Paints: Spark Shade-Card
1
Executive Summary
Market data
BSE SENSEX 21265
Nifty 6318
Date Jan 17, 2014
Tejash Shah
+91 22 4228 8155
Gnanasundaram S
+91 44 4344 0062
Spark Shade-Card: 3QFY14 – ‘Showing brighter shade, somehow’
In our endeavor to keep pace with the ever evolving Indian paint sector, we publish our second edition of our quarterly
update on the sector - ‘Spark Shade-Card’. As almost all the key listed participants in the sector maintain utmost
secrecy on the vital business details, we have to rely heavily on our channel checks aka ‘Scuttlebutt notes’ and media
inputs to keep abreast with the key developments in the sector. Hence, we believe that a structured effort like ‘Spark
Shade-Card’ could not only help us paint a coherent picture on the paint industry but also update the investor
community on the near term trends and emerging long term themes.
Post our interaction with the industry participants at the end of 9MFY14, we believe the following trends are
emerging this quarter. (1) After being subdued in 1HFY14 due to extended monsoon, exterior paint sales have
bounced back sharply this quarter ... (2) … However, the good monsoon has led to increased disposable
income in the rural market which should translate to better paint demand and higher rural offtakes in the
coming quarters (3) Good festive offtakes in October and moderate sales in November and December is
expected to lead to healthy volume traction this quarter. (4) Premiumisation trend continues across decorative
paints offerings (5) We understand that the dealer network is gearing up for an another round of price increase
in February, though official communication is still awaited (6) In the industrial paints segment, pressure on
growth and margins continued in this quarter as well.
How do we see the current quarter shaping up for the coverage paint companies
Akzo Nobel India (AKZO): Growth of ~12% to be pegged on volume growth of ~9% in decoratives segment. Operating
margins to remain flat despite higher raw material costs on account of low other operating expenses. Watch out for
guidance on its business plan for the merged entities. New CEO comments on growth plans and margin expansion.
Asian Paints (APNT): Growth to be led by ~12% volume offtakes and ~4% pricing increase in the decoratives
segment. Better traction in construction chemicals to lead to higher growth. Watch out for comments on demand
outlook, raw material prices (TiO2 in particular). Some hint on the anticipated expansion in the scope of business
activities will be crucial.
Berger Paints (BRGR): Favorable mix to improve volume growth in the decorative paints segment. Growth to be led
by increasing offtakes in tier 2 and tier 3 towns. Festive off-takes have been on expected lines. Operating margins to
remain flat. Watch out for comments on Hindupur plant status and overall business outlook.
Kansai Nerolac (KNPL): Tepid industrial (automotive/non-automotive) demand to keep revenue growth subdued. On
account of high cost inventory and low pricing power in non-decorative business, gross margins are expected to
contract sequentially, albeit EBITDA margins to expand yoy. Watch out for guidance on - demand outlook across
business verticals, raw material basket (TiO2 in particular).
Stock Calls: Akzo Nobel India- Add (TP: Rs. 946), Asian Paints - Add (TP: Rs. 538), Berger Paints- Reduce (TP:
Rs. 228), Kansai Nerolac – Reduce (TP: Rs. 1088)
Stock performance
Company 1m 3m 12m
Asian
Paints2.0 3.1 15.8
Berger -5.1 -2.2 36.9
Akzo Nobel
India1.3 -2.8 -10.2
Kansai
Nerolac3.0 -0.9 3.3
Sensex 2.9 3.5 7.3
Nifty 2.7 3.8 5.3
Paints: Spark Shade-Card
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All numbers in Rs. mn except per share data
Quarter Change
Dec-13 Sep-13 Dec-12 YoY QoQ
Akzo Nobel India (Consolidated) (Date of results : YTA)
Net sales 6,768 5,764 6,052 12% 17%
EBITDA 574 376 498 15% 53%
EBITDA Margin 8.5% 6.5% 8.2% 24bps 195bps
PAT 554 337 506 9% 64%
EPS 11.9 7.2 10.9 9% 64%
Asian Paints (Consolidated) (Date of results : 20th January 2014)
Net sales 35,381 31,147 30,529 16% 14%
EBITDA 6,226 5,108 5,104 22% 22%
EBITDA Margin 17.6% 16.4% 16.7% 88bps 120bps
PAT 3,958 3,268 3,352 18% 21%
EPS 4.1 3.4 3.5 18% 21%
Berger Paints India (Consolidated) (Date of results : 1st February 2014)
Net sales 10,829 9,662 9,203 18% 12%
EBITDA 1,295 1,042 1,168 11% 24%
EBITDA Margin 12.0% 10.8% 12.7% -73bps 118bps
PAT 811 627 768 6% 29%
EPS 2.3 1.8 2.2 6% 29%
Kansai Nerolac Paints (Consolidated) (Date of results : 31st January 2014)
Net sales 8,434 7,917 7,666 10% 7%
EBITDA 967 917 846 14% 5%
EBITDA Margin 11.5% 11.6% 11.0% 43bps -12bps
PAT 549 517 489 12% 6%
EPS 10.2 9.6 9.1 12% 6%
Spark quarterly Estimates
Paints: Spark Shade-Card
AKZO concentrated on its premium offering ‘Velvet’ and exterior offering
‘Dulux weather shield’…
Source: Company, Youtube, Spark Capital
3
APNT’s premium variant Aspira advertisement was rolled out this quarter
while exterior paint brand Apex Ultima Ads were back on air.
Source: Company, Youtube, Spark Capital
Exterior Weather coat offering and Premium Silk offering advertisements
were the most prominent from Berger’s stable this quarter.
Source: Company, Youtube, Spark Capital
..while KNPL extensively promoted their exterior emulsion offering pan
India and economy Nerolac little master offering in southern markets.
Source: Company, Youtube, Spark Capital
http://www.youtube.com/watch?v=BL8OhKga9dY
http://www.youtube.com/watch?v=GU-NyONc3D4http://www.youtube.com/watch?v=3UprZimTprI
http://www.youtube.com/watch?v=fdSWyNEn1TA
All the players extensively promoted exterior offerings this quarter
Aspira Advt featuring Celebrities,
(Saif & Soha Ali Khan)
Berger exterior ads resurfaced
this quarter
While Silk Advts continued to
be prominent
Dulux Weather guard exterior
was extensively promoted…
Ad behind economy Nerolac
Master was visible in South India
… along with ‘velvet’
advertisements
Apex Ultima – Exterior paints
While external Nerolac Excel ads
were prominent pan India
Paints: Spark Shade-Card
0
50000
100000
150000
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250000
Jan
-12
Fe
b-1
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Ma
r-12
Ap
r-12
Ma
y-1
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Jun
-12
Jul-1
2
Au
g-1
2
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12
Nov-1
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Jan
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Jun
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13
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Dec-1
3
Domestic Passengercar offtakes
90
100
110
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130
140
150
Ap
r-08
Jul-
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Oct-
08
Jan
-09
Ap
r-09
Jul-
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Ap
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Ap
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Ap
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Jan
-14
0%
5%
10%
15%
20%
25%
0
10000
20000
30000
40000
50000
60000
70000
80000
New Launches Absorption Rate
4
GDP growth continues to dwindle
Source: Industry, Spark Capital
So does absorption of new real estate projects
Source: Industry, Spark Capital
Passenger cars production is struggling to bounce back
Source: SIAM, Company, Spark Capital
Demand Drivers
Price hikes affected in decorative paints to counter weakening Rupee
Source: Bloomberg, Company, Spark Capital
Weakening Rupee has
forced the companies to
affect ~4% price increase
in 3QFY13
GDP growth is expected to
remain subdued in FY14.
Real estate activity remains lackluster
9.3
7.7
11.4
9.58.7
9.29.9
7.56.5
65.1 5.4 5.2
4.7 4.8 4.4 4.8 4.7
0
2
4
6
8
10
12
YoY GDP growth Quarterly
Paints: Spark Shade-Card
150
170
190
210
230
250
270
290
TiO2 (INR/Kg)
TIO2 prices have risen on a YoY basis…
Source: Bloomberg, Spark Capital
40
45
50
55
60
65
70
0
1000
2000
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0
20
40
60
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100
120
INR
/Barr
el
US
D/B
arr
el
USD/Barrel INR/Barrel
5
...so does Rupee weakening
Source: Bloomberg, Spark Capital
…Global crude oil prices though have increased 10% YoY this quarter
Source: Bloomberg, Spark Capital
Further Diesel price hike though could force further price rise...
Source: Bloomberg, Spark Capital
Raw material price movement
Indian crude prices were up
26% YOY this quarter due
to weaker Rupee
With the Rupee weakening by 14% YoY,
pressures are evident on imported Ti02
prices and Crude oil.
Titanium Di-Oxide prices are up 11.2%
yoy this quarter on Rupee weakening
40
45
50
55
60
65
70
Diesel (INR/Lit)
Diesel prices are already up 12%
YoY in 3QFY13, further pressure
could prompt another price rise
Paints: Spark Shade-Card
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Major filings by the paint companies in the exchanges
Date Category Announcement
Asian Paints
20-Dec-2013Strike at Sriperumbudur,
Tamil Nadu
Operations at the Company's Paints Plant situated at Sriperumbudur, Tamil Nadu will be affected due to the strike called by the Asian Paints
Employees’ Union Sriperumbudur
18-Dec-2013 UpdateCompany's Chemical Plant engaged in manufacturing of Penta situated at Cuddalore, Tamil Nadu, has taken temporary shut down for annual
preventive maintenance.
25-Nov-2013 UpdateAsian Paints Industrial Coatings Limited (APICL), has closed down the operations of its powder coatings plant at Baddi, Himachal Pradesh with effect
from November 25, 2013.
11-Nov-2013 Update Announces voluntary unconditional cash offer for the shares of Berger International Limited (BIL), Singapore by Asian Paints (International) Limited
21-Oct-2013 Change in Directorate Mrs. Ina Dani, Non - Executive Director has resigned as a Director of the and the vacancy so created has been filled by the Board of Directors by
appointment of Shri Malav Dani as a Non - Executive Director
21-Oct-2013Board declares Interim
Dividend
Board of Directors of the Company at its meeting held on October 21, 2013, inter alia, have recommended payment of interim dividend of Rs.
1.10/share
Berger Paints
03-Dec-2013U.K Paints increases stake
via inter se-transfer with
promoters
U.K.Paints (which held 45.63% prior to the transaction) purchased 0.10% from Mr.Vinu Dingra (2.20% prior to the transaction) via inter se-transfer
with in promoters for Rs. ~80mn (350000 shares @Rs.228.50 per share)
Akzo Nobel India
18-Dec-2013 Change in Directorate Mr. Amit Jain, Managing Director, will be stepping down from the Board of the Company as the Managing Director with effect from close of business
on December 31, 2013.
18-Dec-2013 Change in Directorate Mr. Himanshu Agarwal, Wholetime Director and CFO has, in addition to his current role, been nominated as the Operating Head of the Company.
2-Sep-2013 Company UpdateAkzo Nobel India Ltd has submitted to BSE a press release issued on October 28, 2013, after the formal inauguration of Company's Gwalior plant by
Akzo Nobel Group CEO Mr. Ton Buchner.
Kansai Nerolac
09-Jan-2014 Company UpdateTrading Window" of the Company will remain closed from January 17, 2014 to January 31, 2014 in view of the Board Meeting to be held on January
31, 2014 to consider the unaudited financial results for the quarter ended December 31, 2013 for the Directors/ Officers and designated employees.
Source: Exchange filings, Company, Spark Capital
Corporate Announcements
Paints: Spark Shade-Card
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Key Developments
Asian Paints
Source: Company, Spark Capital
Berger Paints
Source: Company, Spark Capital
Akzo Nobel India
Source: Company, Spark Capital
Kansai Nerolac
Source: Company, Spark Capital
Strike at Sriperumbudur,
Tamil Nadu
Closed down its powder
coatings plant at Baddi,
Himachal Pradesh
Announces the launch of
Berger Silk to Nepal
Indicates robust growth
from rural India backed by
good monsoon
Mr.Himanshu Agarwal
appointed to lead
operations
Plant in Gwalior official
inaugurated.Ties-up to be the official
partner of Kidzania, India
Rolls out mobile-swipe
promotions to promote
Nerolac Excel
Paints: Spark Shade-Card
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Stock performance (%)
Company 1 month 3 months 6 months 12 months
Asian Paints 2.0 3.1 2.5 15.8
Berger Paints -5.1 -2.2 -11.6 36.9
Akzo Nobel India 1.3 -2.8 -20.2 -10.2
Kansai Nerolac 3.0 -0.9 -2.9 3.3
Sensex 2.9 3.5 7.1 7.3
Nifty 2.7 3.8 6.1 5.3
Valuations
ROE Vs PE
Source: Bloomberg, Company, Spark Capital
EPS growth Vs PE
Source: Bloomberg, Company, Spark Capital
Source: Bloomberg, Company, Spark Capital
Recap of what happened in 1HFY14
1QFY14 2QFY14
CompanyYoY Revenue
Growth
YoY PAT
Growth
YoY Revenue
Growth
YoY PAT
Growth
Asian Paints 11.5% -4.6% 18.3% 36.7%
Berger Paints 12.6% 10.6% 19.1% 17.4%
Akzo Nobel India 1.9% -42.8% 10.1% -24.7%
Kansai Nerolac 9.5% -3.8% 16.1% 9.1%
Source: Bloomberg, Company, Spark Capital
PPG industries
Sherwin Williams
Akzo Nobel
Nippon Paints
Kansai Paints
Asian Paints
Berger Paints
Akzo Nobel India
Kansai Nerolac
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
10.0 15.0 20.0 25.0 30.0 35.0
EP
S G
RO
WT
H (
%)
1 YR FWD PE
PPG industries
Sherwin Williams
Akzo Nobel
Nippon Paints Kansai
Paints
Asian Paints
Berger Paints
Akzo Nobel India
Kansai Nerolac
0%
10%
20%
30%
40%
50%
60%
10.0 15.0 20.0 25.0 30.0 35.0
RO
E -
1 Y
R F
WD
1 YR FWD PE
Paints: Spark Shade-Card
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Company Parent
Country
Markt Cap
(USD Mn)
EV (USD
Mn)
PE PB EV/EBITDA ROE (%)OCF
Yield
Dividend
Yield
CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E 2012 2012
Ppg Industries IncUnited
States27,084 28,500 23.5 23.2 20.0 5.2 5.7 5.2 11.1 12.2 11.5 70.6 27.0 28.6 15.2% 0.3%
Sherwin-Williams
Co/The
United
States19,571 20,520 25.8 25.5 21.1 10.8 11.5 12.9 14.3 14.6 12.7 43.3 42.8 51.6 22.0% 0.3%
Akzo Nobel Netherlands 10,060 11,711 NA 20.2 16.8 2.4 2.0 2.0 9.4 10.0 8.6 9.5 9.9 11.1 17.2% 0.6%
Koninklijke Dsm Nv Netherlands 13,857 8,973 27.1 17.3 14.2 1.6 1.6 1.5 10.8 9.2 8.2 6.0 8.9 10.2 14.0% 0.9%
Clariant Ag-Reg Switzerland 5,121 8,143 17.0 16.1 14.0 2.1 1.9 1.8 8.9 8.9 8.0 -0.2 5.7 13.6 14.4% 1.9%
Valspar CorpUnited
States6,229 7,492 21.5 17.9 15.5 5.6 5.3 4.8 12.0 11.0 10.0 24.7 30.9 32.7 15.6% 0.4%
Rpm International IncUnited
States5,773 7,091 22.8 20.5 18.4 4.4 3.8 3.4 12.3 12.3 11.3 14.8 20.3 20.5 15.7% 0.6%
Nippon Paint Co Ltd Japan 4,608 4,567 17.8 16.0 15.3 2.4 2.5 2.2 11.5 12.4 11.9 17.2 16.9 14.2 15.2% 0.4%
Kansai Paint Co Ltd Japan 3,898 3,893 16.6 19.1 18.8 1.6 1.8 1.7 9.7 10.8 9.8 10.8 9.9 8.5 16.3% 0.5%
Global paint companies valuation summary
Source: Bloomberg, Company, Spark Capital
Paints: Spark Shade-Card
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Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) EBITDA Margin
Company FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E
Asian Paints 96,322 1,09,7071,28,6511,53,032 15,088 17,319 21,178 24,895 9,887 11,139 13,095 15,646 10.3 11.6 13.7 16.3 15.7% 15.8% 16.5% 16.3%
Akzo Nobel
India19,878 22,320 24,793 29,249 1,746 1,885 2,207 2,790 2,017 2,188 2,142 2,453 54.8 46.9 45.9 52.6 8.8% 8.4% 8.9% 9.5%
Berger
Paints29,477 33,464 39,184 46,372 3,034 3,712 4,340 5,314 1,800 2,184 2,535 3,158 5.2 6.3 7.3 9.1 10.3% 11.1% 11.1% 11.5%
Kansai
Nerolac26,006 28,566 32,086 36,899 3,373 3,361 3,772 4,313 2,159 1,995 2,302 2,645 40.1 37.0 42.7 49.1 13.0% 11.8% 11.8% 11.7%
P/E (x) EV/EBITDA (x) EV/Sales (x)CMP (Rs)
Mkt Cap Target * Rating
Company FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E (Rs. mn) P/E Price Absolute
Asian Paints 47.9 42.5 36.2 30.3 30.9 26.9 21.8 18.3 4.8 4.2 3.6 3.0 494 473460 33x 538 Add
Akzo Nobel
India15.3 17.9 18.3 16.0 11.0 14.9 13.7 10.5 1.0 1.3 1.2 1.0 839 40215 18x 946 Add
Berger Paints 40.7 33.6 28.9 23.2 24.6 20.5 17.6 14.3 2.5 2.3 1.9 1.6 212 73419 25x 228 Reduce
Kansai Nerolac 28.4 30.7 26.6 23.2 17.5 17.9 15.8 13.5 2.3 2.1 1.9 1.6 1137 61275 22x 1088 Reduce
Company
Dividend OCFWC days
FY14E
ROE
FY14E
ROCE
FY14EPer Share
FY14EPayout %
Dividend
YieldOCF/Sales OCF Yield
Asian Paints 5.2 38% 1.1% 10.9% 2.5% 46 34.9% 31.2%
Akzo Nobel India 20.0 44% 2.4% 7.1% 3.5% 10 18.5% 17.5%
Berger Paints 2.0 27% 0.9% 0.0% 0.0% 71 24.4% 17.4%
Kansai Nerolac 12.0 28% 1.1% 6.6% 3.4% 72 16.9% 15.3%
Valuation Summary
Source: Bloomberg, Company, Spark Capital
Paints: Spark Shade-Card
Spark Disclaimer
Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with
SEBI as a Stock Broker and Category 1 Merchant Banker.
This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is
provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or
financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document.
Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this
document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely
for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not
directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction.
The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to
inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction
where such an offer or solicitation would be illegal.
Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital ,
its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the
securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company
referred to in this report.
This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we
would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory,
compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives
shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or
actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential
including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report.
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has
incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Absolute Rating Interpretation
Buy Stock expected to provide positive returns of >15% over a 1-year horizon
Add Stock expected to provide positive returns of >5% – <15% over a 1-year horizon
Reduce Stock expected to provide returns of <5% – -10% over a 1-year horizon
Sell Stock expected to fall >10% over a 1-year horizon
11
Paints: Spark Shade-Card
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The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research
analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
Additional Disclaimer for US Institutional Investors
This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities
Exchange Act of 1934, as amended) only by Decker & Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker &
Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker & Co.
All responsibility for the distribution of this report by Decker & Co, LLC in the US shall be borne by Decker & Co, LLC. All resulting transactions by a US person or entity should be effected
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or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker & Co, LLC and Spark Capital Advisors (India) Private Limited are
permitted to provide research material concerning investment to you under relevant legislation and regulations;
Disclosure of interest statement Yes/No
Analyst ownership of the stock No
Group/directors ownership of the stock No
Broking relationship with the company covered No
Investment banking relationship with the company covered No
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