B P W E A L T H. Paint Sector Overview

Transcription

1 W E A L T H Paint Sector Overview

2 BP WEALTH Paint Sector Overview INDEX Introduction to Paint Industry Market Structure Industry Overview Business Model (Micro) Analysis Companies Asian Paints Ltd Kansai Nerolac Paints Ltd..17 Berger Paints (India) Ltd Akzo Nobel India Ltd BP Equities Private Limited (

3 Paint Sector 2nd Feb, 2011 BP WEALTH Sector Analysis 12 th March, 2013 INTRODUCTION The paint sector in India is estimated at Rs 2,910,000mn and has been witnessing robust growth to the tune of 17% CAGR over the past seven years. Furthermore the industry is expected to grow at 12-13% per year for the next 5 years, with the volume of consumption at times the real GDP level. This can largely be attributed to the increase in demand from the consumer as well as the industrial sectors, which form the primary segments in this industry. As with other industries the paint sector comprises of players from the regional as well as the international landscape. Traditionally the industry had been dominated by the unorganized sector, but with the foray of foreign firms as well as the rapid industrialization and institutionalization of the country there has been a restructuring. The pact has now been led by the organized sector, with the smaller and unorganized players either been amalgamated or integrated as suppliers of the larger industry chain. Currently the organized players account for 65% of the market, while the remaining belonging to the unorganized firms. The unorganized sector comprises of around 2000 small scale paint units. Top Five players are estimated to control>80% of the organized market. List of the public firms that compete in the industry Asian paints. Kansai Nerolac Berger Paints Akzo Nobel India Valuation Company Name CMP FY15E EPS Target Price Upside Potential Rating Asian Paints 4, ,342 12% HOLD Kansai Nerolac 1, ,518 30% BUY Berger Paints % HOLD Akzo Nobel India ,152 16% BUY Source: Company reports, Bloomberg, BP Equities Research Peer comparison Snapshot Key Financials (FY12) Asian Paints Kansai Nerolac Berger Paints Akzo Nobel India YE March (Rs in Mn) Net Sales 100,324 27,312 26,621 19,878 EBITDA 16, ,340 2,869 Net Profit 10,205 2,159 1,773 1,300 Basic EPS Restated (Rs) Key Ratios EBITDA (%) NPM (%) RoE (%) RoCE (%) Debt / Equity (x) Valuation Ratios P/E (x) P/BV (x) EV/EBITDA (x) Source: Capital Line, BP Equities Research BP Equities Private Limited ( 1

4 Paint Sector Brief Overview The spurt in the economic growth over the past few years has caused a tremendous increase in the size of the industry. This phenomenon has intensified the influx of many worldwide established firms to increase their presence here, 7 out of the top 10 global companies have their operations set up in the country. Even though India s share in the world paint market is estimated at 0.6% only, the promising scope of growth has not made them apprehensive about increasing their scales and building capacities. Looking at the per capita consumption of paint in India, which currently stands at 1.5kgs, lower than even economies like Sri Lanka and Pakistan it is expected to grow considerably. Consumers can look forward to new products launches, some for application in special areas. Company will be increasing the value added services available to customers by offering a variety of finishes through specialized and trained applicators. There will be more options like ranges of colors/finishes for wood applications through the tinting machines. Additionally, the trend towards water based coatings is likely to set in both for industrial and decorative applications. While India has not yet embraced the DIY concepts as cheaper labor is still available, exclusive retail chain stores sponsored and run by Indian paint companies will become a reality. The Indian paint industry has progressed well and moving ahead is likely to be influenced by several factors including new technologies, new innovative products, new associations, consolidation of industry and poor performers getting out of the market. Ultimately, in the years ahead there will be only four or five key players operating in the Indian Paint Market. Presently the growth of the Indian paint industry is being witnessed from new demand pockets, especially in Tier II and Tier III cities, thus, signaling the growth acceptance of quality products among the masses. The growing popularity of quality paints and increasing income levels of people residing in Tier II and Tier III cities have pushed the growth in premium paint market of Indian decorative paint industry. India s strong economic growth has propelled the paint industry to double digit growth over the past few years and has made it Asia Pacific fastest growing paint market. Despite of fast growth, India s per capita paint consumption is still low ~2kg a year. Due to increased government funding for infrastructure, demand for paints both in industrial and decorative segment is set to rise, there by rendering Indian paint industry to be poised for future growth. Nearly ~65% of the paint market is highly concentrated and a classic example of an oligopoly, where entire barriers are high and top five players capture most of the market, while the unorganized markets is highly fragmented with over 2,000 players. Going Forward The Indian paint industry has overcome a long way from the days when paints were considered a luxury item. Today the awareness level on preventing corrosion through paints is relatively high, a development that should be a huge boost to the paint industry. The Indian paint industry offers lucrative scope for stable revenue streams to manufacturers of both decorative and industrial paints. The industry has witnessed increased activity in the industrial variety of paints with entry on MNC s in auto, consumer durables, etc. The report covers both decorative and industrial varieties of paints along with elaboration on products sub-segments within these two product segments. The typical features of the Indian paint industry have been discussed in depth covering typical features of the Indian industry viz. raw material intensives, working capital intensives, seasonality of the current global scenario with reference to the paint industry has been covered in the report. The share of the organized and unorganized sector has been dealt with detail, discussing the impact of recent issues and trends (like excise duty rationalizations, quality consciousness in user segment) on the industry dynamic. The demand supply scenario existing in the industry has been covered, detailing paint production trends in India, consumption across user segments. Growth of the Paint Industry FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Market Size (Rs. Bn) Source: Industry, BP Equities Research BP Equities Private Limited ( 2

5 Paint Sector Fragmentation of the Paint Industry Source: Industry, BP Equities Research Market structure: Decorative Paints The current market structure of the decorative paint industry is an oligopoly. Typically the characteristics are high barriers to entry due to large capital outlays. Therefore the existing players remain well insulated with respect to new entrants maintaining relatively stronger pricing power. This scenario is expected to remain unchanged till the medium term, especially in the decorative market segment leading to further protection. Contribution from this segment is Rs 2,250,000mn towards the total market for paints. Industrial Paints The industrial paints segment of the market remains to be dominated by foreign firms. With a technological advantage over its peers, this segment continues to attract competition. Hence the pricing power remains week and margins are slumped making it even more sensitive to the changes in input prices. This accounts for Rs 660,000mn towards the output of the industry. Segmentation of the Paint Industry Industrial 25% Decorative 75% Source: Industry, BP Equities Research BP Equities Private Limited ( 3

6 Paint Sector Industry Overview: The decorative and industrial paints form the primary segments within the paint industry. The decorative segment contributes 75% of the industry revenues and the remainder 25% by the industrial segment. The decorative paint segment can be classified into applications ranging from wood, metal and walls. Paint for Walls can be used for interior as well as external purposes. Cement paints and emulsion are used externally, while solvent and water based paints are used for the interior. The industrial paint segment is fragmented into automotive and non-automotive uses. The non automotive applications comprise mainly of protective and powder coatings. Overall market share of Competing firms Shalimar Paints Kansai Nerolac 3% 16% Berger Paints 17% 52% Asian Paints 13% Akzo Nobel Source: Industry, BP Equities Research Decorative Paints: The decorative paints segment is an important contributor to the Indian paint industry. As mentioned earlier, 75% of the industry revenue is generated by this segment. The demand for decorative paints has been increasing tremendously over the past few years. The demand can be divided into two categories-repainting forming 70% and fresh paintings making up the remaining 30%. Decorative Paints segment product break-up Others Primers, Thinners etc 15% 10% 32% Enamels Cement Paints 4% Distempers 13% 26% Emulsion Source: Industry, BP Equities Research 4

7 Paint Sector There are several factors that can be attributed to this phenomenon: Rapid urbanization Greater proportion of the population migrating to cities, due to better opportunities. Easy availability of financing for housing loans. Wider acceptance of nuclear families. All in all higher demand for residential housing. Increase in purchasing power across various income groups. Reduced duration of repainting cycles, has further prompted customers to use paint more frequently. Spurt in commercial construction fuelled by rampant economic growth. Various research and development facilities along with state of the art Information Technology Enabled Services (ITES) hubs and industries have been set up in India in the recent years. Recent developments Over the recent years firms have been developing strong product portfolios catering to customers across the entire spectrum. The customer s preferences favoring premium products over value alternatives have led to a greater growth in this category improving margins of the firms ultimately leading to greater profitability. Branding has been an important focus of the firms as consumers consider buying paints a high involvement purchase. Hence branding not only helps create differentiation but also promote exotic products since firms are better able to sell quality goods by passing on higher prices especially to the urban customers. Firms have also been investing heavily in building strong distribution networks spreading across the nation. This will enable them to penetrate deeper into the rural markets where their presence is weak and will also help improve customer service at various points of sales. The main drivers for the urban customers are premium products while for the rural market the shift is towards the organized sector. Currently the rural and urban markets contribute 45% and 55% respectively. Urban Rural Mix of the Paint Industries Rural 45% Urban 55% Source: Industry, BP Equities Research 5

8 Paint Sector Industrial Paints: The industrial Paints segment has been growing rapidly but has not received the prominence and scale that its counterpart currently commands. Rapid industrialization and demand from the other core sectors of the economy is soon changing this. The recent arrival of foreign players into this segment has attracted some serious contribution. Fragmentation of the Industrial Paints sector Auto Refinish 13% 10% Powder Coatings Others 23% 21% Auto OEM 33% Protective & GI Source: Industry, BP Equities Research Demand Drivers for this segment Increase in domestic production of automobiles further aided by easy financing options. Government policy on infrastructure to boost spending. Economic development spurting creation of new industries. Market structure: Industrial paints require higher investments and technological expertise compared to decorative paints. Thus the barriers to enter are traditionally higher and the segment has been dominated by foreign players, as their parent companies continue to provide them with constant assistance and technical knowhow. There are several differences however: -Lesser need for branding-since the industrial paints are largely sold to businesses directly and low concentration of firms in this segment means prospective clients can be found easily. -Distribution-the distribution network requirements are relatively much smaller compared to the decorative segment as they use the B2B model, but however the after sales service requirements are greater due to the stringent quality standards. Manufacturers work closely with clients to tailor their products according to their specifications. This helps in saving time and building stronger relations developing loyalty, ultimately leading to sustainability of earnings. -Since majority of the players are based internationally, their revenues are largely generated by firms in other sectors based in the same home country, hence the order flow remains consistent and the existing relations save resources -Investing in R&D is imperative in this segment as the clients require highly specialized products. This has been one of the prime reasons for the dominance of foreign players in the industry. 6

9 Paint Sector Raw Material Mix Containers Addlitives 4% 14% 36% Resins/Latex Solvents 15% 31% Pigments Source: Industry, BP Equities Research Business Model (micro) Analysis: The competing firms in the industry use different models based on the views and anticipations of their management. Segment mix There are firms like Asian Paints that derive 93% of their revenue from the decorative segment and the remainder 7% by supplying to the industrial clients, at one end of the spectrum. Firms like KNPL have almost a balanced revenue mix to the tune of 55% and 45% contributed by the decorative and industrial divisions respectively. Since KNPL has a prominent presence in the industrial paints space it is also the most sensitive to the business cycles experienced by the user industries. Other firms like Berger Paints have a more biased portfolio towards the decorative side with 80% and Akzo Nobel with 62%. 120% Revenue Contribution for Industrial & Decorative Paints 100% 80% 7% 20% 38% 45% 60% 40% 20% 93% 80% 62% 55% 0% Asian Paints Berger Paints Akzo Nobel India Kansai Nerolac Decorative Paints Industrial Paints Source: Industry, BP Equities Research 7

10 Paint Sector Sourcing Companies that continue to source their materials from abroad are relatively more sensitive to foreign currency fluctuations and changes in the regulatory environment. However for international firms the trend has been to increase the local sourcing eventually as the scalability improves. KNPL has the highest sourcing risk amongst its peers because it has the strongest industrial portfolio. The materials required for this segment are difficult to produce domestically due to technological constraints, leaving no choice but to import them. Another observation worth noting is that APNT has reduced its domestic sourcing requirements that can be attributed to the increase in the supply of industrial paints. Percentage of Sourcing 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 80% 74% 67% 57% 43% 33% 26% 20% Akzo Nobel Asian Paints Berger Paints Kansai Nerolac Imported Local Source: Industry, BP Equities Research Advertising & Brand Creation Without any doubts APNT remains the highest spender in this area. Even though in relative terms expressed as the cost of percentage of revenue is not that much compared to the others, in absolute terms it is still the highest. KNPL s cost here remains the lowest, not surprisingly as the industrial segment does not require high levels of advertising and branding compared to the consumer market as we have already seen with APNT Advertisement & Sales Promotion of the Competing Firms % % 3, % 3.8% 500 1,092 1,367 1,011 0 Akzo Nobel Asian Paints Berger Paints Kansai Nerolac Advertisement & sales promotion (Rs.mn) Ad Spend as % of Sales Source: Industry, BP Equities Research 8

11 Paint Sector Retail Network & Distribution Asian paints has the strongest retail network and distribution infrastructure ensuring high penetration levels spread across urban and rural areas alike. Berger paints has a robust depot network the strongest in the nation, aided by the British paints network. Company wise Dealer Distribution Network 30,000 28,200 25,000 20,000 15,000 16,000 12,000 10,000 8,000 5,000 0 Akzo Nobel Asian Paints Berger Paints Kansai Nerolac Total Dealers Source: Industry, BP Equities Research Global Presence Most of the global giants from Europe and the U.S have a presence in the Asia Pacific region. India has a favorable position within the region. The slowdown in the developed world has further prompted the international firms to increase their exposure in India, betting on a more optimistic outlook domestically. Global Company Ranking Company Name Global Ranking Akzo Nobel 1 PPG 2 Sherwin Williams 3 DuPont 4 BASF 5 RPM 6 Nippon Paints 10 Source: Industry, BP Equities Research 9

12 2nd Feb, 2011 Asian Paints Ltd. Hold BP WEALTH Company Overview : Asian Paints India Ltd (APNT) is India s largest paint manufacturer with a 52% 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%, 2.5x that of its nearest competitor making it an undisputed leader. Overall APNT is the 10 th largest paint producer in the world with aspirations to become the 5 th largest. Investment rational Favorable position in the decorative paints segment APNT is able to leverage its dominant position with in 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. Industrial Paints to drive next phase of growth 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. Structural changes with the industry Since the past few years there has been a severe consolidation in the industry causing a major shift towards the organized sector. Even though this move is beneficial to the organized players in the industry as a whole, APNT is to gain the most from this move. Many reasons can be attributed to this phenomenon Firstly-Asian paints has the strongest distribution network spanning across the nation, amongst the paint companies. It also has a strong brand equity and diverse product portfolio relative to its peers. Stock Rating BUY HOLD SELL > 15% -5% to 15% < -5% Sector Outlook Bullish Stock CMP (Rs) 4,760 Target Price (Rs) 5,343 BSE code NSE Symbol ASIANPAINT Bloomberg APNT IN Reuters ASPN.BO Key Data Nifty 5,957 52WeekH/L(Rs) 4,778 / 3,004 O/s Shares (mn) 96 Market Cap (Rs bn) 424 Face Value (Rs) 10 Average volume 3 months 76,071 6 months 74,757 1 year 90,980 Share Holding Pattern (%) 20.0% 8.6% 52.8% 18.6% Secondly-The decorative paints segment has been traditionally dominated by the unorganized players. APNT is the leader in this segment having the highest market share, hence it is to benefit even further. Promoter FII DII Others Revamping the entire product portfolio APNT is planning to revamp its entire product portfolio to include a larger proportion of enamels and emulsions. It will achieve this by reducing the production of distempers and focus on these two core products to drive future growth. Enamels and emulsions command a higher value, as a result better margins. Outlook & Valuation Relative Price Chart 5,000 4,500 4,000 3,500 3,000 Asian Paints is an industry leader and dominant player, we have assigned a target P/E multiple of 30x to our FY15 EPS of Rs178.1 to arrive at a target price of Rs 5,343. We have a hold rating on the stock as already high price appreciations have led us to believe that the stock s upside potential is capped at 12%. 2,500 Asian Paints Relative Nifty BP Equities Private Limited ( 10

13 Asian Paints LTD. Asian Paints B P Also these two products are positioned higher up in the value chain,hence the demand is to be driven by better purchasing power amongst individuals and greater demand for higher quality products in the years to come. Revenue Breakup of the paint industry Paint Category Revenue Breakup % Enamels 50 Distemper 19 Interior Emulsions 17 Exterior Emulsions 12 APNT will be concentrating on the industrial paints division so it can have a stronger foothold. Wood Finish 2 Source : Company, BP Equities Research Strong fundamentals and robust performance ANPT is the strongest player in the industry and has consistently outperformed its rivals on numerous fronts. It is able to achieve this by maintaining a competitive position in various areas such as: Broad product offerings As already mentioned earlier the paint industry is divided into the industrial and decorative paints segment. Within these segments specially the decorative paints segment APNT has the most diverse and widest product range. The most important observation to be noted is that in spite of its afore mentioned strength, APNT constantly refreshes its entire product portfolio to adhere to changing market dynamics in the respective segments. It is this quality that contributes to maintaining its dominant position along with its strong R&D programs and synergies with various international players stretched across the globe. Shifts towards the organized sector will greatly benefit APNT. Competing at various price points Since APNT has the widest product range it is able to cater to different segments of market at various price points. So diverse is its portfolio that its is able to offer products to urban as well as rural populations alike. The product portfolio is able to provide volumes for the firm at the lower and the mid price ranges as well as offer considerable margins contributed by its more expensive products sold mainly in urban areas. In the coming years the contribution from higher end products towards the income is expected to grow even further. Strong supply chain network APNT has the strongest distribution network covering the whole nation within the industry. It is a result of the firm s policy on investing heavily to build a strong supply side. The company s continuous efforts into dealer development programs and focus on the customer centric model it is able to build a robust infrastructure network in place. Comprising of tinting machines, dealers, depots and SKU s. Superior products across the entire range to dominate future offerings BP Equities Private Limited ( 11

14 Asian Paints LTD. Asian Paints B P Asian Paint s current dealer & distribution network Tinting Machines ~18K Dealers ~28K Supply chain Depots 106 Factories 6 Versatile product ranges to commend strong growth as well as profitability & strengthening margins. Source: Company, BP Equities Research Strong pricing power Being a market leader APNT is able to maintain a strong pricing power in the industry. It is able to increase prices when crude oil prices move up without impacting the volumes and holds this degree of flexibility. Despite its dominant position APNT does not hesitate to pass on the savings to its customers whenever it can The price reductions when the excise duty was reduced bears witness to this situation. The volatility in crude oil prices do affect the end prices to the consumers and thus the margins respectively. Asian Paints current product range along with prices User Segment Price Range Brands APNT leads a dominant position in the market, as it has been able to effectively leverage its infrastructure. It also has the strongest base of tinting machines. Texture, Interior, Exterior Premium: >Rs. 400/ ltr, Rs. 290/ ltr, Rs. 250/ ltr Royale Play, Rolyal Premium, Apex Interior, Exterior, Distemper Medium: >Rs / ltr, Rs / ltr, Rs / ltr Premium Emulsion, Ace, Tractor Interior, Exterior, Distemper Economy: > Rs. 160/ ltr, Rs / liter, Rs. 40ltr Tractor Emulsion, Ace, Tractor Source: Company, BP Equities Research BP Equities Private Limited ( 12

15 Asian Paints LTD. Asian Paints B P Segment wise Revenue Mix As with the industry APNT has bifurcated its operations into two main divisions. The decorative and industrial segments contribute differently to the revenue; have non similar cost structures, demand drivers, diverse clientele and supply chain infrastructure. The industrial coatings segment is divided into Automotive and non-automotive coatings. As mentioned earlier this segment operates as APPG.The revenue from the automotive side increased to RS 65.9 MN witnessing a growth of 15.7%,but the PAT dropped to 2.6mn. Strong pricing power and a diversified revenue base ensure that shareholders get maximum ROE Segment wise revenue mix Particulars Decorative Automotive Paints Industrial Coatings International Operations Revenue Share ~81% ~4% ~3% ~12% Growth (CAGR) FY07-FY12:23% FY07-FY12:12% FY07-FY12:NA FY07-FY12:13% Key Segments India Decorative India Automotive Paints India Powder, Protecting Coatings Middle East, Caribbean, South East Asia Etc. Key Competitors Berger, KNPL, Shalimar, ANI KNPL, ANI, Others Kansai Nerolac, Berger Paints, Others Different players in different geographic Pricing Power Very High pricing maker Moderate Price taker Low Price taker NA Source : Company, BP Equities Research On the international front, the Middle East contributes almost 50 % of the revenue International Operations South Pacific Caribbean 7.80% 14.90% 50.10% Mddle East 27.20% Asia Source : Company, BP Equities Research BP Equities Private Limited ( 13

16 Asian Paints Country wise contribution APNT Int. Operations ~12.3% of FY12 consolidated revenues Countries Middle East Caribbean Asia South Pacific Egypt, Oman, Bahrain and UAE Barbados, Jamaica, Trinidad and Tobago Bangladesh, Sri Lanka, and Singapore Fiji, Solomon Islands, Samoa, Tonga and Vanuatu Source : Company, BP Equities Research Looking Ahead Information technology along with R&D is going to be the main focus for the management looking forward. This will help the firm build strong and superior products to make it compete more effectively and also streamline operations in an efficient manner. APNT has consistently remained a market leader for several years. As a result of this phenomenon it has been able to maintain tremendous pricing power. They had been able to perform 14 price hikes in the past 36 months bears testament to this fact. Challenges Despite the challenges faced by APNT strong R&D activities and innovation will help the firm going forward. Despite the challenges in the global and regional macro environments, the firm was able to behave quite resiliently and post robust performance. Overall sales grew by 24.7% and PAT drew by 17.3% due to strong domestic demand. At the same time the company has been investing heavily in distribution and focus on developing a superior and diverse product portfolio. Main challenges remain maintaining margins due to inflationary pressures from input materials especially crude oil. The decorative paints business remained on track fuelled by continuous expansion and capacity additions to meet future expectations. Industrial paints witnessed a slump as margins continued to erode pressured by rising costs. Also a slowdown in orders from core customers like the auto-industry further dented the situation. However since the firm has a large amount of global operations it was able to leverage its domestic operations and contain the situation quite successfully. BP Equities Private Limited ( 14

17 Asian Paints Balance sheet YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12 Liabilities Equity Share Capital Reserve & Surplus 11,073 16,141 20,915 26,526 Net Worth 12,032 17,100 21,874 27,485 Total Loans 3,086 2,292 2,334 3,411 Other Liabilities Minority Interest ,099 1,367 Capital Employed 15,874 20,337 26,201 33,181 Assets Gross Block 15,120 15,371 20,249 21,458 Less: Depreciation 6,186 6,133 7,038 8,338 Less: Impairment of Assets Net Block 8,636 9,096 13,099 13,006 Capital WIP 921 4, ,171 Investments 784 6,241 4,290 3,547 Other Assets 0 0 1,273 3,490 Current Assets 17,987 18,437 27,011 32,749 Cash 2,104 1,058 6,262 6,243 Loans & Advances 2,475 2,395 1,963 2,704 Inventories 7,690 9,559 13,054 15,989 Debtors 5,719 5,425 5,731 7,813 Total Current Liabilities 11,921 16,947 19,053 24,853 Current Liabilities 10,147 13,797 13,727 18,577 Provisions 1,775 3,150 5,327 6,275 Net Current Assets 6,066 1,490 7,958 7,896 Deferred Tax Assets Deferred Tax Liability ,181 1,248 Net Deferred Tax (533) (562) (852) (928) Capital Applied 15,874 20,337 26,201 33,181 Source: Company, Capital Line Cash Flow Statement YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12 Cash and Cash Equivalents Cash from Operating Activities Cash Used in Investing Activities (2144) (2421) (4103) (4647) Cash Used in Financing Activities (2216) (2388) (3195) (2971) Net Inc. / (Dec.) in Cash (1108) (80) Cash at End of the year Source: Company, Capital Line 15

18 Asian Paints Income statement YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12 Total Income 58,028 72,085 82, ,127 total Expenditure 50,791 58,312 68,501 86,941 EBITDA (Operating Profit) 7,237 13,773 13,989 16,186 % change (YoY) 90.3% 1.6% 15.7% Less: Depreciation & Amortization ,131 1,211 EBIT 6,493 12,938 12,857 14,975 % change (YoY) 99.2% -0.6% 16.5% Less: Interest PBT 6,169 12,570 12,597 14,541 % change (YoY) 103.8% 0.2% 15.4% Less: Tax 1,737 3,676 3,502 4,274 % of PBT 28.2% 29.2% 27.8% 29.4% Less: Deferred Tax Reported PAT 4,195 8,839 8,814 10,206 % change (YoY) 110.7% -0.3% 15.8% Minority Interest Less: Extra Ordinary Items Adjusted PAT 3,957 7,855 8,411 9,652 % change (YoY) 98.5% 7.1% 14.8% Adjusted EPS Source: Company, Capital Line Key Ratios YE March FY09 FY10 FY11 FY12 P/E (x) P/BV (x) EV/EBITDA (X) Market Cap./Sales (x) Source: Company, Capital Line 16

19 Kansai Nerolac Paints Ltd. Buy BP WEALTH Company Overview : Kansai Nerolac (KNPL) 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 ecofriendly no lead added paint space the future seems promising. KNPL has remained surefooted on its expansionary plans and has been strengthening the supply chain infrastructure to take on its rivals. Aggressive expansions have helped KNPL 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. Investment Rationale Urban Aspirations Transformation of India from a rural economy to a one driven by urbanization has impacted all industries alike. The paint industry has greatly benefited from this move. Urbanization has affected the decorative as well as the industrial segments respectively. Since a greater proportion of the younger population has been moving to cities in search of a better future, demand for houses and automobiles have been on a rise ever since greater demand for houses translates into a positive move for the decorative paints segment and for automobiles contributing to the growth in the industrial and automotive paints segment. However rampant urbanization does not mean that rural India is witnessing poor growth. It should be considered that at the same time the purchasing power and disposable incomes of the various segments of the population have increased considerably, even from the rural areas. All these factors have cumulatively resulted in an optimistic outlook for KNPL and will continue to contribute to its growth even in the future. Dominant player in the Industrial paints segment KNPL 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. KNPL 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. The company has also been working closely with OEM s to custom tailor products to suit their specifications leading to greater customer loyalty, a pre-requisite in this segment. For the automotive market KNPL has developed a wide range of solutions and has also deployed technical service team members at customers site to provide constant assistance. The powder coatings and performance coatings segment has witnessed a substantial jump in sales over the past few years. KNPL currently commands a 27% market share and the firm is highly optimistic about this segment to provide future growth prospects. Stock Rating BUY HOLD SELL > 15% -5% to 15% < -5% Sector Outlook Stock Bullish CMP (Rs) 1,168 Target Price (Rs) 1,518 BSE code NSE Symbol Bloomberg Reuters KANSAINER KNPL IN KANE.BO Key Data Nifty 5,957 52WeekH/L(Rs) 1,220 / 865 O/s Shares (mn) 54 Market Cap (Rs bn) 56 Face Value (Rs) 10 Average volume 3 months months 17,978 1 year 14,457 Share Holding Pattern (%) Relative Price Chart 1,150 1, % 7.6% 4.8% 69.3% Promoter FII DII Others Outlook & Valuation We have assigned a target PE multiple of 25x to our FY15 EPS of Rs 60.7 to arrive at a target price of Rs 1,518. We have a Buy rating on the stock with a potential upside of 30% from CMP. KNPL Relative Nifty 17

20 Kansai Nerolac Ltd. Kansai Nerolac Paints Industrial Paint Market Share of Competing Firms B P Others Shalimar Paints 7% 22% 44% Kansai Nerolac KNPL leads the industrial paints segment, specifically automotive coatings. 12% Asian Paints 15% Berger Paints Source : Company, BP Equities Research Streamlining operations Ever since its inception KNPL has been on a quest to innovate and perform its operations in an efficient manner, while also reducing its carbon foot print..the firm has risen its IT spending across various segments to reduce costs in numerous processes and is anticipating it to translate into a bps rise in EBITDA margins in the long run. Technological collaborations with international players has helped it constantly innovate and launch technologically advanced products in the marketplace. This remains the prime reason as to why Nerolac dominates the industrial paints segment,as it requires specialized knowledge and techniques. Capacity additions have helped KNPL to progressively ramp up production and keep pace with the growing industry demand without loosing out on any opportunities. Cost cutting measures across various fronts to improve profitability. KNPL s Industrial s Revenue Mix Marine & Protective Coatings Others 6% 7% Performance Coatings 18% 46% Automotive Coatings 23% Powder Coatings Source : Company, BP Equities Research 18

21 Kansai Nerolac Paints Key Clients of Kansai Nerolac in the Auto Motive Industry Maruti Suzuki General Motors Bajaj Auto Suzuki Motorcycle Tata Motors Renault Nissan Hero Motors Toyota Kirloskar Mahindra & Mahindra Hindustan Motors Honda Eicher Motors Ashok Leyland Fiat TVS Motors TAFE Honda Siel Volvo India Yamaha TACO Source : Company, BP Equities Research Shifting the focus towards the decorative segment KNPL is currently the third largest player in the decorative paints segment with a 16% market share and contributing almost 55% to the total revenues. KNPL 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. The firm hope to achieve this through a aeries of steps which include: Catering to a broader market segment KNPL has been offering a wide product range and will further widen it in the coming years to ensure that it appeals to consumers at varying price points. This will include creating affordable products as well as high value niche products to appeal to the urban and rural customers likewise. In the coming years the decorative paints segment will provide a much more unified and balanced presence across various sectors. Revenue mix to improve profitability Since the firm is keen to improve its position in the decorative paints segment,as this segment currently commands a formidable position in the Indian paint industry. In the coming years the revenue mix contributed by the industrial and decorative segments will help improve the firm s performance in various parameters such as profitability, margin performance,cost absorption and cash flow position. Decorative Paint Market Share Kansai Nerolac 16% Asian Paints 48% 18% Berger Paints 11% Source : Company, BP Equities Research 7% Shalimar Paints Akzo Noble 19

22 Kansai Nerolac Paints Branding initiatives KNPL has been performing aggressive marketing activities to achieve higher market penetration levels. This also includes a rigorous brand creation exercise an important step to increase sales in the decorative paints segment. This segment generally requires greater marketing activities to constantly appeal to the end users both existing as well as new resulting in a higher rate of sales realization. The company is also a pioneer in the ecofriendly paints space. Even though this is currently a niche space, it has a high growth potential. Marketing and branding initiatives to translate into a higher market share. Decorative Paint Fragmented Revenue Contribution Distempers Enamels 17% 35% 10% Others 16% 22% Interior Emulsions Source : Company, BP Equities Research Exterior Emulsions Strategic collaborations KNPL s initiatives to tie up with architects and interior decorators will give it the much needed push to bump up numbers in the decorative paint segment. Tying up with such professionals by continuously educating them and enhancing their awareness about the products and usage will not only help in the correct implementation but also in building brand loyalty. Strategic collaborations and a wider supply side base will help KNPL achieve deeper market penetration levels and increased presence. Industrial & Decorative Paint Segment Revenue Mix 70% 60% 50% 40% 58% 42% 54% 46% 50% 50% 45% 55% 30% 20% 10% 0% FY06 FY08 FY10 FY12 Industrial Segment Decorative Segment Source : Company research 20

23 Kansai Nerolac Paints Nationwide dispersion KNPL has a presence across the whole nation with 5 factories and a dealer network comprising of The company currently dominates the northern region but has a relatively weaker hold in the south. However adding capacity in the region with the opening of new plants is about to change that. Tier I and Tier ii cities have been contributing strongly to the sales growth and will continue to do so in the future. KNPL s Nation wide presence Shifting towards water based alternatives will help ease margin pressures and the much needed crude oil independence. South East 18% 25% North 30% 27% West Source : Company, BP Equities Research Managing raw material mix to improve margins The paint industry is the most susceptible to volatility in crude oil prices as it is the core raw material. KNPL s raw material cost has remained at around 65-67% of total sales. This is because demand has been fueled by solvent or oil based paints that rely solely on crude oil derivatives. However going ahead the company hopes to reduce its dependency and relatively shield itself from the volatility by focusing on water based Emulsion paints for the industrial and decorative segments as it requires only 35-40% of crude oil derivatives. Thus margins will improve by the reduction in the raw materials cost. Titanium dioxide is the single largest pigment required in the manufacturing process but a domestic shortage means that it has to imported and a shortage worldwide has put an upward pressure on prices Hence currency price fluctuations can have an adverse impact on the overall profitability. Composition of raw materials Marketing and brand transformation initiatives to transcend KNPL s current stature and heightened brand awareness. Packing Others 10% Organic Acids & Chemicals 12% 9% 45% Pigments & Resins 24% Solvents & Oil Source : Company, BP Equities Research 21

24 Kansai Nerolac Paints Category wise revenue contribution Primers, Putty Distempers Other Industrial 5.5% Marine Coatings Automotive Coatings 9.4% 20.7% Interior Emulsion 8.8% 8.1% 19.3% Enamels Decorative Coatings 10.4% 12.1% Powder Coatings Source : Company, BP Equities Research Exterior Emulsion Looking Ahead Kansai Nerolac excessive advertising and brand formation activities are definitely not going unnoticed. These efforts have helped Nerolac become a household name making it unanimously recognized as a quality and innovative product. Another unconventional departure was being associated as an initiator of bringing eco-friendly paints into the country. In a nation where going green does not necessarily translate into greater loyalty or preference, never the less it still appeals to the environmentalists and propagates in reflecting its true global roots. Improvement in macro economic factors to aid the company further. Most recently KNPL won the 2012 product of the year award further strengthening its brand equity. At the same time the firm also participated in the largest architecture, building and construction expository in the country. The next focus for the firm however will be the propulsion of new dealer openings, placement of computerized color dispensing machines and establishing tie-ups. Further more the firm is moving towards a more customer centric business model embarking upon customer service. Going ahead the company will be working closely with OEM s and also extend its effort into making niche high value products. Also vendors are being awarded for quality and delivery as this will ensure future supply of consistent quality and timely delivery of products. Challenges Regulation of environmental laws remain a major constrain for the KNPL, but the company is hoping to encounter this by following stringent standards that it has adopted globally over the years. Margins remain under pressure due to volatility in input costs; however this remains an industry wide phenomenon. The management intends to solve this problem by cost reduction and efficient cash management policies. Rising crude oil prices, raw materials costs, labor costs, power shortage, transportation, demand generation and environmental hazards pose as road blocks going ahead. KNPL is leveraging its management s skill to effectively tackle this situation. Out of all the listed paint companies KNPL has the highest exposure to the industrial paints segment. KNPL s margins are impacted as this side of the industry faces greater cost pressure and greater sensitivities to business cycles. Environmental regulation hurdles persist along with crude oil price volatility but skillful divergence by creating eco friendly products and clever water based alternatives are helping to aver the situation. 22

25 Kansai Nerolac Paints Balance sheet YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12 Liabilities Equity Share Capital Reserve & Surplus 6,361 7,459 8,623 10,093 Net Worth 6,630 7,728 9,162 10,632 Total Loans 936 1, Other Liabilities Minority Interest Capital Employed 7,566 8,828 9,986 11,809 Assets Gross Block 5,420 6,377 6,753 8,486 Less: Depreciation 3,034 3,474 3,962 4,516 Less: Impairment of Assets Net Block 2,374 2,893 2,782 3,963 Capital WIP ,036 1,615 Investments 3,030 4,015 3,718 1,839 Other Assets Current Assets 4,981 5,620 7,043 9,029 Cash Loans & Advances Inventories 1,706 2,474 3,541 4,537 Debtors 2,096 2,324 2,603 3,588 Total Current Liabilities 3,281 3,980 4,726 5,172 Current Liabilities 2,442 3,043 3,635 4,440 Provisions , Net Current Assets 1,700 1,640 2,316 3,857 Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Capital Applied 7,566 8,828 9,986 11,809 Source: Company, Capital Line Cash Flow Statement YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12 Cash and Cash Equivalents at the Start of the year Cash from Operating Activities Cash Used in Investing Activities (1178) (1629) (565) (121) Cash Used in Financing Activities 428 (227) (755) (706) Net Inc/(Dec) in Cash 428 (351) (14) 195 Cash at End of the year Source: Company, Capital Line 23

26 Kansai Nerolac Paints Income statement YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12 Total Income 13,967 17,268 21,876 28,168 Total Expenditure 12,171 14,427 18,482 24,552 EBITDA (Operating Profit) 1,796 2,841 3,393 3,616 % change (YoY) % 19.5% 6.6% Less: Depreciation & Amortization EBIT 1,420 2,398 2,900 3,052 % change (YoY) 68.9% 20.9% 5.3% Less: Interest PBT 1,402 2,386 2,891 3,051 % change (YoY) % 21.2% 5.5% Less: Tax % PBT 29.7% 30.6% 28.8% 29.2% Reported PAT 986 1,655 2,060 2,159 % change (YoY) % 24.5% 4.8% Adjusted PAT 986 1,655 2,060 2,159 % change (YoY) % 24.5% 4.8% Adjusted EPS Source: Company, Capital Line Key Ratios YE March FY09 FY10 FY11 FY12 P/E (x) P/BV (x) EV/EBITDA (X) Market Cap./Sales (x) Source: Company, Capital Line 24

27 Berger Paints India Ltd. Hold BP WEALTH Stock Rating Company Overview Berger Paints India Ltd (BPIL) is the third largest paint manufacturer and the second largest decorative paint player in India. They are offering their customers a variety of innovative painting solutions, decorative or industrial. The company is headquartered in Calcutta and services the market through a distribution network comprising of 75 stock points and above 12,000 paint retailers. Their manufacturing facilities are located in West Bengal, Uttar Pradesh, Pondicherry, Goa, and Jammu & Kashmir. Berger Auto & Industrial Coatings Ltd, a wholly owned subsidiary was amalgamated with the company. The firm entered into a Joint Venture Agreement with Nippon Bee Chemical Co Ltd, Japan for the purpose of formation of a company for manufacture and sale of coatings for plastic substrates used in automobiles and parts thereof in India. Investment Rational BUY HOLD SELL > 15% -5% to 15% < -5% Sector Outlook Bullish Stock CMP (Rs) 207 Target Price (Rs) 234 BSE code NSE Symbol BERGEPAINT Bloomberg BRGR IN Aspirations to become a prominent industry player Reuters BRGR.BO BPIL is the second largest firm in the decorative paint segment with a market share of 21%.The firm ranks 33rd globally and has plans to reach the top 25 position by 2016.The management intends to increase the market share to 23% in the next four years through a plethora of measures such as: Ramping production BPIL s current production capacity stands at 43% of Asian Paints. The company hopes to narrow this gap by building capacity through expansions in both Greenfield as well as Brownfield projects. Expansion for future activities are to be funded through internal accruals. All in all these activities will help BPIL to reach closer to Asian Paint s capacity, the current market leader in the decorative paints arena. Effective supply chain infrastructure A strong and efficient distribution network is imperative to ensure high levels of customer satisfaction. BPIL s measures to improve the dealer network and supply side support by adding dealers along with 1,600-1,700 tinting machines every year will help them garner a strong foothold in this area.crm implementation will help the firm transform its operations on an efficient scale and better manage inventories and demand forecasting activities. Key Data Nifty 5.,957 52WeekH/L(Rs) 201 / 101 O/s Shares (mn) 346 Market Cap (Rs bn) 60 Face Value (Rs) 2 Average volume 3 months 324,265 6 months 284,748 1 year 264,930 Share Holding Pattern (%) 9.5% 3.4%11.6% 75.5% Moving higher up the value chain The firm is reorganizing it s product portfolio to include a greater proportion of premium products. Premium products command higher prices, hence will result in better margins for the firm. Selling exotic products will also help improve the brand s perception leading to a higher sales realization, even for its low range and mid positioned products. Brand reconciliation efforts As discussed earlier BPIL is on the rise to improve its brand recognition efforts. The decorative paint market does require constant marketing activities as the products are being pushed to the end consumers in a highly competitive environment. Aggressive marketing initiatives by the management have ensured that these vital opportunities are not lost and constant brand awareness,as repainting constitutes to an important contributor to the firm s overall revenues. Promoter FII DII Others Relative Price Chart Outlook & Valuation We have assigned a target PE multiple of 25x to our FY15 EPS of Rs 9.71 to arrived at a target price of Rs 234 with a Buy rating on the stock. Berger Paints Relative Nifty 25