Working Capital Management of Asian Paints Ltd. and Nerolac Paints Ltd.

in
India- A Comparative Study
Merajud Din Drangay1 & Dr. N. Periyasami2
Research Scholar, Department of Commerce, Annamalai University1
Associate Professor, Department of Commerce, Annamalai university2
Email: merajdin333@gmail.com

Abstract
The main part of the financial management is working capital management and it is
important for the development of an organisation. Working capital management is one of the
vital important financial decisions in business that represent the management efficiency.
Working capital is considered to be life-giving force to an economic entity. When considering
about the corporate management, working capital is found to be the most important factor for
increasing the efficiency of an organization. It helps in fulfilling the short-term financing
requirements of a corporate sector which includes maintaining the best possible balance of
accounts receivables, accounts payables and inventory. In this study the researcher tried to
carry out a comparative analysis on working capital management of major two Indian Paint
companies namely Asian Paint and Nerolac Paint. The aim of this study is to analyze which
company’s performance is better than other company. For this analysis researcher have use only
of secondary data from companies’ websites, companies’ annual reports and financial websites
like money control .com for five years 2013-2017.for data analysis researcher have selected the
technique of ratio analysis.
Key Words: Working Capital, Asian Paint, Nerolac Paint, Current ratio, Quick ratio,
INTRODUCTION

Working Capital is the life blood of every business concern. Business firm cannot make
progress without adequate working capital. Inadequate working capital means shortage of inputs,
whereas excess of it leads to extra cost. So the quantum of working capital in every business firm
should be neither more nor less than what is actually required. The management has to see that
funds invested as working capital in their organization earn return at least as much as they would
have earned return if it invested anywhere else. At the time of increasing capital costs and scare
funds, the area of working capital management assumes added importance as it deeply influences
a firm's liquidity and profitability.

A firm may exist without making profits but cannot survive without liquidity. The
function of working capital management organization is similar that of heart in a human body.
Also it is an important function of financial management. The financial manager must determine
the satisfactory level of working capital funds and also the optimum mix of current assets and
current liabilities. He must ensure that the appropriate sources of funds are used to finance
working capital and should also see that short term obligation of the business are met well in
time.

The aim of good working capital management is to maintain balance in having sufficient
working capital to ensure that the business is liquid to meet its current requirements. A this stage,
it must be noted that being liquid does not mean to be in such a way that it affect or
reduce the profitability of the business. Rather, it means to maintain balance by finding ways to
smooth out cash payments in order to keep working capital stable. Thus, the importance of
managing good working capital emerges due to the fact a business that manages its working
capital effectively can survive while meeting its day-to-day

REVIEW OF THE LITERATURE

Misra (1975) in her study entitled the problems of working capital with special reference
to six selected public sector undertakings in India over the period 1960- 61 to 1967-68. This
study Analysis the financial ratios and responses to a questionnaire revealed somewhat the same
results as those of NCAER study with respect to composition and utilization of working capital.
In all the selected enterprises, inventory constituted the more important element of working
capital.
Mukti R. Barot (2016). In this study the researcher tried to carry out a comparative
analysis on working capital management of Raymond and vardhman textile limited. The aim of
this study is to analyze which company’s performance is better than other company. For this
analysis researcher have use only of secondary data for ten years 2006-2015.for data analysis
researcher have selected the technique of ratio analysis.

Karamjeet Singh and Firew Chekol Asress (2010), concluded that firms which have
adequate working capital in relation to their operational size are performed better than those
firms which have less than the required working capital in relation to their operational size. If
firms actual working capital is below the required working capital in relation to their operational
size, firms are forced to produce below their optimal scale and this create problem to run day to
day activities smoothly, so this lead firms to generate low return on their investment.
PROFILE OF THE COMPANIES

ASIAN PAINTS LTD.

Asian Paints India Ltd is India’s largest paint manufacturer with a 35% overall market
share covering both the industrial as well as the decorative segment. The company has a
dominant position in the decorative paints industry with a market share of 60%. Overall Asian
Paints is the 10th largest paint producer in the world with aspirations to become the 5th largest.

Asian Paint is able to leverage its dominant position within the decorative paints segment
(currently 5th largest in the world) to drive its future growth. The decorative paints division has
shown promising growth in the past, along with comfortable margin performance. In India
currently the decorative paints segment is considerably bigger than the industrial paints division.
The decorative paints division is primarily driven by growth in the real estate sector, rising
purchasing power and rapid urbanization. These factors will continue to contribute to the
revenues in the coming years as a part of India’s growth story.

Asian Paints is currently the market leader in the Indian paint industry. Even though its
product portfolio is biased more towards the decorative paints segment, it is about to change that.
The next phase of growth will be embarked by the industrial paints segment. The firm has been
heavily investing to develop a strong industrial paint product portfolio to bet on India’s rampant
industrialization. Recent changes in the government policy to revive the infrastructure sector will
also greatly benefit this segment. However within the industrial paints segment, APNT has a
strong foothold in the automotive coatings segment where it operates through a joint venture
with PPG, a worldwide leader in the coating industry.

Kansai Nerolac Paint

Kansai Nerolac paint is a subsidiary of Kansai Paints, Japan. With more than 92 years of strong
foundation the company is geared to set up its operations firmly in India. With continuous R&D
activities, strong marketing and brand creation initiatives along with being one of the pioneers in
the eco friendly no lead added paint space the future seems promising. Kansai Nerolac Paint has
remained surefooted on its expansionary plans and has been strengthening the supply chain
infrastructure to take on its rivals. Aggressive expansions have helped Kansai Nerolac Paint
assume a prominent scale and presence over the past few years and recently it acquired the
Shalimar Paints manufacturing facility located in Nepal. Maruti Suzuki remains one of its top
clients for automotive paints.

Kansai Nerolac Paint is a leader in the industrial paints segment with a market share of
44% and contributing about 45% to its overall revenues. Within this segment its primary
activities extend into automotive, industrial, powder, marine and protective coatings. Kansai
Nerolac Paint also dominates the automotives coatings market with a 60 % share. Further
bifurcations within this sub segment can be classified as follow: 90% share in passenger cars,
60% in LCV’s and more than 40% in two wheelers & HCV’s.

Kansai Nerolac Paint is currently the third largest player in the decorative paints segment
with a 16% market share and contributing almost 55% to the total revenues. Kansai Nerolac
Paint is the leader in industrial paints and is hoping to recreate the same foothold in the
decorative paints segment by steadily increasing its market share. Kansai Nerolac Paint has a
presence across the whole nation with 5 factories and a dealer network comprising of 13000. The
company currently dominates the northern region but has a relatively weaker hold in the south.

OBJECTIVES OF THE STUDY

1. To determine the efficiency of the working capital through ratio analysis.

2. To compare the efficiency of working capital management in Paint companies
3. To reach the final suggestions and conclusion.

METHODOLOGY

The study is analytical and empirical in nature based on secondary data. For present study
a sample of two Paints companies listed at Bombay Stock Exchange (BSE) has been selected
using convenience sampling for the period of five years i.e. 2012 to 2017 .The Sample
companies are Asian Paints ltd. and Nerolac Paints ltd. The data have been collected from
secondary sources viz., annual reports and accounts of selected companies and
financial journals.

Working Capital Analysis

In this paper, an attempt is made to analyze the change in working capital adequacy and
financing pattern of the working capital position of the company. Funds are needed for short
term purposes for the purchase of raw material, payment of wages and other day-to-day expenses
etc. Financial ratio analysis helps us to understand how profitable a business is, if it has enough
money to pay debts and we can even tell whether its shareholders could be happy or not.
Financial ratios allow for comparisons:

 Between companies
 Between industries
 Between different time periods for one company
 Between a single company and its industry average

To evaluate the performance of a firm, its current ratios will be compared with its past
ratios. When financial ratios over a period of time are compared, it is called time series or trend
analysis. It gives an indication of changes and reflects whether the firm‘s financial performance
has improved or deteriorated or remained the same over that period of time. It is not the simply
changes that has to be determined, but more importantly it must be recognized that why those
ratios have changed. Because those changes might be result of changes in the accounting polices
without material change in the firm‘s performances. Another method is to compare ratios of one
firm with another firm in the same industry at the same point in time. This comparison is known
as the cross sectional analysis. It might be more useful to select some competitors which have
similar operations and compare their ratios with the firm‘s. This comparison shows the relative
financial position and performance of the firm.

Following Ratios are used for this Study

 Current Ratio
 Quick Ratio
 Working Capital Turnover Ratio
 Current Assets to Proprietary Fund Ratio
1. Current Ratio

The current ratio is found by dividing current assets by current liabilities. A ratio of 1 means
the business has just enough current assets to pay current liabilities. Ratios above 1 mean a firm
has more current assets than current liabilities; ratios below 1 mean more current liabilities than
current assets. Investors typically prefer a lower current ratio because it shows that a firm's assets
are working to grow the business.
 Current Ratio = Current Assets
Current Liabilities

Table 1.1
Current Ratio
Year Asian Paint Nerolac Paint
2012-2013 1.44 2.69
2013-2014 1.25 2.49
2014-2015 1.10 1.84
2015-2016 1.02 1.97
2016-2017 1.25 1.69
Average 1.21 2.14
Source: Secondary Data

Figure 1.1

Current Ratio
3
2.5
2
Percentage

1.5
1
0.5
0
2012- 2013- 2014- 2015- 2016-
2013 2014 2015 2016 2017
Year Asian Paint 1.44 1.25 1.1 1.02 1.25
Year Nerolac Paint 2.69 2.49 1.84 1.97 1.69

In the above table 1.1, it is observed that the average current ratio for the Asian Paint is
1.21 percent, and for the Nerolac Paint the average current ratio is 2.14 percent during the five
years study period from 2013-2017. In the year 2015-16 it was found the minimum current ratio
for the Asian Paint is 1.02 and high in the year of 2012-13 is 1.44. For the Nerolac Paint it is
found that in the year 2016-17 there is low current ratio i.e., 1.69 and high in the year of 2012-13
which is 2.69. Therefore the current ratio for both the companies during this study period is
Satisfactory. Also it was found that the current ratio for the Nerolac Paint is better than the Asian
Paints.

2. Quick Ratio

The quick ratio, also called the acid test, subtracts inventory from current assets before
dividing them by current liabilities. The acid test gives a more accurate view of the firm's short-
term liquidity than the current ratio because it removes inventory that the firm may not be able to
sell from the equation.

Quick Ratio = Current Assets -Inventory

Current Liabilities

Table 1.2
Quick Ratio
Year Asian Paint Nerolac Paint
2012-2013 0.67 1.67
2013-2014 0.59 1.62
2014-2015 0.45 0.94
2015-2016 0.43 0.81
2016-2017 0.61 0.84
Average 0.55 1.67
Source: Secondary Data

Figure 1.2

Quick Ratio
2

1.5
Percentage

0.5

0
2012- 2013- 2014- 2015- 2016-
2013 2014 2015 2016 2017
Asian Paint 0.67 0.59 0.45 0.43 0.61
Nerolac Paint 1.67 1.62 0.94 0.81 0.84
 In the above table, it is found that the average Quick ratio for the Asian Paint is 0.55
percent and 1.67 percent average ratio for the Nerolac Paint during the study period from 2103-
2017.The minimum Quick ratio of Asian Paint is 0.43in the year 2015-16 and maximum Quick
ratio 0.67 in the year 2012-13. For the Nerolac Paint it is found that in the year 2012-13 its
maximum Quick ratio is 1.67 percent and low Quick ratio is 0.81 percent in the 2015-16. From
the above graph of Quick ratio it is clear that the position of Nerolac is better because higher
quick ratio indicate better position of the firm in comparison Asian position is going down in
2014-15 and 2015-16.

3. Working Capital Turnover Ratio:

A higher ratio indicates efficient utilization of working capital and a low ratio indicates,
otherwise but a very high turnover of working capital is a sign of over trading and may put the
concern into financial difficulties. This ratio indicates the number of times the working capital is
turned over in the course of a year.

Working capital Turnover Ratio= Net Sales

Net Working Capital
Where:
Working Capital = Current Assets – Current Liabilities

Table 1.3
Working Capital Turnover Ratio
Year Asian Paint Nerolac Paint
2012-2013 11.43 3.84
2013-2014 21.86 4.21
2014-2015 41.23 7.39
2015-2016 43.63 6.41
2016-2017 16.01 6.94
Average 26.83 5.76
Source: Secondary Data
 Figure 1.3

Working Capital Turnover Ratio

50
40
Percentage

30
20
10
0
2012-
2012 2013- 2014- 2015- 2016
2016-
2013 2014 2015 2016 2017
Asian Paint 11.43 21.86 41.23 43.63 16.01
Nerolac Paint 3.84 4.21 7.39 6.41 6.94

The table shows the change of working capital turnover ratio of Asian Paint and Nerolac
Paint for the study period from 2013-17.The
2013 maximum working capital turnover ratio of the
Asian Paint is 43.63 in the year 2015-16,
2015 and minimum 11.43 is in the year of 2012
2012-13. On the
other side the Nerolac Paint company Working Capital Turnover ratio is maximum is 7.39 in the
year of 2014-15
15 and minimum is 3.84 in the year of 2012-13.
2012 A higher working capital turnover
ratio is better, it means that the company is utilizing its working capital more efficiently i.e.
i.e.,
generating more revenue using less investments. So Asian Paint has a good working capital
turnover ratio as compared to the Nerolac Paint during this study period from 2013
2013-17.

4. Current Assets to Proprietary Fund Ratio

The ratio of current assets to proprietary fund is obtained by dividing the value of current
assets by the amount of proprietary fund. The purpose of this is to show the percentage of
propriety funds invested in current assets.

Current Assets to Proprietary Fund Ratio = Current Assets

Shareholders Fund
Where:

Shareholders Fund= Share Capital + Reserves Surplus

 Table 1.4

Current Assets to Proprietary Fund Ratio

Year Asian Paint Nerolac Paint
2012-2013 1.03 1.21
2013-2014 1.24 1.18
2014-2015 1.39 1.43
2015-2016 1.93 1.54
2016-2017 1.67 1.53
Average 1.25 1.37
Source: Secondary Data

Figure 1.4

Current Assets to Proprietary Fund Ratio

2.5

2
Percentage

1.5

0.5

0
2012- 2013- 2014- 2015- 2016-
2013 2014 2015 2016 2017
Asian Paint 1.03 1.24 1.39 1.93 1.67
Nerolac Paint 1.21 1.18 1.43 1.54 1.53

In the above table 1.4, the change of current assets to proprietary fund ratio of both the
companies has been presented during the study period from 2013-17. The average current assets
to proprietary fund ratio are 1.25 and 1.37 of both the companies respectively. In the year 2012-
13 the minimum current assets to proprietary fund ratio is 1.03 for the Asian Paint and maximum
is 1.93 in 2015-16. On the other side related to the Nerolac Paint the minimum current assets to
proprietary fund is 1.18 in 2013-14 and maximum is 1.54 in 2015-16.

Conclusion

The study of the working capital management concerned with the companies like Asian
Paint and Nerolac Paint was listed with objective of assessing the performance of working
capital management in terms of the existing system of inventory, receivables and payables
management of the companies by analysis the financial data with help of ratio analysis and
schedules of changes in working capital. It is observed from the analysis that the working capital
of the companies is efficiently managed throughout the study period. It is also understand that
over all the working capital management of the companies is found to be satisfactory.

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