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INDEX
Introduction to Paint Industry …………..……………………..……………………………………………………………………….1
Companies
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 1.5-
2 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 in-
dustry had been dominated by the unorganized sector, but with the foray of foreign firms as well as the rapid industrialization and institu-
tionalization of the country there has been a restructuring. The pact has now been led by the organized sector, with the smaller and unor-
ganized 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 4,757 178.1 5,342 12% HOLD
Kansai Nerolac 1,171 60.7 1,518 30% BUY
Berger Paints 206 9.3 234 13% HOLD
Akzo Nobel India 991 57.6 1,152 16% BUY
Source: Company reports, Bloomberg, BP Equities Research
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 avail-
able, 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 govern-
ment 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 wit-
nessed 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 typi-
cal features of the Indian paint industry have been discussed in depth covering typical features of the Indian industry viz. raw material in-
tensives, 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.
300
250
250
204
200
170
148
150 137
120
95
100 82
50
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Paint Sector
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 pric-
ing 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.
Industrial
25%
Decorative
75%
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.
Shalimar Paints
Kansai Nerolac
3%
16%
13%
Akzo Nobel
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%.
Others
10%
Primers, Thinners Enamels
etc
15% 32%
Cement Paints 4%
13%
26%
Distempers
Emulsion
Paint Sector
Rapid urbanization
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 cus-
tomer’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 pene-
trate 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. Cur-
rently the rural and urban markets contribute 45% and 55% respectively.
Rural
45% Urban
55%
Paint Sector
Industrial Paints:
The industrial Paints segment has been growing rapidly but has not received the prominence and scale that its counterpart currently com-
mands. 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.
13% 10%
33%
Protective & GI
Source: Industry, BP Equities Research
Market structure:
Industrial paints require higher investments and technological expertise compared to decorative paints. Thus the barriers to enter are tradi-
tionally higher and the segment has been dominated by foreign players, as their parent companies continue to provide them with constant
assistance and technical knowhow.
-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.
Paint Sector
14% Resins/Latex
36%
Solvents 15%
31%
Pigments
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% contrib-
uted 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%.
100%
7%
20%
80% 38%
45%
60%
93%
40% 80%
62%
55%
20%
0%
Asian Paints Berger Paints Akzo Nobel India Kansai Nerolac
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%
80% 74%
67%
70%
57%
60%
50% 43%
40% 33%
30% 26%
20%
20%
10%
0%
Akzo Nobel Asian Paints Berger Paints Kansai Nerolac
Imported Local
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 surpris-
ingly 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.
4000
3500 4.3%
3000
2500
2000
3,386
1500 5.1%
5.5% 3.8%
1000
1,367
500 1,092 1,011
0
Akzo Nobel Asian Paints Berger Paints Kansai Nerolac
Paint Sector
30,000 28,200
25,000
20,000
16,000
15,000
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.
Akzo Nobel 1
PPG 2
Sherwin Williams 3
DuPont 4
BASF 5
RPM 6
Nippon Paints 10
APNT is able to leverage its dominant position with in the decorative paints segment (currently 5th Target Price (Rs) 5,343
largest in the world) to drive its future growth. The decorative paints division has shown promising BSE code 500820
growth in the past, along with comfortable margin performance. In India currently the decorative NSE Symbol ASIANPAINT
paints segment is considerably bigger than the industrial paints division. The decorative paints divi-
Bloomberg APNT IN
sion is primarily driven by growth in the real estate sector, rising purchasing power and rapid urbani-
Reuters ASPN.BO
zation. These factors will continue to contribute to the revenues in the coming years as a part of
India’s growth story. Key Data
Nifty 5,957
Industrial Paints to drive next phase of growth
52WeekH/L(Rs) 4,778 / 3,004
Asian Paints is currently the market leader in the Indian paint industry. Even though its product port-
O/s Shares (mn) 96
folio 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 in- Market Cap (Rs bn) 424
vesting to develop a strong industrial paint product portfolio to bet on India’s rampant industrializa- Face Value (Rs) 10
tion. Recent changes in the government policy to revive the infrastructure sector will also greatly
Average volume
benefit this segment. However within the industrial paints segment, APNT has a strong foothold in
3 months 76,071
the automotive coatings segment where it operates through a joint venture with PPG, a worldwide
leader in the coating industry. 6 months 74,757
1 year 90,980
Structural changes with the industry
Share Holding Pattern (%)
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
20.0%
this phenomenon
8.6% 52.8%
⇒ Firstly-Asian paints has the strongest distribution network spanning across the nation, amongst 18.6%
the paint companies. It also has a strong brand equity and diverse product portfolio relative to
its peers.
⇒ 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 Promoter FII DII Others
benefit even further.
3,000
Outlook & Valuation
2,500
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 Asian Paints Relative Nifty
is capped at 12%.
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.
Enamels 50
APNT will be con-
Distemper 19 centrating on the
industrial paints
division so it can
Interior Emulsions 17
have a stronger
foothold.
Exterior Emulsions 12
Wood Finish 2
Source : Company, BP Equities Research
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:
As already mentioned earlier the paint industry is divided into the industrial and decorative paints segment. Shifts towards the
organized sector will
Within these segments specially the decorative paints segment APNT has the most diverse and widest product greatly benefit
range. The most important observation to be noted is that in spite of its afore mentioned strength, APNT con- APNT.
stantly 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.
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.
Superior products
⇒ Strong supply chain network across the entire
range to dominate
APNT has the strongest distribution network covering the whole nation within the industry. It is a result of the future offerings
firm’s policy on investing heavily to build a strong supply side. The company’s continuous efforts into dealer de-
velopment 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.
Tinting
Machines
~18K
Dealers Depots
~28K Supply chain 106
Versatile product
ranges to commend
strong growth as
well as profitability
& strengthening
Factories margins.
6
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 APNT leads a domi-
affect the end prices to the consumers and thus the margins respectively. nant position in the
market, as it has
been able to effec-
tively leverage its
Asian Paints current product range along with prices infrastructure. It also
has the strongest
base of tinting ma-
User Segment Price Range Brands chines.
Interior, Exterior, Distemper Economy: > Rs. 160/ ltr, Rs. 100-140/ liter, Rs. 40ltr Tractor Emulsion, Ace, Tractor
As with the industry APNT has bifurcated its operations into two main divisions. The decorative and industrial
Strong pricing
segments contribute differently to the revenue; have non similar cost structures, demand drivers, diverse clien- power and a diversi-
tele and supply chain infrastructure. fied revenue base
ensure that share-
The industrial coatings segment is divided into Automotive and non-automotive coatings. As mentioned earlier holders get maxi-
this segment operates as APPG .The revenue from the automotive side increased to RS 65.9 MN witnessing a mum ROE
Key Competi- Berger, KNPL, Shalimar, Kansai Nerolac, Ber- Different players in differ-
KNPL, ANI, Others
tors ANI ger Paints, Others ent geographic
Pricing Power Very High pricing maker Moderate Price taker Low Price taker NA
On the international front, the Middle East contributes almost 50 % of the revenue
International Operations
South Pacif ic
7.80%
Caribbean
14.90%
27.20%
Asia
Asian Paints
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 op-
erations 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 Despite the challenges
faced by APNT strong
bears testament to this fact. R&D activities and
innovation will help
Challenges the firm going forward.
Despite the challenges in the global and regional macro environments, the firm was able to behave quite resil-
iently and post robust performance. Overall sales grew by 24.7% and PAT drew by 17.3% due to strong domes-
tic 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. How-
ever since the firm has a large amount of global operations it was able to leverage its domestic operations and
contain the situation quite successfully.
Asian Paints
Balance sheet
YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12
Liabilities
Equity Share Capital 959 959 959 959
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 0 0 893 918
Minority Interest 756 945 1,099 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 298 142 113 115
Net Block 8,636 9,096 13,099 13,006
Capital WIP 921 4,072 433 6,171
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 312 308 329 319
Deferred Tax Liability 845 870 1,181 1,248
Net Deferred Tax (533) (562) (852) (928)
Capital Applied 15,874 20,337 26,201 33,181
Source: Company, Capital Line
Asian Paints
Income statement
YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12
Key Ratios
Kansai Nerolac Paints Ltd. Buy BP WEALTH
Stock Rating
Kansai Nerolac (KNPL) is a subsidiary of Kansai Paints, Japan. With more than 92 years of strong
> 15% -5% to 15% < -5%
foundation the company is geared to set up its operations firmly in India. With continuous R&D activi-
ties, strong marketing and brand creation initiatives along with being one of the pioneers in the eco-
Sector Outlook Bullish
friendly no lead added paint space the future seems promising. KNPL has remained surefooted on its
Stock
expansionary plans and has been strengthening the supply chain infrastructure to take on its rivals.
CMP (Rs) 1,168
Aggressive expansions have helped KNPL assume a prominent scale and presence over the past
Target Price (Rs) 1,518
few years and recently it acquired the Shalimar Paints manufacturing facility located in Nepal. Maruti
BSE code 500165
Suzuki remains one of its top clients for automotive paints.
NSE Symbol KANSAINER
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.
Kansai
Kansai Nerolac
Nerolac PaintsLtd.
Industrial Paint Market Share of Competing Firms
Others
KNPL leads the in-
dustrial paints seg-
22% ment, specifically
automotive coat-
Kansai Nerolac ings.
44%
Shalimar Paints 7%
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 Cost cutting meas-
costs in numerous processes and is anticipating it to translate into a 50-60 bps rise in EBITDA margins in the ures across various
long run. fronts to improve
profitability.
Technological collaborations with international players has helped it constantly innovate and launch technologi-
cally 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.
Performance
Automotive
Coatings 46%
18% Coatings
23%
Powder Coatings
Since the firm is keen to improve its position in the decorative paints segment ,as this segment currently com-
mands 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 profit-
ability, margin performance ,cost absorption and cash flow position.
Kansai
Nerolac
16%
Asian Paints
48% 18% Berger Paints
11%
7%
Akzo Noble
Shalimar
Paints
Source : Company, BP Equities Research
KNPL has been performing aggressive marketing activities to achieve higher market penetration levels. This Marketing and
also includes a rigorous brand creation exercise an important step to increase sales in the decorative paints branding initiatives
segment. This segment generally requires greater marketing activities to constantly appeal to the end users both to translate into a
higher market share.
existing as well as new resulting in a higher rate of sales realization. The company is also a pioneer in the eco-
friendly paints space. Even though this is currently a niche space, it has a high growth potential.
Distempers
Enamels 17%
35% Others
10%
16%
22% Interior
Emulsions
Exterior
Emulsions
Source : Company, BP Equities Research
Strategic collabora-
⇒ Strategic collaborations
tions and a wider
KNPL’s initiatives to tie up with architects and interior decorators will give it the much needed push to bump up supply side base will
numbers in the decorative paint segment. Tying up with such professionals by continuously educating them and help KNPL achieve
deeper market pene-
enhancing their awareness about the products and usage will not only help in the correct implementation but
tration levels and
also in building brand loyalty. increased presence.
70%
58%
60% 54% 55%
50% 50%
50% 46% 45%
42%
40%
30%
20%
10%
0%
FY06 FY08 FY10 FY12
South
East
18% 25%
30% 27%
North
West
Packing
Others 10%
9%
45% Pigments &
Organic Acids Resins
& Chemicals 12%
24%
20.7%
9.4%
Interior
Emulsion 8.8%
19.3%
8.1% Enamels
Decorative
Coatings 10.4% 12.1%
Powder
Exterior
Coatings
Emulsion
Source : Company, BP Equities Research
Looking Ahead
Improvement in
Kansai Nerolac excessive advertising and brand formation activities are definitely not going unnoticed. These
macro economic
efforts have helped Nerolac become a household name making it unanimously recognized as a quality and inno- factors to aid the
vative product. Another unconventional departure was being associated as an initiator of bringing eco-friendly company further.
paints into the country. In a nation where going green does not necessarily translate into greater loyalty or pref-
erence, never the less it still appeals to the environmentalists and propagates in reflecting its true global roots.
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
Environmental regu-
Regulation of environmental laws remain a major constrain for the KNPL, but the company is hoping to encoun- lation hurdles per-
sist along with crude
ter this by following stringent standards that it has adopted globally over the years. Margins remain under pres- oil price volatility
sure due to volatility in input costs; however this remains an industry wide phenomenon. The management in- but skillful diver-
tends to solve this problem by cost reduction and efficient cash management policies. Rising crude oil prices, gence by creating
eco friendly prod-
raw materials costs, labor costs, power shortage, transportation, demand generation and environmental hazards ucts and clever wa-
pose as road blocks going ahead. KNPL is leveraging its management’s skill to effectively tackle this situation. ter based alterna-
Out of all the listed paint companies KNPL has the highest exposure to the industrial paints segment. KNPL’s tives are helping to
aver the situation.
margins are impacted as this side of the industry faces greater cost pressure and greater sensitivities to busi-
ness cycles.
Balance sheet
YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12
Liabilities
Equity Share Capital 269 270 539 539
Reserve & Surplus 6,361 7,459 8,623 10,093
Net Worth 6,630 7,728 9,162 10,632
Total Loans 936 1,100 825 746
Other Liabilities 0 0 0 432
Minority Interest 0 0 0 0
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 12 10 8 7
Net Block 2,374 2,893 2,782 3,963
Capital WIP 356 164 1,036 1,615
Investments 3,030 4,015 3,718 1,839
Other Assets 0 0 0 437
Current Assets 4,981 5,620 7,043 9,029
Cash 762 411 397 592
Loans & Advances 417 411 502 311
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 838 937 1,091 732
Net Current Assets 1,700 1,640 2,316 3,857
Deferred Tax Assets 106 115 134 123
Deferred Tax Liability 0 0 0 25
Net Deferred Tax 106 115 134 98
Capital Applied 7,566 8,828 9,986 11,809
Source: Company, Capital Line
Cash and Cash Equivalents at the Start of the year 334 762 411 392
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) - 58.1% 19.5% 6.6%
Less: Depreciation & Amortization 376 443 494 564
EBIT 1,420 2,398 2,900 3,052
% change (YoY) 68.9% 20.9% 5.3%
Less: Interest 18 12 8 1
PBT 1,402 2,386 2,891 3,051
% change (YoY) 0 70.2% 21.2% 5.5%
Less: Tax 416 731 831 892
% PBT 29.7% 30.6% 28.8% 29.2%
Reported PAT 986 1,655 2,060 2,159
% change (YoY) 0 67.9% 24.5% 4.8%
Adjusted PAT 986 1,655 2,060 2,159
% change (YoY) 0 67.9% 24.5% 4.8%
Adjusted EPS 37 61 38 40
Source: Company, Capital Line
Key Ratios
Berger Paints India Ltd. Hold BP WEALTH
Stock Rating
Berger Paints India Ltd (BPIL) is the third largest paint manufacturer and the second largest decora-
tive paint player in India. They are offering their customers a variety of innovative painting solutions, > 15% -5% to 15% < -5%
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 manu- Sector Outlook Bullish
facturing facilities are located in West Bengal, Uttar Pradesh, Pondicherry, Goa, and Jammu & Stock
Kashmir. Berger Auto & Industrial Coatings Ltd, a wholly owned subsidiary was amalgamated with CMP (Rs) 207
the company. The firm entered into a Joint Venture Agreement with Nippon Bee Chemical Co Ltd,
Target Price (Rs) 234
Japan for the purpose of formation of a company for manufacture and sale of coatings for plastic
BSE code 509480
substrates used in automobiles and parts thereof in India.
NSE Symbol BERGEPAINT
Investment Rational Bloomberg BRGR IN
Key Data
BPIL is the second largest firm in the decorative paint segment with a market share of 21%.The firm
Nifty 5.,957
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: 52WeekH/L(Rs) 201 / 101
O/s Shares (mn) 346
⇒ Ramping production
Market Cap (Rs bn) 60
BPIL’s current production capacity stands at 43% of Asian Paints. The company hopes to narrow Face Value (Rs) 2
this gap by building capacity through expansions in both Greenfield as well as Brownfield projects.
Average volume
Expansion for future activities are to be funded through internal accruals. All in all these activities will
3 months 324,265
help BPIL to reach closer to Asian Paint’s capacity, the current market leader in the decorative
6 months 284,748
paints arena.
1 year 264,930
⇒ Effective supply chain infrastructure
Share Holding Pattern (%)
A strong and efficient distribution network is imperative to ensure high levels of customer satisfac-
tion. BPIL’s measures to improve the dealer network and supply side support by adding 400-500
11.6%
dealers along with 1,600-1,700 tinting machines every year will help them garner a strong foothold 3.4%
9.5%
in this area.CRM implementation will help the firm transform its operations on an efficient scale and
better manage inventories and demand forecasting activities. 75.5%
The firm is reorganizing it’s product portfolio to include a greater proportion of premium products.
Promoter FII DII Others
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. Relative Price Chart
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 con- 125
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.
Asian Paints the industry leader in decorative trails ahead by a substantial margin in terms of market share. Scope for improve-
Even though BPIL is the second largest in the decorative paints segment its margins are much lower compared ment in margins and
to that of Asian Paints. There are number of reasons responsible for this. Firstly APIL has a greater presence in a commendable
the decorative paints segment ,that has traditionally commanded higher margins than the industrial segment. position in the deco-
Secondly APIL has been adding a greater proportion of water based alternatives to its product lineup arsenal, rative paints division
will help in better
that offer much better margins to conventional crude oil based derivatives.
future performance.
700000
600000
500000
INR 400000
mn
300000
200000
100000
0
FY07 FY08 FY09 FY10 FY11
However BPIL had realized and decided to implement a slew of measures intended to improve its performance
specially its margins. Adding water based products to the product portfolio has increased the contribution to the
overall revenues from this segment and improved margins at the same time. The company is also expanding its
presence in the decorative paints segment by continuously adding capacity and increasing its marketing initia-
tives as already mentioned earlier.
3,500 3,200
3,000
2,500
2,000
1,500 1,350
1,100
1,000 850
500
-
INR Akzo Nobel Berger Paints Asian Paints Kansai Nerolac
MN
Source : Company, BP Equities Research
Correction of titanium dioxide prices in beginning of the FY12,due to the global slowdown has caused a slump in
the demand lowering the prices. This will be a major contributor to the overall margin performance and also a
revision in prices of key raw materials will help in this regard. Since quite a few raw materials are imported the
appreciation in the rupee will help in easing margins.
6.4%
1.3%
20.2%
1.1%
2.4% 62.8%
4.1%
1.8%
⇒ Price Increases
Recent price increases bundled with lower costs of raw materials have significantly helped in improving the over-
all profitability. This approach if sustained in the future will continuously yield positive results for the company.
The paint industry remains a highly dynamic and competitive environment. Hence innovation and constant prod-
uct development is the only way for firms to survive in this industry. BPIL has remained promising on this front by
continuously offering competitive products through investments in technology and frequent up gradations. Even
in the industrial paints space BPIL has not failed to disappoint as it has found a way to offer niche products with
alternative applications.
Global footprint
BPIL has a strong presence worldwide through its subsidiaries and strategic collaborations with international play-
ers. This has helped in strengthening its domestic hold as the synergies have trickled down and percolated not
only into its product offerings but also in the manner the firm operates .
Balance sheet
YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12
Liabilities
Equity Share Capital 637.7 692.1 692.0 692.0
Reserve & Surplus 3,262.8 5,272.5 6,203.0 7,223.0
Net Worth 3,900.5 5,964.6 6,895.0 7,915.0
Total Loans 3,502.2 2,673.8 3,297.0 4,180.0
Other Liabilities 0.0 0.0 80.0 102.0
Minority Interest 0.0 0.0 0.0 0.0
Capital Employed 7,402.7 8,638.4 10,272.0 12,197.0
Assets
Gross Block 6,196.5 6,756.5 7,157.0 8,317.0
Less: Depreciation 2,129.7 2,461.9 2,816.0 3,228.0
Less: Impairment of Assets 0.0 0.0 0.0 0.0
Net Block 4,066.8 4,294.6 4,341.0 5,089.0
Capital WIP 275.3 326.0 818.0 730.0
Investments 44.6 1,281.6 526.0 40.0
Other Assets 0.0 0.0 145.0 456.0
Current Assets 6,027.9 6,566.7 8,871.0 11,553.0
Cash 363.8 412.6 1,253.0 1,824.0
Loans & Advances 523.2 432.3 452.0 599.0
Inventories 2,944.5 3,298.6 4,438.0 5,544.0
Debtors 2,196.4 2,423.2 2,728.0 3,586.0
Total Current Liabilities 2,777.8 3,566.3 4,166.0 5,359.0
Current Liabilities 2,496.3 3,031.3 3,684.0 4,666.0
Provisions 281.5 535.0 482.0 693.0
Net Current Assets 3,250.1 3,000.4 4,705.0 6,194.0
Deferred Tax Assets 123.7 105.5 90.0 82.0
Deferred Tax Liability 357.8 369.7 353.0 394.0
Net Deferred Tax (234.1) (264.2) (263.0) (312.0)
Capital Applied 7,402.7 8,638.4 10,272.0 12,197.0
Source: Company, Capital Line
Cash Flow
YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12
Cash and Cash Equivalents 399.0 318.7 376.0 1,228.0
Cash from Operating Activities 990.8 1,650.2 1,146.0 1,199.0
Cash Used in Investing Activities (429.4) (2,072.3) (292.0) (670.0)
Cash Used in Financing Activities (641.7) 479.0 (2.0) 6.0
Net Inc/(Dec) in Cash (80.3) 56.9 852.0 535.0
Cash at End of the year 318.7 375.6 1,228.0 1,763.0
Source: Company, Capital Line
Income statement
YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12
Minority Interest 0 0 0 0
Key Financials
Akzo Nobel India Ltd. Buy
BP WEALTH
Stock Rating
Company Overview
BUY HOLD SELL
Akzo Nobel India (ANI) is the subsidiary of Akzo Nobel, the Dutch based international coating giant.
Most recently there was a consolidation in the Indian operations leading to a merger of the three
group subsidiaries into one main powerhouse giving ANI the much needed scale to compete. Strong > 15% -5% to 15% < -5%
technological support from the parent company has helped the firm become a prominent player in
the industrial paints segment, with the automobile industry being one of its main consumers along Sector Outlook Bullish
with other industrial clients.
Stock
Opportunities & Constrains CMP (Rs) 991
Target Price (Rs) 1,152
ANI has been showing some promising prospects over the last few years. The sales growth in FY
BSE code 500710
12 was contributed mainly by tier 2 and tier 3 cities. Creation of different brands has helped the firm
compete in various segments of the market. Over time the costs will optimize because the strategic NSE Symbol AKZOINDIA
partnerships with vendors will result in protection from price fluctuations and foreign exchange trans- Bloomberg AKZO IN
lations. The ongoing assistance and collaboration by the parent has created new products and Reuters AKZO.BO
streamlined operations. Despite the promising future a few hurdles continue to remain. Uncertainty
regarding the outcome of the business to be generated by the merged entity. Also the composition Key Data
of the revenue to be generated from the consumer and the industrial businesses remain to be seen Nifty 5,957
stability of earnings.ANI has been particularly focusing on the mid range value products as these Share Holding Pattern (%)
offer the highest potential for growth and have been selling well in tier I and tier ii cities, that are ex-
pected to provide a reasonable contribution to the firms overall growth in the years to come.
14.3%
Gearing up marketing initiatives to take on rivals 11.2%
1.5%
ANI has been beefing up its marketing activities and indulging in aggressive advertisement cam- 73.0%
paigns to promote the Dulux brand. As discussed earlier the advertisement spending in the decora-
tive paint segment is generally higher as firms scamper in a bid to grab market share by building a
strong brand and high levels of awareness. This will ensure that the playing field is leveled and the
management expects the performance in the decorative segment to be better than the industrial
Promoter FII DII Others
segment.
Decorative
Paints
Industrial
A&A ANI Coatings
Chemicals
To increase the penetration levels and grab a larger pie of the market share,ANI has remained adamant to keep
the dealer and distribution network infrastructure initiatives on track. The company has setup warehousing facili-
ties and delivery points to make sure that the supply side remains uninterrupted and functions in an efficient man-
ner. Customer service has also been prioritized though these measures as it will ultimately lead in creating high
levels of brand loyalty.
Others
3%
Speciality Chemicals
23%
39% Decorative Paints
35%
Performace Coatings
Speciality Chemicals
Decorative Paint
33%
34%
33%
Speciality Chemicals
5%
Industrial
34%
Decorative
61%
16%
16%
16% 16%
Resins
Solvents
Balance sheet
YE March-Consolidated (Rs
FY09 FY10 FY11 FY12
mn)
Liabilities
Equity Share Capital 381 368 368 479
Reserve & Surplus 9,330 9,553 10,548 13,931
Net Worth 9,711 9,921 10,916 14,410
Total Loans 0 0 0 191
Other Liabilities 0 0 0 629
Minority Interest 0 0 0 0
Capital Employed 9,711 9,921 10,916 15,230
Assets
Gross Block 3,255 3,495 3,749 3,563
Less: Depreciation 1,924 2,114 2,330 0
Less: Impairment of Assets 0 0 0 0
Net Block 1,331 1,381 1,419 3,563
Capital WIP 16 23 145 148
Investments 9,152 9,602 9,850 1,390
Other Assets 0 0 0 4
Current Assets 2,826 2,724 3,985 16,975
Cash 147 143 303 739
Loans & Advances 914 801 1,449 10,642
Inventories 1,008 972 1,532 3,334
Debtors 757 808 701 2,260
Total Current Liabilities 3,556 3,788 4,442 6,824
Current Liabilities 2,019 2,236 2,745 5,067
Provisions 1,537 1,552 1,697 1,757
Net Current Assets (730) (1,064) (457) 10,151
Deferred Tax Assets 140 0 0 0
Deferred Tax Liability 198 21 41 26
Net Deferred Tax (59) (21) (41) (26)
Capital Applied 9,711 9,921 10,916 15,230
Source: Company, Capital Line
Cash Flow
YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12
Cash and Cash Equivalents 6,989 9,297 9,743 654
Cash from Operating Activities 20 1,108 585 1,413
Cash Used in Investing Activities 2,827 755 273 (607)
Cash Used in Financing Activities (539) (1,417) (698) (721)
Net Inc/(Dec) in Cash 2,308 446 160 85
Cash at End of the year 9,297 9,743 303 739
Source: Company, Capital Line
Income statement
YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12
Total Income 12,033.2 10,433.0 12,068.0 21,001.0
total Expenditure 7,999.2 8,210.0 9,637.0 18,132.0
EBITDA (Operating Profit) 4,034.0 2,223.0 2,431.0 2,869.0
% change (YoY) -45% 9% 18%
Less: Depreciation & Amortization 213.3 212.0 217.0 366.0
EBIT 3,820.7 2,011.0 2,214.0 2,503.0
% change (YoY) -47% 10% 13%
Less: Interest 29.3 11.0 15.0 39.0
PBT 3,791.4 2,000.0 2,199.0 2,464.0
% change (YoY) -47% 10% 12%
Less: Tax 877.3 444.0 413.0 433.0
% change (PBT) 23% 22% 19% 18%
Less: Deferred Tax (36.1) (37.0) 20.0 13.0
Reported PAT 2,950.2 1,593.0 1,766.0 2,018.0
% change (YoY) -46% 11% 14%
Less: Extra Ordinary Items 2,094.3 0 0 0
Adjusted PAT 855.9 1,593.0 1,766.0 2,018.0
% change (YoY) 86% 11% 14%
Adjusted EPS 74.7 42.6 47.9 42.1
Source: Company, Capital Line
Key Ratios
YE March FY09 FY10 FY11 FY12
P/E (x) 5.9x 14.8x 18.3x 16.1x
P/BV (x) 1.7x 2.2x 2.8x 2.1x
Disclaimer Appendix
We analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our per-
sonal views about any and all of the subject issuer (s) or securities. We also certify that no part of our compensation was, is, or will be
directly or indirectly related to the specific recommendation (s) or view (s) in this report. Analysts aren't registered as research analysts by
FINRA and might not General Disclaimer
General Disclaimer
This report has been prepared by the research department of BP WEALTH MANAGEMENT Pvt. Ltd. and BP EQUITIES Pvt. Ltd, is for infor-
mation purposes only. This report is not construed as an offer to sell or the solicitation of an offer to buy or sell any security in any jurisdiction
where such an offer or solicitation would be illegal.
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of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or complete-
ness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to
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