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Industry Risk Score : PAINTS
By: Group 9 Section B• Rahul Relan
AGENDA
• Industry : Executive summary
• Company Analysis
• Competition Analysis
• Financials
• HDFC Bank
• Risks Involved
• Products and Offerings
INDUSTRY
• Executive Summary– The paint industry is divided into organized and unorganised
sector
– The Indian Paints Industry stands at Rs 112 bn, of which
75% is Decorative Paints while 25% is Industrial Paints.
– The unorganised segment plays a huge role in decorative
paint segment due to low technical know-how and highly
scattered market
– Market is seasonal in nature
DEMAND Side Analysis
– Positively related with GDP and disposable income
– Decrease in investment in Real Estate
– Increase in income levels of the consumers
INDUSTRY
• Executive Summary
Supply Side Analysis
– Dependent on raw materials, mostly petro based.
– Large distribution network is a prime requirement decorative
paints business.
– Most companies are planning CapEx to increase their installed
capacity.
Recent Developments
– Increase in the crude oil prices
– Depreciating rupee to affect imports
Government Policies
– Industrial paint segment would benefit from the excise duty
cuts in the auto sector.
– The cut in Personal income tax and waiver of Agricultural Debt
which results in the rise of disposable income
Kansai Nerolac Paints
Background– Established in 1920
– Strong corporate governance, with high focus on technology,
transformation, innovation & style
– Good brand image/recall with brands, like Impressions,
Beauty, Excel and Suraksha
– Coveted many awards in last 5 years including ICSI National
Award for Excellence in Corporate Governance
– It supplies 70 per cent of the paint requirement of Maruti
besides supplying to other customers like Telco, Toyota,
Hindustan Motors, Hero Honda, TVS-Suzuki, Mahindra &
Mahindra, Ashok Leyland, Ford India, PAL Peugeot and Bajaj
Auto.
– KNP leads the industrial segment with 41%, & owns 70% of the
market in OEM passenger car segment
Kansai Nerolac Paints
– Consistent supplies from Khakhu Enterprises.
– Ventured into eco-friendly coating, with low VOC
(Volatile Organic Compounds), has helped the customer
increase its productivity and reduce power cost.
– Believe in technology up gradations, KNP has technical
collaborations with Ashland Chemicals Inc, USA, a leader in
the petrochemical industry, Nihon Tokushu Toryo Co and
Oshima Kogyo Co Ltd, Japan.
COMPETITOR ANALYSIS
COMPETITOR ANALYSIS
Asian Paints
Berger Paints
Nerolac ICI Paints Shalimar
Net Sales3585.86 1559.75 1404.14 1025.84 256.05
Net Sales growth %
21.78 18.49 13.18 5.4 17.97
PBDIT 619.55 130.16 247.69 115.87 16.14
PAT 375.2 83.07 153.61 60.21 4.75
PAT growth % 37.92 18.18 10.94 -86.57 39.3
TNW 928.5 274.46 510.29 761.5 27.25
TOL /TNW 0.85 0.72 0.62 0.35 2.43
Current Ratio 1.15 1.33 2.7 0.81 1.18
NWC 61.1 243.74 368.5 -73.35 68.21
FINANCIALS
Profitability Ratios (in %age) 2006 2007 2008Industry (2008) 2009 2010
Total - Reserves 380.55 484.78 566.74 642.25 724.36
Total - Shareholders Funds 406.06 510.29 593.69 673.00 757.44
Reserves/ Shareholders Fund 0.94 0.95 0.95 0.95 0.96
PAT/ Sales 0.17 0.12 0.11 0.10 0.14 0.14
Retained Profit / PAT 71.41 80.66 78.95 45.32 81.42 82.06
Return on Capital Employed 54.37 35.81 36.80 42.74 37.03 35.94
Return on Equity 43.95 31.40 25.87 45.3 32.78 32.22
Capital Structure
Debt / Equity 0.18 0.16 0.13 0.15 0.14 0.14
Activity Ratios
Stock Days 85.33 72.87 65.95 46 70.37 69.96
Debtor Days 49.49 55.19 55.35 32 56.37 57.49
Creditor Days 74.84 61.43 65.39 52 59.84 57.12
Stability Ratios
Current Ratio 2.07 2.56 2.74 1.31 2.70 2.79
Acid Test Ratio 1.44 1.82 2.07 1.98 2.04
HDFC Bank
Exposure for chemical industry : Around 780 crore
(Sub Sector Paints – Can get about 78 crores)
Consortium of 5 Banks
Company Rating Analysis
COMPANY Kansai Nerolac Limited
i-RISK – CURRENT AA BASE YEAR: 2007-2008
i-RISK - PREVIOUS BASE YEAR:
EXTERNAL CREDIT RATINGS
AGENCY RATING Product
CRISIL AAA For Non Convertible Debentures
CARE P1+ Short Term Debt
GROUP KANSAI Group of Industries
INCORPORATED ON 1920
CORPORATE STATUS Listed
INDUSTRY Paints
BUSINESS Industrial Paints, Decorative paints
Assessment of Risk
STRENGTH OF THE CREDIT: Very Strong
– NPL has secured loans of only Rs 192 crores that has been secured by a charge on the fixed assets of the factory at Jainpur
– The remaining of the Net Total Assets of INR 6,916 crores are free of any charge
Assessment of Risk
RISKS PERCEIVED AND MITIGANTS
Risks Perceived:– Prices of Raw materials: Rise in raw material prices
especially crude oil prices may affect margins adversely.– Foreign Currency Risk: Due to weakening of rupee there will
be a negative impact on the performance of the company as it is a net importer.
Mitigants:– The company can hedge itself against oil price fluctuations
by employing various futures and options contracts. – The company has hedged itself against currency
fluctuations by employing various forwards and options.
Products Offered
• FUND BASED WCAP
• FUND BASED TERM LOAN
• CHANNEL FINANCING
• FOREX SWAPS
ASSESSMENT OF LIMITS
• FUND BASED WCAP – 30 crores– The company will need excess working capital financing of INR
79.2 Crores in FY 09 & FY 10– No working capital loan to finance the net working capital
position of INR 424.17 cr. as at FY 2008
• FUND BASED TERM – 20-30 crores– Not a capital intensive business; Fixed Assets to Sales Ratio is
just at 0.16 for FY 08
• LC – NIL– Raw material imports stood at INR 1,806 crores for FY 08
implying 20% of the total raw material requirement of INR 8,370 crores
• BG – NIL– Corporate guarantee provided by its holding company, Kansai
Paint Co. Ltd., Japan
• OTHERS: Channel Financing, CMS, Forex Swaps (for hedging against foreign exposures as it is a net importer by INR 1865 crores)
Terms & Covenants
TERM EXISTING PROPOSED
COVENANTS NIL
- The company will provide financial information to the bank on a regular basis- The assets can’t be sold off to the tune of more than 30% of the asset value as at FY 2008-
EVENTS OF DEFAULT
NIL
- Financials - Current Ratio above 1.33- TOL/TNW below 1.00 (annual)- Company incurring loss for 2 consecutive years
- Others - Cross default (as and when)- Change in Management (as and when)- CARE rating below A (as and when)
PRIMARY SECURITY
NIL
First charge on all current assets of the company ranking pari passu with other participating banks for WC limits, as and when.
MARGINS NIL
COLLATERAL NIL3rd/Residual charge on all fixed assets of the company including factory and buildings on pari passu terms with other banks.
GUARANTEES NIL
FUND BASED WCAP
• Purpose - Inventory Financing
• Limit – 30 crores
• Tenure – Review every year
• Interest Rate – 8.75% + 150 BP
• Collateral - First charge on all current assets of the company
FUND BASED TERM – 30 crores
• Purpose – Capacity Expansion
• Limit – 20-30 crores
• Tenure – 5 years
• Interest Rate – 8.75% + 100 BP
• Collateral - 3rd/Residual charge on all fixed assets of the company including factory and buildings on pari passu terms with other banks
Channel Financing
• Purpose – Improve Cash Cycle
• Limit – maximum 10 crores
• Tenure – Review every year
• Interest Rate – 8.75% + 175 BP
• Collateral – Bills Receivable
Cash Management Service
• Purpose – Collection & disbursement of cash
• Fee – 25 BP
Thank You