but on comparison basis, Berger’s position is alarming when it comes
to long term liabilities while Asian has again come back to being best in class.
2.DEBT TO EQUITY:

The debt-to-equity ratio measures the amount of debt capital a firm uses compared to the amount of equity capital it uses. A
ratio of 1.00x indicates that the firm uses the same amount of debt as equity and means that creditors have claim to all assets,
leaving nothing for shareholders in the event of a theoretical liquidation.

0.400
0.300
Kansai Nerolac
0.200
Berger Paints
0.100
Asian Paints
0.000
Mar '13 Mar '14 Mar '15

Again D/E ratio being healthy for all three but is yet again alarming for Berger while the debt is almost 0 for
Asian Paints which is quite remarkable for a giant of a company like this.

3.FINANCIAL LEVERAGE: ( Average Total Assets/ Average Total Equity )

This will ideally move in tandem with D/E but can be higher at times as major part of Assets might be financed
by external factors like Current Liabilities but is acceptable as long as companies Long term assets are not being
financed by Short term Funds.

2.50
2.00
1.50 Kansai Nerolac
1.00 Berger Paints
0.50 Asian Paints
0.00
Mar '13 Mar '14 Mar '15

Although the Debt position is quite healthy for Asian Paints but pertaining to its cash shortage when compared
to Current Liabilities, its leverage is not in line unlike other two with D/E but is still not that alarming.

4.INTEREST COVERAGE RATIO

The interest coverage ratio, also known as times interest earned, measures a company’s cash flows generated compared to its
interest payments. The ratio is calculated by dividing EBIT (earnings before interest and taxes) by interest payments. The
higher the figure, the less chance a company has of failing to meet its debt repayment obligations. A high figure means that a
company is generating strong earnings compared to its interest obligations. With interest coverage ratios, it’s important to
analyze them during good and lean years. Most companies will show solid interest coverage during strong economic cycles,
but interest coverage may deteriorate quickly during economic downturns.
 20000.00

15000.00
Kansai Nerolac
10000.00
Berger Paints
5000.00 Asian Paints
0.00
Mar '13 Mar '14 Mar '15

Although this is quite healthy for other two as well but the skyscraping figure of Nerolac is due to the fact that it
has negligible interest that is in decimals to be more precise thus making the ratio look so huge. Asian has again
been a consistent performer with the ratio at 65 in Mar’15 as compared to Berger’s 12 in Mar’15.

E)VALUATION RATIOS

These are the ultimate set of ratios that will help in analysing & arriving to the final investment decision making
with some actual projection figures and takes into account some important factors like P/E ratio, EPS, P/BV
ratio, Price to cash flow etc. Basically these set of ratios will reveal the actual valuation of a company purely
from an investor’s POV and proves to be a big deciding factor for investment decisions.

1.SUSTAINABLE GROWTH RATE:-

The sustainable growth rate (SGR) is the maximum rate of growth that a firm can sustain without having to increase
financial leverage or look for outside financing. The SGR is a measure of how large and how quickly a firm can grow
without borrowing more money. For a firm operating above its SGR, sustaining growth can be difficult in the long term due
to strained financial resources or overextended financial leverage, in which case the firm should borrow funds to facilitate
prolonged growth. Meanwhile, firms that fail to attain their SGR are at risk of stagnation. The SGR calculation assumes that
a company wants to maintain a target capital structure of debt and equity, keep a static dividend payout ratio and accelerate
sales as quickly as the organization allows.

30.00%

20.00% Kansai Nerolac

Berger Paints
10.00%
Asian Paints
0.00%
Mar '13 Mar '14 Mar '15

Thus we can see that Asian Paints has maintained and grown significantly in this scenario meaning that it’s existing setup is
able to maintain around 20% growth yearly as compared to other two where they are decreasing & fluctuating yet hovering
around mark of 10% only.
2.PEG RATIO:-

The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its
earnings for a specified time period. The PEG ratio is used to determine a stock's value while taking the company's earnings
growth into account, and is considered to provide a more complete picture than the P/E ratio. The lower the PEG ratio, the
more the stock may be undervalued given its earnings performance. The degree to which a PEG ratio value indicates an over
or underpriced stock varies by industry and by company type, though a broad rule of thumb is that a PEG ratio below one is
desirable.

5.00
4.00
3.00 Kansai Nerolac

2.00 Berger Paints

1.00 Asian Paints

0.00
Mar '13 Mar '14 Mar '15

Undoubtedly Asian Paints is the standout winner among all three as even having a high PE is justified by the
higher growth rate as well.

3.DUPONT ANALYSIS:

According to DuPont analysis, ROE is affected by three things: operating efficiency, which is measured by profit margin;
asset use efficiency, which is measured by total asset turnover; and financial leverage, which is measured by the equity
multiplier.
DuPont analysis involves examining changes in these figures over time and matching them to corresponding changes in
ROE. By doing so, analysts can determine whether operating efficiency, asset use efficiency or leverage is most responsible
for ROE variations.

50.00%

40.00%

30.00% Kansai Nerolac

20.00% Berger Paints

Asian Paints
10.00%

0.00%
Mar '13 Mar '14 Mar '15

Pertaining to good Net profit margins, Asset turnover & a stable financial leverage structure; Asian Paints looks
to be most assuring while Kansai looks very volatile.
CONCLUSION:

On first look we might conclude that Asian Paints looks most sound & assuring investment scrip due to its good
revenue growth , healthy profitable margins, good debt ratios, sustainable growth ; Asian Paints do look to be
more of a safe investment rather than a good return generating investment as all of these ratios are trailing
basis and one of the major concerns with Asian is severe cash shortage which undoubtedly will disrupt some of
the healthy looking figures in case it continues its growth rate. Thus according to me Asian paint is more of a
safe investment but not a great return generating.

Now comparing Nerolac & Berger together , both were more or less on similar lines and not much alarming
signs were visible for these two scrips even though they were lagging Asian and Kansai was showing volatility
at times but there were some serious positive indicators visible that prompt me to bet on Kansai Nerolac for
some decent returns among all three like negligible or no debt, under utilised capacity and a huge growth scope
due to that.

Final Verdict- KANSAI NEROLAC for investment for approx 3 years minimum .