Kansai Nerolac Information

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February 24th, 20

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ANSAI NEROLAC PAINTS LIMITED HOLD

ansai Nerolac Paints Limited (KNPL) is a 70% subsidiary of Kansai Paint Company Ltd, a

ading Japanese paint company. It has strong presence in both decorative and industrial paint

egment. It is a leader in industrial paints (automotive and powder) with a market share of over

0%. It is the third largest player in decorative paints with a moderate market share of ~14%.

apacity expansion plans:- KNPL is planning to increase its capacity form its existing 2.05 lakh

ones to 3 lakh tonnes by making an investment of Rs 4,000mn, which is expected to be

ompleted by September this year at Jainpur and Hosur, which will be beneficial to cater

creasing customer demands. The company has also received board approval for brown field

apacity expansion at Bawal unit in Haryana.

ndisputed leader in industrial paint segment: - In industrial paint segment, it is the largest

nd undisputed leader in automotive segment (has more than 60% market share and supplies

more than 90% of the OEM requirements) and powder coatings. Growth of automotive paints is

rectly linked to the growth of automobile industry in India, which is projected to grow at 12%

a. in volume terms for the next 3 years as per KPMG report.

remendous growth for decorative paint segment: - Low per capita consumption of 1.5kgs

ecorative paints in India compared to other developing nations, like China (2.5 kgs), Sri Lanka

.5kgs) and Malaysia (5 kgs), provides ample opportunity for growth. The Indian paint market is

rgely dominated by unorganized players and offers tremendous scope for the paint companies

o increase their share in the market.

trong technological backup: - KNPL has strong technological backup from its parent

ompany Kansai, the largest paint company in Japan. It provides automotive paints to major

uto companies in the world like Suzuki, Toyota, Honda etc. Automotive segment contributed

45% to its overall revenue.

ased on a standalone FY14 P/E multiple of 17, the fair value for the company works out to

s. 984

ndalone Financial Snapshot

jections (Rs Mn) FY09A FY10A FY11A FY12E FY13E FY14E

enue 14,705 18,220 22,662 26,301 30,343 33,877

-Y Growth % 24% 24% 16% 15% 12%

TDA 1,574 2,637 2,905 3,436 4,091 4,560

-Y Growth % 67% 10% 18% 19% 11%

usted PAT 986 1,655 2,060 2,361 2,678 3,119

-Y Growth % 68% 24% 15% 13% 16%

Rs 18 31 38 44 50 58

S Rs 121 143 170 214 264 321

TDA % 11% 14% 13% 13% 13% 13%

M % 7% 9% 9% 9% 9% 9%

E % 15% 21% 22% 20% 19% 18%

x 20 18 15

Ratio 4.1 3.3 2.7

75

85

95

105

115

125

135BSE_SENSEX KNPL

Recommendations 20% p.a.

Buy Expected Returns from 10 to 20% p.a.

Hold Expected Returns from 0 % to 10% p.a.

Reduce Expected Returns from 0 % to 10% p.a. with possible downsi

Sell Returns < 0 %

STOCK DATABSE / NSE Code

Bloomberg Code

No. of Shares (Mn)

Sensex / Nifty

PRICE DATA

CMP Rs (22nd Feb 2012)

Beta

Market Cap (Rs mn)

52 Week High-low

Average Daily Volume

STOCK RETURN (%)

30D 3M 6M

KNPL 2% 1% 4%

Sensex 8% 15% 10%

Nifty 9% 17% 11%

SHARE HOLDING PATTERN (%)Promoter

Institution

Non Institution

Total

1 Year Price Performance (Rel. to Sensex)

9

500165 / K

KNPL

18


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February 24th, 20


USINESS PROFILE

sai Nerolac Paints Ltd. (KNPL), a subsidiary of Kansai Paint (Japan), was established in the year 1920. It is the second largest coating

mpany in India and the market leader in industrial coatings. Having completed 90 years of existence, KNPL has established itself as a

l known brand with a strong recall proposition. The company is present in decorative as well as industrial paint segments. While it

leader in industrial paints (automotive and powder), it is the third largest player in decorative paints. KNPL has a pan-India

sence and serves its customers through its 74 sales locations and 5 factories. The manufacturing operations extend across India

are located in Bawal in Haryana, Lote in Maharashtra, Jainpur in UP, Chennai and Hosur in Tamil Nadu.

disputed leader in Industrial Paint segment: - KNPL is the undisputed leader in industrial paints segment with market share of

re than 40% and contributes ~45% to its overall revenue. It caters mainly to automotive (automotive coatings) and consumer

ables (powder coatings) industry and also has presence in general industrial coatings and high performance coatings. KNPL leads

technology intensive industrial paint market due to its collaboration with world leader Kansai Paint Company of Japan (for

yester resins & acrylic resins), Oshima Kogyo Co. Ltd., Japan (for manufacturing heat resistance coatings) and PPG International

formance Coatings and Finishes, USA (for manufacturing high performance coatings for petrochemical & power sectors).

45%

55%

Indicative Revenue Break-up

Industrial Segment

Decorative Segment

mendous growth opportunity for decorative paint segment: - Indian paint industry is characterized by low per capita consumption (pcc) compa

er developing and developed countries and large unorganized market. Pcc is set to increase gradually due to improving financial status and incr

lear family culture, which in turn will generate strong housing demand (in turn driving demand for fresh and refinish paints); and urbanization is l

up trading from lime-wash kind of low end products to paints (distempers, enamels and emulsions). KNPL is one of the major organized pla

orative paints with strong brands covering all price points and distribution network spread all over India. KNPL has a market share of ~14%

orative paint segment and generates ~55% of its revenue from it. KNPL offers products across all categories through some renowned brands like N

pressions, Pearls, Beauty, Suraksha and Excel.

mpanys product portfolio

gment Interior Emulsion Enamel Designer Exterior Emulsion

miumLustre /Satin/Synthetic

Impressions

dium Impressions 24 Carat Goody Synthetic Impression Excel Total

ry LevelBeauty Premium/Flexi

CoatImpression Excel

nomical Beauty Suraksha

Undisputedleader industrial segment market shamore than 4

KNPL leadtechnologyintensiveindustrial market42%

16%

13%

5%

24%

Industrial Paints Market Share

Kansai NerolacPaints

Berger Paints

Asian Paints

Shalimar Paints

Others

32%

25%12%

31%

Kansai (India) Decorative PaintSegment Revenue

Emulsions Enamels Distamper Others


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February 24th, 20


NDUSTRY OVERVIEW

FY11, the Indian economy has seen good growth. Demand across various key end user segments (be it housing, automobiles, consumer durablesen robust. The paint industry as a whole is expected to have grown by 22% in FY11. During the year, KNPL has grown by 26%, supported by gr

ross all segments.

sing income and aspiration levels of young demography along with changing lifestyle has catapulted the demand for both repainting and fresh pa

espite slowdown in FY09, paint industry reported robust double digit growth in the last two years on the back of higher demand. Going ahea

lieve demand scenario to remain strong backed by higher discretionary spending, increasing penetration, high construction activities and robust gr

auto & consumer durables industries. In FY11, the industry also saw high inflation which reduced the margins for the company. The companies i

dustry took a series of internal measures in-order to minimize the impact of rising RM prices. In the decorative business, the companies were able to

the cost increases to a certain extent. However, in the industrial business, passing on the cost impact continues to be a challenge. This has had an im

the bottom line growth for the companies. As far as the market for paints segment for India is concerned, the long term fundamentals are sound an

dustry is expected to grow at about 12-13% annually over the next five years.dustry Composition

e industry size for paints is estimated at Rs. 240bn, wherein the organized sector accounts for 65% while the remaining is with the unorganized s

mprising of around two thousand small scale paint units. The decorative paints segment accounts for Rs. 180bn while industrial accounts for Rs. 60

e total paint market. Unorganized players mainly offers low quality enamels, distempers, lime wash, cement paint etc. Top organized players in

ian Paints (30% market share), Kansai Nerolac (20% market share), Berger Paints (19% market share) and ICI (12% market share). These organized pl

fers premium to high range of emulsions.

ints industry can be classified in two broad categories.

ecorative: - It accounts for 60% of the entire paint industry in India. Major segments in decorative include exterior wall paints, interior wall paints, w

ishes, enamel and ancillary products such as primers, putties etc. Demand for decorative paint is mainly driven by fresh construction (40%)

painting (60%).dustrial: - It accounts for 40% market share in Indian paint industry. The automobile segment generates more than two-third of the deman

dustrial paints, and hence is the growth driver for the segment. Industrial paints segment mostly offers products like automotive coatings (35%), po

atings (10%), and protective coatings & general industrial coatings (32%). The industrial paints segment has grown at a fast pace of more than 15% i

t 4-5 years on back of boom in auto and consumer durables demand along with rising industrial spend.

India Paint Industry

Decorative

Segment (60%)

Premium Range( High end

AcralicEmulsions)

Medium Range(Enamel Paints)

DistamperRange (Low end

Paints)

Industrial

Segment (40%)

AutomotiveSector (about2/3 rd share)

ConsumerDurables Marine

Paints otherOEM's

50%

30%

10%

5%5%

Industrial Sector Compositio

AutoPaint

HighPerfo

CoatPowdCoat

Coil C

50%

19%

17%

12%2%

Decorative Sect or Composition

Enamels

Distemper

Emulsions

Exterior Coatings

Wood Finishes


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February 24th, 20


USINESS PERFROMANCE

r Q3FY12, KNPL reported sales at Rs 6,657mn, a Y-o-Y and Q-o-Q growth of 18.79% and 8.06% respectively. It was

wer than street expectations on the back of moderation in volume growth in industrial paints, which accounts for

5% of its revenues. Decorative paints continued to perform well on the back of good volume growth and higher

alization. The blended volume growth for Q3FY12 has been ~6-7%, much lower than ~10% in Q2FY12 and ~15% in

FY12. The sales in industrial paints segment continued to suffer due to slowdown in auto industry. Volume of

ssenger vehicles registered a marginal growth of 1.45% in 9MFY12 dragged largely due to production cut on the back

labour issues at Maruti Suzuki.

e average price hike taken by the company is ~8-10% in decorative segment and ~2-3% in industrial segment in the

MFY12. Going forward, although we expect some improvement in volume growth (on back of normalization in

oduction in Maruti Suzuki) but lower growth in realization would reduce the overall growth in revenues for FY13.

0%

2%

4%

6%

8%

10%

12%

14%

-

5,000

,000

,000

,000

,000

,000

,000

,000

FY09 FY10 FY11 FY12E FY13E FY14E

Revenue, Operating & PAT Margin

Revenue (Rs Mn) EBIDTA Margin PAT Margin

0

2

4

6

8

1

1

1

1

1

2

0

1000

2000

3000

4000

5000

6000

7000

Revenues(Rsmn)

Quarterly Performance

Net Revenue (Rs mn) EBITDA Margins

eer Comparison

We are comparing KNPL with Akzo Nobel and Berger Paints, which operates under the same industry. KNPL is the leader in industrial paint segment

ndia, with a market share of over 40% and it is the third largest player in decorative paints. Going forward we believe that revenue of the firm

expected to grow by 15% annually on account of strong position in the industrial paint segment. RoE is better as compared to Akzo Nobel and same

ompared to Berger Paints. EBITDA margins are higher as compared to Berger Paints.

Any interest rate cutresult in a revival in defor new housing automobiles and, hvolume growth for pain

eer Group Comparison

ompaniesRevenue

(Rs. mn)

EBITDA

Margin (%)

PAT

Margin (%)ROE (%)

P/E

(x)

P/B

(x)

CMP

(Rs.)

FV

(Rs.)

ansai Nerolac India Ltd 24,534 13% 8.6% 23% 22.3 5.2 876 10

kzo Nobel 12,170 20% 10.0% 17% 16.6 2.8 815 10erger Paint India Ltd 25,116 10% 6.6% 23% 22.0 5.1 106 2

TM Figures


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February 24th, 20


VALUATIONS

andalone Profit & Loss Statement

articulars (Rs Mn) FY09A FY10A FY11A FY12E FY13E FY14E

et Revenue 14,705 18,220 22,662 26,301 30,343 33,877

perating Expenditure 13,131 15,583 19,757 22,866 26,252 29,317

epreciation 376 443 494 543 699 555

BIT 1,198 2,194 2,411 2,893 3,393 4,005

BIT Margin (%) 8% 12% 11% 11% 11% 12%

terest 18 12 8 8 22 58

ther Income 222 204 488 395 455 508

ofit Before Tax 1,402 2,386 2,891 3,279 3,826 4,455ess: Tax 416 731 832 918 1,148 1,337

djusted PAT 986 1,655 2,060 2,361 2,678 3,119

AT Margin (%) 7% 9% 9% 9% 9% 9%

OE (%) 15% 21% 22% 20% 19% 18%

PS (Rs) 18.3 30.7 38.2 43.8 49.7 57.9

VPS (Rs) 121 143 170 214 264 321

atio Analysis

atios (x) FY09A FY10A FY11A FY12E FY13E FY14E

urrent Ratio 1.5 1.4 1.5 2.1 2.6 2.6

ash Ratio 0.2 0.1 0.1 0.1 0.1 0.1

ebt-Equity 0.1 0.1 0.1 0.2 0.3 0.0

ales / Assets 2.0 2.1 2.3 2.0 1.6 1.5

OE % 15% 21% 22% 20% 19% 18%

OCE % 11% 17% 17% 16% 12% 13%

t the CMP, the stock is trading at 18x and 15x its FY13 and FY14 estimated EPS of Rs 50 and Rs 58, respectively.

With theowdown in automobile sales and considering automotive paints constitutes maximum of the sales for the company, we

elieve volume sales growth in the upcoming quarters would be weak for this segment. As far as the demand for

ecorative paint is concerned, it is expected to grow at a slower pace. The paint industry is raw material intensive with

ost of the products based on pertroleum. So any major fluctuation in crude oil and titanium dioxide would keep the

argins under pressure.

With increasing focus on expanding its capacities and maintaining its leadership position in industrial paint segment,

NPLs future prospects looks promising. The stock was trading at 2 year forward PE multiple of 11.9x in FY08 and has

ached 14.9x in FY12E so we expect the stock to trade at 2 year forward multiple of 17x in FY14E.

ased on a standalone FY14 P/E multiple of 17, the fair value for the company works out to Rs. 984. We recommend

HOLD rating on the stock.

With increasing f

on expanding

capacities

maintaining

leadership position

industrial p

segment, KNPLs fu

prospects lo

promising


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February 24th, 20


andalone Balance Sheet

rticulars (Rs Mn) FY09A FY10A FY11A FY12E FY13E FY14E

urces of Fundsuity Capital 270 270 539 539 539 539

serves & Surplus 6,275 7,459 8,623 10,984 13,662 16,781

areholders funds 6,545 7,728 9,162 11,523 14,201 17,320

an funds 936 1,100 825 1,825 4,825 4,825

tal 7,481 8,828 9,987 13,347 19,025 22,144

pplication of funds

t Block 2,374 2,893 2,782 3,239 5,540 3,485

pital WIP 356 164 1,036 1,036 1,036 1,036

vestments 2,944 4,015 3,718 3,718 3,718 3,718

ventories 1,706 2,474 3,541 4,471 6,676 10,163

btors 2,096 2,324 2,603 3,945 6,069 8,469

sh & bank balances 762 411 397 556 785 1,030

ans & advances 417 411 502 850 530 400

tal Current Assets 4,981 5,620 7,043 9,823 14,059 20,063

rrent Liabilities 2,442 3,043 3,636 3,156 3,945 5,082

ovisions 839 937 1,091 1,447 1,517 2,710

tal Current Liabilities 3,281 3,980 4,727 4,603 5,462 7,792

t Current Assets 1,700 1,640 2,316 5,220 8,597 12,271

her Assets 1,500

t Deferred Tax 106 115 134 134 134 134

tal 7,481 8,828 9,987 13,347 19,025 22,144

andalone Cash Flow Statement

rticulars (Rs Mn) FY09A FY10A FY11A FY12E FY13E FY14E

ofit Before Tax 1,402 2,386 2,891 3,279 3,826 4,455

tal Adjustments (PBT & Extraordinary Items) 201 255 32 543 699 555ange in Working Capital 861 (366) (822) (2,744) (3,149) (3,428)

rect Taxes Paid (419) (770) (796) (918) (1,148) (1,337)

sh Flow from Operating Activities 2,046 1,505 1,306 159 228 246

t Investment in GFA (747) (757) (1,268) (1,000) (3,000) (3,000)

e of Fixed Assets 0 0 1 0 0 0

ange in Investments (586) (1,029) 573 0 0 0

hers 155 157 129 0 0 0

sh Flow from Investing Activities (1,178) (1,629) (565) (1,000) (3,000) (3,000)

Proceed from 0ther Long Term Borrowings 8 203 0 1,000 3,000 3,000

Proceed from Short Tem Borrowings 0 0 0 0 0 0

Of the Long Tem Borrowings (51) (39) (54) 0 0 0

Of the short term Borrowings 0 0 (221) 0 0 0

Dividend Paid (324) (323) (404) 0 0 0

Net Interest Paid (18) (12) (9) 0 0 0

Others (55) (55) (67) 0 0 0

sh Flow from Financing Activities (441) (227) (755) 1,000 3,000 3,000

et Cash Flow 428 (351) (14) 159 228 246

pening Balance of Cash 481 762 411 397 556 785

osing Balance of Cash (Transferred to Balance Sheet) 909 411 397 556 785 1,030


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February 24th, 20


-

Board Of Directors

Director Name Current Position Description

Jamshed IraniIndependent Non-Executive

Chairman of the Board

Dr. Jamshed J. Irani, Ph.D., is Independent Non-Executive Chairman of the Board of Kansai Nerolac Paints Limited. He

obtained a B.Sc. from Science College, Nagpur with a Gold Medal in Geology and a M.Sc. (Geology) from the Nagpur

University, both with a first class first, M. Met and Ph.D from the University of Sheffield, U .K., with a Gold Medal for the

Ph.D. thesis. Dr. Irani, honoured with a Padma Bhushan by the Government of India in 2007, is a recipient of numerous

awards from reputed institutions in India and abroad for his contributions made to the metallurgical profession and

industry, for fostering harmonious employee-management relations in industry and for entrepreneurial success and

corporate leadership. Dr. Irani is Chairman/member of the Board of Directors of the following Companies (excluding

private companies, foreign companies and companies registered under Section 25 of the Companies Act, 1956): Tata

Sons Limited, Tata Steel Limited, Tata Motors Limited, Electrosteel Castings Limited, Repro India Limited, Housing

Development Finance Corporation Ltd, BOC India Limited, Tata Refractories Limited and TRF Limited.

Devendra KothariIndependent Non-Executive Vice

Chairman of the Board

Mr. Devendra M. Kothari is Independent Non-Executive Vice Chairman of Kansai Nerolac Paints Ltd. He is qualified

Chartered Accountant by profession and is an authority on the Indian Paints Industry. Mr. Kothari had been in the whole-

time employment of the Company for a period of 29 years, till his retirement on 30th April, 1990. During his employmen

with the Company, Mr. Kothari had an extremely tenure as the Managing Director of the Company for a period of 15

years, from 1st April, 1975 to 30th April, 1990, that witnessed the spectacular growth in turnover of the Company by ove

ten times from about Rs. 14 crores in 1975 to Rs. 147 crores in 1990. During his tenure as the Managing Director, the

Company entered into technical and financial collaboration with Kansai P aint Co. Ltd., Japan, which laid the foundation

for the Company to be the undisputed leader in the industrial paints business and paved the way for the Company to

attaining greater heights. Subsequent to his retirement as the Managing Director, Mr. Kothari was appointed as aNonrExecutive Director designated as the Vice-Chairman of the Company from 1st May, 1990, which position he

continues to hold on the Board of Directors of the Company. Mr. Kothari has also been the president/member of several

trade Associations such as the Indian Paints Association, The Chemicals & Allied Products Export Promotion Council

(CAPEXIL), The Indian Chemicals Manufacturers Association (ICMA), The Bombay Chamber of Commerce and Industry

(BCCI) and The Federation of Indian Export Organization (FIEO).

Harishchandra BharukaManaging Director, Wholetime

Director

Mr. Harishchandra M. Bharuka is Managing Director, Wholetime Director of Kansai Nerolac Paints Ltd. Mr. Bharuka, with a

varied experience of around 28 years, joined the Company on 1 st October, 1985. Mr. Bharuka was appointed on the

Board of Directors on 1st April, 1999, and was Deputy Managing Director, prior to his appointment as the Managing

Director from April 1, 2001.

Pravin Chaudhari Wholetime DirectorMr. Pravin D. Chaudhari is Wholetime Director of Kansai Nerolac Paints Limited since 1st May, 2008. Mr. Chaudhari is B.E.

(Production), MMS and was Director- Supply Chain prior to his appointment on the Board.

Hiroshi Ishino Non-Executive Director

Mr. Hiroshi Ishino is Non-Executive Director on the Board of the Company. Mr. Ishino is a Graduate of the Faculty of Law,Tokyo University and MBA of the Wharton School of University of Pennsylvania, USA. Mr. Ishino is having knowledge in

the field of Marketing. Mr. Ishino is a Senior Managing Director of Kansai Paint Co, Ltd.,Japan. Mr. Ishino is a Nominee

Director of Kansai Paint Co. Ltd., Japan, the Companys holding Company.

Y. Takahashi Non-Executive Director

Mr. Y. Takahashi is Non-Executive Director of Kansai Nerolac Paints Ltd, Representative of Kansai Paint Co. Ltd. He is a

graduate from Hitotsubashi University and has in the field of Automotive Business Marketing, Dealer Development,

Logistics, Corporate Strategy and Planning and General Administration. Mr. Takahashi has had a varied experience

working abroad in a number of countries. He joined Kansai Paint Co. Ltd., Japan at the Osaka Head Office in February,

2009 and is Senior Manager at their International Business Division.

Susim DattaIndependent Non-Executive

Director

Mr. Susim Mukul Datta is Independent Non-Executive Director of Kansai Nerolac Paints Limited. He is a reputed

management and is on the Board of Directors of a number of companies. Mr. Datta graduated with Honours in

Chemistry, Presidency College, Kolkata and obtained a Post- graduate Degree in Science & Technology from the Kolkata

University. Mr. Datta is a Chartered Engineer, Fellow, Institution of Engineers, Fellow, Indian Institute of Chemical

Engineers, Member, Society of Chemical Industry (London) and Honorary Fellow of All India Management Association.

Mr. Datta was the chairman of Hindustan Lever Limited (HLL) as well as of the Unilever Group Companies in India and

Nepal from 1990 to 1996. Mr. Datta is a Past President of Associated Chambers of Commerce and Industry and the

Council of EU Chambers of Commerce in India, a past president of Bombay Chamber of Commerce & Industry, Indian

Chemical Manufacturers Association and Bombay First. Mr. Datta is Chairman/member of the Board of Directors of thefollowing companies (excluding private companies, foreign companies and companies registered under Section 25 of

the Companies Act, 1956): Chairman of Castrol India Ltd., Philips Electronics India Ltd., IL & FS Investment Managers Ltd.,

BOC India Ltd., Tata Trustee Co. Ltd., Transport Corp. of India Ltd., and member of the Board of Directors of Peerless

General Finance & Investment Co. Ltd., Peerless Hospitex Hospital & Research Centre Ltd., Peerless Hotels Ltd., Zodiac

Clothing Company Ltd., Atul Ltd., Bhoruka Power Corporation Ltd., Deutsche Postbank Home Finance Ltd. and Rabo

India Finance Ltd. Mr. Datta is the Chairman of the following Board Committees (other than that of Kansai Nerolac Paints

Limited).

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