Paint Industry Report - SPA Sec - 15 June 2011

Paints Industry Report
June 15, 2011 SPA Securities Ltd.
C o n t e n t s
Executive Summary Industry Description Asian Paints Akzo Nobel Kansai Nerolac Berger Paints : : : : : : 01 - 01 02 - 05 07 - 12 14 - 19 21 - 26 28 - 33
Executive Summary
Paint Industry
Indian paint industry is in the sweet spot. Rising income and aspiration levels of young demography along with changing lifestyle has catapulted the demand for both repainting and fresh paints. Despite slowdown in FY09, paint industry reported robust double digit growth in last two years on back of higher demand. Going ahead, we believe demand scenario to remain strong backed by higher discretionary spend, increasing penetration, high construction activities and robust growth in auto & consumer durables industries. Paint industry has witnessed strong growth of 1.5-2x GDP growth since liberalization. There has been considerable reduction in average number of years required for repainting from 10-11 years 5 years back to 4-5 years now. This is the stark evidence of changing lifestyle with rising income levels. Repainting the home is not just a discretionary spend as it used to be as changing lifestyle resulted in people aspiring for cleaner and beautiful looking homes. Robust construction activities on back of higher housing demand has further boosted the growth of paint industry. The share of fresh paints in total demand has increased significantly in last decade on back of increasing urbanization and higher demand for housing. The fresh demand for paints is expected to remain strong in many years to come.
Demand in rural areas witnessed strong upsurge with rising income levels backed by increasing employment opportunities and government focus on rural prosperity. Higher growth in rural areas and tremendous scope of increasing penetration strengthen our belief of sustainability of long term growth of the industry. Industrial paint segment also piggybacked the robust growth in auto, consumer durables segment and higher infrastructural spend. Auto segment and consumer durables segment reported more than 20% growth in last few years. We expect growth momentum in auto and durables segment to continue going forward. Higher infrastructure spend targets by planning commission indicates strong builtup of infrastructure. This would lead to sustainable long term demand for industrial paints. Attracted by strong potential, foreign players like Nippon paints, Jotun paints, National Paints and Sherwin Williams to name a few have set their bases in India to share the growth pie of Indian paint industry. However, to gain any significant presence in the industry would require strong distribution network and brand recognition which act as a strong entry barrier for new players. On back of aforementioned reasons, we believe Indian paint industry to benefit significantly from high domestic consumption demand. We therefore have positive outlook for the sector. Our top picks in the sector are Akzo Nobel and Berger Paints.
Companies under coverage

Company CMP (INR) 3,070 875 103 907 Reco. Revenues (INR mn) FY12E FY13E 92,073.3 25,753.2 28,051.5 13,456.8 108,827.0 30,470.2 33,381.2 15,928.3 EBIDTA Margins FY12E FY13E 16.7% 13.2% 10.5% 12.7% 17.2% 13.9% 10.9% 13.6% adj. EPS (INR) FY12E FY13E 104.8 38.8 5.1 53.4 126.7 46.3 6.4 61.5 P/E (x) FY12E FY13E 29.2 22.4 19.8 17.0 24.2 18.8 15.9 14.8 EV/EBIDTA (x) FY12E FY13E 19.5 14.0 12.5 13.3 16.0 11.3 9.9 10.6
Asian Paints Kansai Nerolac Berger Paints Akzo Nobel
Hold Hold Buy Buy
Sumit Duseja
sumit.duseja@spagroupindia.com Ph.No. +91-22-4289 5600 Ext. 630
Executive Summary
Industry Description
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
Paint Industry
Currently estimated at ~INR 210bn, Indian paint industry has grown at a CAGR of ~18.5% in last two years and expected to grow at a CAGR of ~17.5% in next four years to become INR 396bn industry in FY15. Indian paint industry growth is closely related with the GDP growth rate and has grown on an average 1.5-2x GDP growth rate since liberalization. Industry Size (INR Bn)
450 350 300 250 200 150 100 50 0 FY07 FY08 FY09 FY10 FY11 FY15
= 14.7% CAGR
=1 7.5 %
Decorative vs. Industrial

Indian paint industry can be classified into decorative and industrial paints with the market share in the ratio 80:20.
Decorative Paints (INR ~170bn)

General product wise paint classification: Premier decorative paints are water based acrylic emulsions used mostly in metros and other large cities and high end offices The medium range consists of solvent based enamels which are popular in smaller cities and towns Distempers are economy products demanded in the semiurban and rural markets. This segment is dominated by unorganized sector. Margins of distemper lie between emulsions and enamels.
400
(INR Bn)
CA GR
137
148
170
208
396
Source: Industry, SPA Research
Industry vs GDP Growth

25% 20% 15%
In decorative paints segment solvent based paints (enamels) has a larger share of ~33% but there is a significant change in trend towards adopting premium water based paints (emulsions) which are growing at much faster rates of ~20% in volume terms in last 4-5 years. In emulsions, exterior emulsions are growing faster than interior emulsions. Decorative Paints Breakup (%)
120
Enamels 15% Interior Emulsions 33% Exterior Emulsions Distemper Cement Paint 12% 14% Wood Finishes Putty Primers, Thinners etc
Source: AC Neilson, SPA Research
10% 5% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Industry Grow th
Source: SPA Research
6% 4% 4% 13%
GDP Grow th
Industry Structure
Organized vs Unorganized
Indian paint industry is dominated by organized sector which currently captures ~67% market share. Organized sector has grown at a higher rate vis--vis unorganized sector in last few years. Unorganized sector mostly offers lower end products like low end enamels, distempers, lime wash, cement paint etc. Rising disposable income and created awareness from marketing efforts by organized players resulted in consumers preferring for better quality and higher end products like emulsions.
Traditionally repainting has dominated the demand for decorative paints but higher construction activities on back of demand for housing space has resulted in higher growth for new painting demand. Share of fresh demand for paints has increased to ~30% currently from ~15% a decade ago. Region-wise classification: Region-wise, West region market accounts for 32% of paint industry revenues followed by South (28%), North (26%) and East (14%) in order (Chart). Rural regions and smaller towns contribute 40% of the paint industry sales. Growth in Tier II and Tier III cities is higher than the growth in urban markets due to higher construction activities and increasing rural income.
Akzo Nobel Kansai Nerolac Berger Paints
Executive Summary
Asian Paints
Regional Market Breakup
Industry Breakup
14% 32% 26% 28%

Decorative Paints Protective Coatings & GI 80% 20%
32%
10% 23%
35%
Automotive Paints Powder Coatings
West
South
North
East
Others (Marine, packaging etc)

Tinting systems a trend now: Color dispensing machine also known as dealer tinting system (DTS), both computerized and manual, have transformed the business, particularly on the manufacturing and distribution sides. Earlier, paint companies were required to manufacture all the shades in all the packs (five to eight packs). A tinting machine helps mix small color tubes with a white base paint to create a new shade instead of keeping 3000+ SKUs which is challenge to even paint companies. The machines altered the production pattern from shades to producing bases thus providing economies of scale, reduced inventory levels and eliminated redundancy of stocks. It has cut down the new products introduction cycle considerably. This has helped expand the range of shades for each product category, offering a choice of shades to consumers in the hundreds. For the retailers also, it eliminated the sales loss for want of range/desired shade. The machines have brought a total change in the way business is transacted and revolutionized business processes as well. DTS a trend
30000 25000 20000 15000 10000 5000 0 Asian Paints Berger Paints Kansai Nerolac 17500 9500
The industrial paints segment has grown at a fast pace of more than 15% in last 4-5 years on back of boom in auto and consumer durables demand along with rising industrial spend.
Opportunity
The economic growth in India has lead to higher disposable income, increasing urbanization, easy availability of credit and a concurrent growth in construction, automobiles and consumer durables segment which have emerged as the driving force behind the rise in current consumption of paints. Industry has experienced dynamic changes in the last decade in terms of changing environment and structure which propelled it to a high growth trajectory. However, India per capita consumption of paints is still abysmally low at 1.5Kg/annum compared to world average of 15Kg and 25Kg for US. It is even lower than Sri Lanka with per capita consumption of 3.5/Kg. This however indicates tremendous opportunity for paint industry which is currently highly under-penetrated. Per Capita Consumtion (Kg)
60 50 40 (kgs) 38.0 19.0 21.0 25.8 51.7
2000 3000 12500 8000 2500 4000 Akzo Nobel
30 20 10 0 1.5 India 2.5 China 3.5 Sri Lanka 5.0 12.0 15.0
Germany
Malaysia
France
Japan
US
Dealers w ith DTS

Source: Company, SPA Research
Dealers w ithout DTS
Source: Colourworlds, SPA Research
Industrial Paints (INR ~40bn)

Market share of industrial paints in India of ~20% is low compared to some developed countries where it is ~50%. Industrial paints segment mostly offers products like automotive coatings (35%), powder coatings (10%), and protective coatings & general industrial coatings (32%).
Executive Summary Industry Description Asian Paints
Demand for repainting: With change in lifestyle on back of rising income levels, there has been considerable increase in discretionary spend. Also, to keep up with status in the society, people aspire for cleaner and better looking homes. There is always a need for repainting during marriage, home shifting, festivals and various other occasions. Repainting demand
Akzo Nobel Kansai Nerolac Berger Paints 3
Singapore
Sweden
Qatar
therefore has been transforming from more of a discretionary spend to somewhat need based spend. Significant up-trading trend is visible in Tier II and Tier III cities with the shift from lower and economy products like distempers and enamels to high end emulsion paints. Increase in rural income is further supporting the sustainability of paint industry growth rate. Rising Income Level
100% 80% 60% 40% 20% 0% Year 2009
Source: CRISIL, SPA Research
11.6% 17.4%
16.8% 18.6% High Income (> INR 200000)
71.1%
64.6%
Middle Income (INR 100000-200000) Low Income (<INR 100000)
Capacity Addition: To meet the strong ensuing demand, many paint companies have planned huge capacity expansion in next 2 years. Top four domestic companies plan to expand capacities from cumulative 1.16mn MT in FY11 to 1.68mn MT by FY13. Capacity (Lakh tonnes/annum)
1000000
Year 2014E
Fresh paint demand: Beside demand for new paints is also very strong. Indian demography is quite young with 60% of population below the age of 30 years which creates a high demand for housing. Higher housing construction creates demand for fresh paints in decorative segment. Based on the findings of Ministry of Housing & Urban Poverty Alleviation, India, there is a shortfall of 24.7mn dwelling units at the beginning of 11th Five year Plan which will increase to 26.5mn units by the end of it. This represents high demand for housing construction in India. No of Pakka Households-Urban (mn)
70 60 50 (INR mn) 40 30 20 10 0 2001 2005 2010 2015E 41.2 45.3 57.5 51.0
800000 600000 400000 200000 0 Asian Paints Berger Paints FY11

Kansai Nerolac FY13E
Akzo Nobel
Threats
Raw material cost inflation
Manufacturing of paints requires more than 300 different ingredients. Key ingredients like titanium dioxide (TiO2) and oil derivatives constitutes 15-20% and 20-40% of the of raw material cost respectively. Cost of titanium dioxide is witnessing huge rise due to supply side constraints which arose from the lack of capacity addition and slow restarting of shut down plants after 2008-09 recession. The Indian prices of titanium dioxide have risen by ~29% in FY11 from 155/Kg to 200/Kg. The prices are continuously rising and have increased by another ~10% in two months since the beginning of FY12. Crude prices have also witnessed strong upsurge with improvement in global economic environment. Crude prices have risen by ~40% from USD 83/barrel to USD 117/barrel in FY11.
Source: Ministry of Housing & Urban Poverty Alleviation, SPA Research
Industrial Paints to see high growth: Robust demand for auto (automotive coatings), consumer durables (powder coatings) and infrastructure spend (performance/protective and general industrial coatings) by private players and government creates fresh demand for industrial paints.
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
TiO2 Dupont India Prices (INR per Kg)

220 200 180 160 140 120 100 210508 210509 210510 210511
Increasing Competition
Entry of new players: Distribution network a strong deterrent Attracted by huge market opportunities many foreign players like Sherwin Williams (USA), Nippon paints (Japan), National Paints (Dubai) and Jotun paints (Europe) are planning to expand in India by setting up/expanding their own manufacturing facilities or by acquiring small paint companies. Strong distribution network is a major deterrent for new entrants. Also, among top paint companies in world, some like Akzo and Kansai are already present in India and rest have either technical collaboration or a joint venture with their Indian counterparts. Threat from imports and unorganized sector is low Despite fall in import duty on paints from 40% to 10% in last decade, imports have not been a threat to Indian paint companies. Indian climatic conditions are not conducive for foreign formulations and modification cost in product formulation is quite high. Unorganized Sector: To mitigate the competition from unorganized sector many paint companies outsource the manufacturing of low cost products like enamels, distempers, primers etc.
Source: Bloomberg, SPA Research
Brent Crude ($/barrel)

160 140 120 100 80 60 40 20 0 10/4/2007
10/4/2008 10/4/2009 10/4/2010
To mitigate the rising cost of raw materials and to protect margins, paint companies hiked prices of their products by 812% but they were not sufficient to prevent erosion of EBIDTA margins. However, prices are expected to stay stable and partly cool off with addition of new capacities resulting better supply of key raw materials in FY13.
Also, installation of DTS and offering of other value added services like colour consultancy, home painting services and colour experience in exclusive stores strengthen the grip of the paint companies.
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
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June 15, 2011
Asian Paints
CMP: INR 3,070 Recommendation: HOLD Target: INR 3,168
Paint Industry Asian Paints, largest decorative paint company in India has a dominant market share of more than 50% in organized sector. The company has presence in 17 counties with 22 manufacturing facilities. It is one of the fastest growing FMCG companies with 4 year revenue CAGR of 20.4%. . Dominance to stay
Despite increasing competition from domestic and major foreign paint companies, Asian Paint has maintained its market leadership and has increased its market share from ~48% in FY04 to ~54% in FY11. We expect it to maintain its dominance going forward with further increase in market share backed by higher sales growth.
International and Industrial business to gain traction

Industrial Segment: Asian Paints has signed a second equal JV agreement with PPG Industries Inc for Non Decorative and Non- Auto Paints in Jan 2011. The arrangement is subject to regulatory approval and is expected to be completed during H2FY12. We expect industrial segment business to perform well on back of robust demand of automotives, consumer durables and higher infrastructure investments. International business: International business division reported a meager 1.9% growth in FY11 revenues on the back of slowdown in international economies and disruptions in operations in MENA region which contributes more than 50% to international business division. Going ahead, with improvement in international economic environment and better operational efficiencies, we expect international business to grow at a 2 year CAGR of 10.2%.
Maximum beneficiary of high GDP growth rate

Asian Paints is having larger presence in South and West markets which contribute ~60% to overall paint industry sales. Company also has strong presence in fast growing rural markets which contributes ~45% to its overall revenue. We expect company to report revenue growth at a 2 year CAGR of 19.9% to INR 90,921.2mn in FY13 in its standalone business backed by strong volume growth.
High competitive advantage and positioning

Asian Paints offers products across all the categories in terms of types of products and customer segmentation. Emulsion which is the fastest growing category at ~20% volume growth contributes ~50% of Asian paints decorative paint segment. Unmatched dealers network of ~27,000 dealers give Asian paints high competitive advantage. With initiatives like Signature stores, Colour Ideas, home painting solutions, company is focusing on increasing services along with product offerings. Company's ad spends (~INR 2931mn) are highest among its peers giving it stronger brand recall and occupy larger mind share.
Valuations
Asian paints having dominant position in paint industry is well poised to take maximum benefit of high GDP growth rate. With changing lifestyle needs, high disposable income and boom in construction activities, we expect Asian paints to grow at a revenue CAGR of 18.8% in the next two years. Based on high RoNW, higher EBIDTA margins and strong growth rate, we value the stock at 25x FY13E EPS of INR 126.7 which implies a target price of INR 3,168. We therefore, initiate the coverage with a Hold rating.
Shareholding (%) Dec-10 Promoters FIIs DIIS Others 52.33 14.61 11.38 21.67
Mar-11 52.34 14.45 11.56 21.66
Key Data BSE Code NSE Code Bloomberg Code Reuters Code Shares Outstanding (mn) Face Value 500820 ASIANPAINT APNT IN ASPN.BO 95.9 10 294.5 3,230/2,283 33,512 18,132.2
Y/E Mar (INR mn) Net Sales Growth (%) EBIDTAM (%) Adj. PAT Growth (%) Adj. PATM (%) Adj. EPS (INR) DPS Dividend Yield (%) P/E (x) P/BV (x) EV/EBIDTA Net Debt/Equity RoACE (%) RoANW (%)
FY09 54,639.0 24.0% 12.3% 3,942.4 -4.1% 7.2% 41.1 17.5 0.6% 74.7 24.5 44.6 0.1 31.8% 36.1%
FY10 66,809.4 22.3% 18.4% 8,292.9 110.4% 12.4% 86.5 27.0 0.9% 35.5 17.2 24.3 0.1 52.3% 56.9%
FY11 77,062.4 15.3% 17.0% 8,432.4 1.7% 10.9% 87.9 32.0 1.0% 34.9 13.5 22.8 0.0 41.1% 43.3%
FY12E
FY13E
92,073.3 108,827.0 19.5% 16.7% 10,052.9 19.2% 10.9% 104.8 40.0 1.3% 29.3 10.7 19.5 0.1 39.4% 40.8% 18.2% 17.2% 12,156.7 20.9% 11.2% 126.7 45.0 1.5% 24.2 8.5 16.0 0.0 38.4% 39.2%
Relative share price performance

150 140 130 120 110 100 90 80 Aug10 Sep10 Oct10 Nov10 Dec10 Feb11 Mar11 Apr11 Jun10 May11 Jul10 Jan11
Mcap (INR bn) 52 Week H/L 2W Avg. Qty, BSE Sensex
AsianPaints
Sensex
Sumit Duseja
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
Investment Rationale
1) Dominance to stay Despite increasing competition from domestic and major foreign paint companies, Asian paint has maintained its market leadership and increased its market share and dominance at the expense of other domestic players and unorganized sector.Organized sector has been growing faster vis--vis unorganized sector indicating increasing penetration by organized sector and consumer preference for better products with the rise in income levels.Based on our analysis on a set of companies in organized sector with market share of more than 5%, Asian Paints has been consistently increasing its overall share in the total cumulative revenue. The share of Asian Paints has increased from ~48 % in FY04 to ~54% in FY11. Gaining Market Share
56% 54% 52% 54.8% 54.7% 54.7% 54.3% 54.8% 50% 48% 46.3% 46.8% 47.9% 46% 44% 42% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Asian Paints standalone (Indian) business has grown at a 2 year CAGR of 21.7%. We further expect it to report revenue growth at a 2 year CAGR of 19.9% to INR 90,921.2mn in FY13 backed by strong volume growth. Standalone Business Trend
100000 80000 60000 40000 20000 0 FY09 FY10 FY11 FY12E FY13E Grow th (%) Standalone Revenue (INR mn)
24.9% 20.0%
23.4%
18.8% 21.1%
30% 25% 20% 15% 10% 5% 0%
Because of strong brand recall, consumers preference for Asian paints product has been higher.Dominant position in the industry helps Asian Paints to be able to extract higher margins from its dealers and is able to maintain lower debtor days at ~26 days which is lower compared to ~40 days for the industry. 2) Maximum beneficiary of high GDP growth rate The growth prospects of paint industry are highly correlated with the growth of the economy and it has been growing at 1.5-2x GDP growth rate post liberalization. Higher GDP growth rate puts more money in the hands of consumers increasing their discretionary spending. Geographical presence: Geographical presence of Asian paints gives it a strong hold and edge over competitors. Asian Paints is having larger presence in south and west markets which contribute ~60% to overall paint industry sales. However, company is seeing higher growth from north and west regions and increasing its presence by penetration through dealer's network. Company also has strong presence in fast growing rural markets which contributes ~45% to its overall revenue. According to the management, growth in rural markets is ~150-200bps higher than the growth in urban markets due to higher construction activities and increasing rural income.
8 Executive Summary Industry Description Asian Paints
Capacity addition: On back of higher demand Asian Paints has planned to expand its capacity by ~0.3mn MT in next two years to ~0.89mn MT from current capacity of 0.59mn MT by setting up a greenfield plant for a capex of INR 10bn in Khandala which is scalable to ~0.4mn MT. Total capex is being funded through internal accruals. The plant is expected to be commissioned by FY13. Presently the company is operating at higher capacity utilization of ~80%. Company commissioned a plant in Rohtak, Haryana of capacity ~0.15mn MT thereby increasing its capacity from ~0.44mn MT in FY10 to ~0.59mn MT in FY11. 3) High competitive advantage and positioning Product offerings: Asian Paints offers products across all the categories in terms of types of products and customer segmentation.
Product Offerings Exterior Emulsion Interior Emulsion Enamel Distempers Brands Apex, Duracast Royale, Tractor Apcolite, Utsav Tractor, Utsav Price (INR/Litre) (Min-Max) 150-290 120-400 150-190 45-95
48.3%
50.4%
Source: SPA Research *prices are in Mumbai region as on 8 May, 2011
Emulsion which is the fastest growing category at ~20% volume growth contributes ~50% of Asian paints decorative paint segment. The margins in emulsion paints are higher than the margins in distempers and enamels. The company has introduced lower priced interior emulsions in order to encourage users of distempers and enamels to upgrade themselves to emulsion paints. Unmatched Dealers network: Unmatched dealers network give Asian paints high competitive advantage. Company expects to add 1,500-2,000 new dealers every year to its already enviable network of ~27,000 dealers.
Out of total dealers network ~17,500 dealers have Asian Paints dealer tinting system installed known as Colour World which enables the company to cut inventory, packaging and space cost helping it aid margins. Dealers have to fork out INR 0.2mn for installation of machine in their shop. In this way, Asian Paint is able to strengthen its hold over its dealership network further reducing any threats from competitors. Initiatives: With initiatives like Signature stores and converting already existing dealers shop into similar model as signature stores (known as Colour Ideas, 16 till now), company is focusing on increasing services along with product offerings. Through these stores company offers colour consultancy, demonstration of colour application, varied themes to decorate home and provides technical assistance in choosing right colour suiting the home and surroundings. It also offers home painting services in 13 cities at a fixed cost per square feet for a particular paint type. Encouraged by the customer response for its signature store, company is shortly opening another store in Connaught Place, New Delhi. We believe that this strategy to offer better value to customers would increase the stickiness and loyalty for the company's product along with brand enhancement. Higher Ad Spends: Company's ad spends are highest among its peers giving it stronger brand recall and occupy larger mind share. Paint demand comes mostly from customer pull rather than distributor push. Therefore, a strong brand positioning is critical for higher sales in the industry. Ad & Publicity Exp. in FY10 (INR mn)
3000 2500 2000 1500 1000 500 0 2,442.5 Asian Paints 4.4% 865.0 9.2% 4.6% 10% 8% 6% 4.0% 679.6 Kansai Nerolac 4% 2% 0% Akzo Nobel Berger Paints
coating to leading two-wheeler companies: Hero Honda Motors Ltd., TVS Motor Company, and Bajaj Auto Ltd. With the acquisition of the advanced refinish 2K business from ICI India in March, 2007, Asian PPG became the leader in the refinish segment. Asian Paints has also signed a second 50:50 JV agreement with PPG Industries Inc for Non Decorative and Non- Auto Paints in Jan 2011. Industrial businesses of both Asian Paints and PPG will be part of this second JV. Asian Paints is to take lead in the second venture and PPG to take the lead in APPG in order to utilize their respective strengths to best capture the growth in infrastructure development and globally driven markets in India. The arrangement is subject to regulatory approval and is expected to be completed during H2FY12. APPG and Industrial paint segment (APICL) of Asian Paints contributed 4.8% (INR 3.7bn) to consolidated revenues, growing by 23.7% in FY11. We further expect this momentum in sales growth to sustain on back of robust demand of automotives, consumer durables and higher infrastructure investments. Revenue Trend: APPG* + APICL (INR mn)
4000 3500 3000 2500 2000 1500 1000 500 0 30.1% 18.6% 35% 30% 23.7% 25% 20% 15% 10% 5% 0% -5% FY11 Grow th (%)
-1.4% FY08 FY09 FY10
Revenue from APPG* + APICL

770.2
International business: International business division reported a meager 1.9% growth in revenues of INR 9.9bn and contributed 12.8% in FY11 consolidated sales. The lower revenue growth was on the back of slowdown in international economies and disruptions in operations in MENA region which contributes more than 50% to international business division.
Value Sales (INR mn) Caribbean Middle East South Asia South Pacific Total
Ad & Publicity Exp. in FY10 (INR mn) as a % of Net Sales
FY10 1,612.0 5,361.0 2,008.0 719.0 9,700.0
FY11 1,568.0 5,159.0 2,403.0 750.0 9,880.0
YoY (%) -2.7% -3.8% 19.7% 4.3% 1.9%
4) International and Industrial business to gain traction Industrial Segment: Asian PPG Industries (APPG), a 50:50 JV of Asian Paints with PPG Industries (USA), is the second-largest player in the automotive OEM paint segment with a market share of ~24%. APPG is one of the largest suppliers of paints to Hyundai Motor India, General Motors India and it is the sole supplier to New Holland Tractors India. Asian PPG is also the leading supplier of acrylic CED
The company has presence in 16 other countries except India along with 13 manufacturing facilities. It is the largest paint company in Caribbean region, top 3 in South Pacific Islands and South Asian regions. Also the company is third largest in the Middle East with ~15% market share in Egypt.
Akzo Nobel Kansai Nerolac Berger Paints 9
Company has exited loss making unit in Singapore in FY11 in its international business portfolio. Going ahead, with improvement in international economic environment and better operational efficiencies, we expect international business to show improved performance and grow at a two year CAGR of 10.2%.
Financial Overview
1) Revenue and Profit growth: FY10 contains 15 month consolidation of international subsidiaries to bring in line with standalone reporting. On like to like basis revenues grew by 19.5% in FY11. On the back of robust demand scenario due to higher GDP growth rate and Asian paints strong positioning in the industry, we expect its topline to record a sales of INR 108.8bn in FY13 at 2 year CAGR of 18.8%. We expect PAT to grow at a 2 year CAGR of 20.1% to INR 12.2bn in FY13. Net Sales Trend
120000 100000 80000 24.0% 22.3% 15.3% 18.2% 19.5% 30% 25% 20% 15% 10% 5% 0% FY09 FY10 FY11 Net Sales (Consol, INR mn) FY12E FY13E Grow th (RHS)
Investment Concerns
1) Raw material cost inflation: Raw material (RM) which accounts for ~60% of Net Sales witnessed strong inflation of 13.9% in FY11 on back of rising prices of key raw material like titanium-dioxide (which contributes 15-18% of RM cost) and increasing prices of crude derivatives (contribution of more than 20%). RM breakup (FY10)
11% 15% 36%
Pigments, extenders, minerals etc Additives Oils & Solvents Monomers & Resins 17% Others
60000 40000 20000 0
21%
APAT Trend
14000 12000 10000 8000 6000 4000 2000 0 FY09 -4.1%
110.4%
120% 100% 80% 60% 40% 1.7% 19.2% 20.9% 20% 0% -20%
Although company has affected cumulative price increases of ~12%, they were not enough to protect the margins. Company's gross margins declined from 43.8% in FY10 to 41.9% in FY11. In light of sustained raw material cost pressure, company increased the prices of its products by cumulative ~6.8% till 1st June, 2011. Though this would help cushion the margins, continuous price increases could pose a threat to demand scenario. On back of higher RM cost inflation, we expect company's gross margins to reduce by 64bps in FY12 to 41.3%. However, we expect margins to improve by 45bps in FY13 to 41.8% on back of expected benign raw material cost inflation. 2) Slowdown in GDP growth rate: Since growth of paint industry has a strong positive correlation with GDP growth rate, any drastic fall in economic growth prospects could pose a serious risk to our growth projections. 3) Increasing competition: Entry of new foreign players like Nippon, Jotun, Sherwin Williams and National Paints; and aggressive capacity addition by existing players indicates increasing competitive intensity. However, Asian Paints has been able to not only defend its market share but continuously increasing it with aggressive market strategies and by anticipating early the next growing trend in the industry (for e.g. company realized the potential for emulsion paints much before its peers).
FY10
FY11
FY12E
FY13E Grow th (RHS)
APAT (Consol; INR mn)
2) Due to continuous pressure from raw material cost and un-equivalent price increases, we expect company's gross margins to fall resulting in the erosion in EBIDTA and PAT margins in FY12. We expect Asian paints margins to reduce by 36bps to 16.7% in FY12. However, we expect EBIDTA margins to rise to 17.2% on back of expected lower raw material cost inflation in FY13.
10
Akzo Nobel
Kansai Nerolac
Berger Paints
Margin Profile
50% 38.3% 40% 30% 18.4% 20% 10% 0% 7.2% FY09 FY10 12.3% 12.4% 17.0% 16.7% 17.2% 43.8% 41.9% 41.3% 41.8%
Valuations
Asian paints having dominant position in paint industry is well poised to take maximum benefit of high GDP growth rate. With changing lifestyle needs, high disposable income and boom in construction activities, we expect Asian paints to grow at a revenue CAGR of 18.8% in the next two years. Based on high RoNW, higher EBIDTA margins and strong growth rate, we value the stock at 25x FY13E EPS of INR 126.7 which implies a target price of INR 3,168. We therefore, initiate the coverage with a Hold rating.
3500 3000 30 25 20
10.9% FY11 EBIDTA Margins
10.9% FY12E
11.2% FY13E
Gross Margins
APAT Margins
3) Going forward, we expect return on average capital employed (RoACE) and return on average net-worth (RoANW) to get in line with its long term average of above 35% after disproportionately high in FY10. Return Profile
60% 55% 50% 45% 40% 36.1% 35% 30% FY09 31.8% FY10 FY11 RoACE FY12E RoANW 52.3% 43.3% 40.8% 41.1% 39.2% 56.9%
2500 2000 1500 1000 500 0 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Berger Paints
10
Company Brief
39.4% 38.4% FY13E
Asian Paints is the largest decorative paint company in India since last 4 decades and has a dominant market share of more than 50% in organized sector. The company has presence in 17 counties with 22 manufacturing facilities. It is one of the fastest growing FMCG companies with a 4 year CAGR of 20.4%. It is also the third largest player in industrial paints with a market share of ~ 13%. Chemical business which contributed 1% to consolidated revenue of FY11 consists of Phthalic Anhydride and Pentaerythritol, which are used in the paint manufacturing process.
Revenue Breakup (FY11)
Decorative Manufacturing Facilities in India Bhandup (Mumbai, Maharashtra)
13% 5% 1% APL - Paints Chemicals APPG* + APICL International 81%
Ankleshwar (Gujarat) Patancheru (Andhra Pradesh) Kasna (Uttar Pradesh) Sriperumbudur (Chennai, Tamil Nadu) Rohtak (Haryana) - Commissioned in April 2010 Kesurdi (Maharashtra) Will be ready by 2013
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
11
Financials
Profit & Loss
Y/E March (INR mn) Net Sales Growth (%) Cost of Goods Sold Gross Profit Gross Profit Margin (%) Employee Cost Other Operating Exp. EBIDTA EBIDTA Margin (%) Dep./Amortization EBIT Interest Expense Other Income Exceptionals EBT Tax Expenses PAT Minority Interest Adjustment to PAT APAT Growth (%) APAT Margin (%) FY09 54,639.0 24.0% 33,706.4 20,932.6 38.3% 3,715.2 10,516.7 6,700.7 12.3% 743.8 5,956.9 263.2 510.1 (12.4) 6,168.7 1,973.9 4,194.8 216.4 (36.0) 3,942.4 -4.1% 7.2% FY10 66,809.4 22.3% 37,579.6 29,229.8 43.8% 4,362.8 12,590.8 12,276.2 18.4% 835.6 11,440.6 284.7 1,405.0 11.5 12,570.2 3,731.1 8,839.1 482.7 (63.5) 8,292.9 110.4% 12.4% FY11 77,062.4 15.3% 44,745.6 32,316.8 41.9% 4,539.9 14,647.2 13,129.7 17.0% 1,131.3 11,998.4 222.3 826.3 12,602.4 3,788.9 8,813.5 381.1 8,432.4 1.7% 10.9% FY12E 92,073.3 19.5% 54,042.5 38,030.8 41.3% 5,174.8 17,503.6 15,352.4 16.7% 1,307.7 14,044.7 254.3 1,232.2 15,022.6 4,515.8 10,506.8 453.9 10,052.9 19.2% 10.9% FY13E 108,827.0 18.2% 63,391.5 45,435.5 41.8% 6,020.1 20,726.2 18,689.2 17.2% 1,678.8 17,010.4 232.4 1,388.4 18,166.4 5,460.8 12,705.6 548.9 12,156.7 20.9% 11.2% - Inventory - Debtors - Loans and Advances Total Current Assets Total Assets 7,689.5 5,719.2 2,469.2 17,987.1 28,328.0 9,558.8 5,425.2 2,392.5 18,436.9 37,845.8 13,054.3 5,855.3 2,947.5 23,189.5 45,940.9 12,927.7 8,497.5 3,223.0 25,842.6 55,073.0 18,299.7 7,929.2 3,984.6 31,475.8 66,874.9 Current Liabilities Provisions Deferred Tax Liability Total Liabilities Gross Block Acc.Depreciation Net Block CWIP Investments - Cash 10,146.8 1,774.5 533.1 28,328.0 15,119.6 6,483.8 8,635.8 921.1 784.0 2,103.7 13,796.5 3,150.4 562.3 37,845.8 15,371.2 6,275.7 9,095.5 4,072.3 6,241.1 1,058.3 16,403.7 3,365.3 851.8 45,940.9 20,205.3 7,407.0 12,798.3 733.6 9,219.5 1,330.4 19,034.0 3,662.8 1,109.7 55,073.0 23,625.5 8,714.7 14,910.8 5,813.4 8,506.2 1,194.4 23,086.6 4,057.3 1,374.0 66,874.9 30,582.2 10,393.5 20,188.7 3,356.7 11,853.6 1,262.4
Balance Sheetmn)
Y/E March (INR mn) Share Capital Reserves and Surplus Total Networth Minority Interest Res. Total Debt FY09 959.2 11,072.5 12,031.7 755.7 3,086.2 FY10 959.2 16,140.6 17,099.8 944.5 2,292.3 FY11 959.2 20,915.0 21,874.2 1,098.9 2,347.0 FY12E 959.2 26,478.9 27,438.1 1,253.3 2,575.2 FY13E 959.2 33,585.4 34,544.6 1,407.7 2,404.8
Key Ratiomn)
Y/E March (INR mn) Per Share Data (INR) Reported EPS Adj. EPS Growth (%) CEPS DPS BVPS Return Ratios (%) RoACE RoANW RoIC Liquidity Ratios Net Debt/Equity Interest Coverage Ratio Current Ratio Quick Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Payable Days Valuation Ratios P/E (x) P/BV (x) MCap/Net Sales (x) P/CEPS (x) Dividend Yield (%) EV/Net Sales (x) EV/EBIDTA (x) FY09 41.6 41.1 -4.1% 49.2 17.5 125.4 31.8% 36.1% 40.5% 0.1 22.6 1.5 0.7 2.0 92.9 34.5 125.5 74.7 24.5 5.4 62.4 0.6% 5.5 44.6 FY10 87.0 86.5 110.4% 95.8 27.0 178.3 52.3% 56.9% 69.5% 0.1 40.2 1.1 0.4 2.0 80.3 30.4 108.3 35.5 17.2 4.4 32.0 0.9% 4.5 24.3 FY11 FY12E 87.9 87.9 1.7% 99.7 32.0 228.0 41.1% 43.3% 49.3% 0.0 54.0 1.2 0.4 1.8 83.8 26.7 116.3 34.9 13.5 3.8 30.8 1.0% 3.9 22.8 104.8 104.8 19.2% 118.4 40.0 286.1 39.4% 40.8% 46.0% 0.1 55.2 1.1 0.4 1.8 92.2 28.4 123.2 29.3 10.7 3.2 25.9 1.3% 3.3 19.5 FY13E 126.7 126.7 20.9% 144.2 45.0 360.1 38.4% 39.2% 44.3% 0.0 73.2 1.2 0.3 1.8 87.7 27.5 119.7 24.2 8.5 2.7 21.3 1.5% 2.8 16.0
Cash Flowmn)
Y/E March (INR mn) EBT Less: Other Incm/Excp. Add: Depreciation Add: Interest Paid Taxes Paid Change in WC Others CFO (a) Capital Expenditure Asset Sales Change in Investment Others CFI (b) Change in Equity Debt Raised/(Repaid) Dividend paid (inc. tax) Interest Paid CFF (c) Change in Cash (a+b+c) Opening Cash Closing Cash FY09 6,168.7 252.0 743.8 263.2 (1,919.2) (1,431.1) 445.7 4,019.1 (3,100.5) 217.5 (10.6) 193.1 (2,700.5) (41.2) (1,999.3) (263.2) (2,303.7) (985.1) 3,088.8 2,103.7 FY10 12,570.2 1,054.3 835.6 284.7 (3,169.4) 1,337.7 (224.5) 10,580.0 (3,953.1) 120.6 (4,814.3) 340.2 (8,306.6) (675.2) (2,358.9) (284.7) (3,318.8) (1,045.4) 2,103.7 1,058.3 FY11 FY12E FY13E 18,166.4 1,388.4 1,678.8 232.4 (5,196.5) (1,512.6) 11,980.0 (4,500.0) (3,347.4) 1,388.4 (6,459.0) (170.4) (5,050.2) (232.4) (5,453.0) 68.0 1,194.4 1,262.4 12,602.4 15,022.6 826.3 1,131.3 222.3 (1,873.4) 1,232.2 1,307.7 254.3 (160.8) -
(3,507.4) (4,257.9)
7,748.9 10,933.6 (1,490.8) (8,500.0) (2,978.4) 751.2 54.7 (222.3) 272.1 1,058.3 1,330.4 713.3 1,232.3 228.2 (254.3) (136.0) 1,330.4 1,194.4
(3,718.0) (6,554.4)
(3,591.2) (4,489.0) (3,758.8) (4,515.2)
12
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
June 15, 2011
Akzo Nobel India

CMP: INR 907 Recommendation: Buy Target: INR 1,157
Paint Industry Akzo Nobel India (Akzo) known for its premium segment product Dulux has a market share of ~910%. Company's business can be broadly divided into decorative paints and refinish auto paints where later contributes ~15% to its revenues. Erstwhile ICI, the companies name was changed to Akzo Nobel in FY10 after it was acquired by largest paint company in the world in 2008. Plans to fill the product gap; bid to renew market share
Akzo Nobel India (formerly ICI India) is known for its strong brand Dulux in premium market segment and ICI in economy market segment. Due to lack of product offerings for mid-market and lower-market segment, company has been continuously losing market share to competition. However, with the complete revamp of top management team in last two years, company is expecting to aggressively launch new products in mid market segment to fill the product gaps and renew efforts to gain market share. We believe that company would record revenue CAGR of 20.5% in next two years on back of new product launches and increased sales & marketing efforts.
Refinish paint business to ride the growth of auto ownership

Refinish paint business which caters to refinish paint for automotives contributes ~15% to Akzo's overall revenues. Company has enhanced its focus to cater this business segment. With increasing ownership of automotives and tough road travelling conditions, we expect good demand for refinish paints. Therefore, we expect the business to perform well going forward.
Renewed focus to grow

Company is backed by the parent company Akzo Nobel, Netherlands which has consistently ranked as world's largest paint company. Backed by the renewed efforts from parent company with its bigger plans for Indian market, Akzo Nobel management has guided to become Euro 1bn entity by 2015. To achieve the target company is undergoing massive capacity expansion plans. It plans to double its capacity from current ~80,000 MT to ~160,000 MT by FY13.
EBIDTA margins to expand

Going ahead, we expect Akzo to benefit from higher operating leverage on back of expanding revenue base. Therefore we believe that company's EBIDTA margins to improve by 140bps from 12.2% in FY11 to 13.6% in FY13. On the back of improvement in margins and higher revenue growth, we expect Akzo's operating PAT to grow at a two year CAGR of 29.8% to INR 1244.0mn in FY13.
Valuations
Expect re-rating of valuation multiple: At CMP of INR 910, Akzo is trading at a PEG of 0.6 compared to 1.2, 1.2 and 0.7 for Asian Paints, Kansai Nerolac and Berger Paints respectively. We expect company to trade atleast on a PEG of 0.85 (avg growth of 29.8% in next two years), which is 30% discount to market leader Asian Paints. We believe the valuations are justified on back of higher growth in revenue and profits, improved margins and return on networth, and lowest capital employed amongst peers. This implies 25.4x FY13 EPS of INR 33.8 translating into target price of INR 1,157 (25.4x FY13 core EPS + 300/ share from Investment surplus) giving an upside of 28%. We initiate the coverage with BUY.
Y/E Mar (INR mn) FY09 9,087.0 -3.6% 12.9% 951.0 20.5% 611.0 9.2% 6.7% 25.0 16.0 16.0 1.8% 36.3 3.6 21.8 (1.0) 15.5% 11.0% FY10 9,471.0 4.2% 13.4% 1,593.0 67.5% 692.3 13.3% 7.3% 43.2 18.8 16.0 1.8% 21.0 3.4 18.8 (1.0) 15.7% 16.2% FY11 10,968.2 15.8% 12.2% 1,664.1 4.5% 737.9 6.6% 6.7% 45.2 20.0 18.0 2.0% 20.1 3.1 17.5 (0.9) 14.0% 16.0% FY12E 22.7% 12.7% 1,968.4 18.3% 968.6 31.3% 7.2% 53.4 26.3 18.0 2.0% 17.0 2.8 13.2 (0.9) 16.9% 17.1% FY13E 18.4% 13.6% 2,263.5 15.0% 1,244.0 28.4% 7.8% 61.5 33.8 20.0 2.2% 14.8 2.5 10.5 (0.8) 17.5% 17.7%
Strong balance sheet with investments of INR 10bn

As per FY2011 balance sheet, Akzo's cash and liquid investments stood close to ~INR10.2bn transforming into INR 275.6 per share (30% of market capitalisation). Going ahead, we expect the cash and liquid investments surplus to increase to INR 10.8bn (INR 294.4 per share) in FY2013, despite accounting for a capex of INR 2.2bn over next two years, driven by strong operating cash flows, high treasury income and improvement in margins.
Shareholding (%) Dec-10 Promoters FIIs DIIS Others 56.40 1.17 19.60 22.83 Mar-11 56.40 1.24 18.30 23.98 Key Data BSE Code NSE Code Bloomberg Code Reuters Code Shares Outstanding (mn) Relative share price performance
150 140 130 120 110 100 90 80 Oct-10 Feb-11 Mar-11 May-11 Jun-10 Nov-10 Dec-10 Sep-10 Jan-11 Jul-10 Aug-10 Apr-11
500710 AKZOINDIA AKZO IN ICI.BO 36.8 10 33.4 970/616 7,689 18,132.2
Net Sales Growth (%) EBIDTAM (%) Adj. PAT Growth (%) Operating PAT Growth (%) Optng. PATM (%) Adj. EPS (INR) Operational EPS DPS Dividend Yield (%) P/E (x) P/BV (x) EV/EBIDTA Net Debt/Equity RoACE (%) RoANW (%)
13,456.8 15,928.3
Face Value Mcap (INR bn) 52 Week H/L 2W Avg. Qty, BSE Sensex
Akzo
Sensex
Sumit Duseja
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
14
1) Plans to fill the product gap: bid to renew market share Akzo Nobel (formerly ICI) is known for its strong brand Dulux in premium market segment and ICI in economy market segment. Company has highest average realization per litre of ~INR 157 compared to INR 110, INR 105 and INR 80 for Kansai Nerolac, Asian Paints and Berger respectively. Avg. Realization FY11 (INR/Lt)
180 160 140 120 100 80 60 40 20 0 Berger Asian Paints Kansai Akzo Nobel 80 105 110 157
Net Sales Trend

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 22.7% 18.4% 15.8% 25% 20% 15% 4.7% -3.6% 10% 4.2% 5% 0% -5% FY08 FY09 FY10 FY11 FY12E FY13E Grow th (RHS) Net Sales (INR mn)
We believe that company would maintain a CAGR of 20.5% in next two years on back of new product launches and increased sales & marketing efforts. 2) EBIDTA margins to expand Akzo's gross margins is highest compared to its peers due to its presence largely in premium paints. However, despite this, Akzo's OPM has been ~600bps lower vis--vis Asian Paints owing to significantly higher overheads, particularly A&P spends (~at 9% of revenue compared to ~3.5-4.5% for its peers), due to lower revenue base. Margins Comparison (FY11)
50% 40% 16.6% 16.3% 16.1% 14.0% 12.8% 10.9% 9.5% 9.1% 10% 0% Gross Profit Margins Akzo Nobel FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Due to lack of product offerings for mid-market and lower-market segment, company has been continuously losing market share to competition. Akzo's market share fell to ~9% in FY11 compared to ~16% in FY04 Akzo Nobel (ICI) Market Share Trend
18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
47.4%
42.3%
30% 20% 18.1% 12.2%
EBIDTA Margins Asian Paints
However, with the complete revamp of top management team in last two years, company is expecting to aggressively launch new products in mid market segment to fill the product gaps and renew efforts to gain market share. Company reported a much improved YoY growth of 15.9% in FY11 after flattish growth in FY08 to FY10.
Going ahead, we expect Akzo to benefit from higher operating leverage as overheads get spread over a larger revenue base. Therefore we believe that company's EBIDTA margins to improve by 140bps from 12.2% in FY11 to 13.6% in FY13.
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
15
Margin Trend
60% 50% 40% 30% 20% 10% 0% FY09 FY10 Gross Margins
Investment & Cash Surplus/Share

350
49.0% 47.3% 46.8% 47.2%
43.9%
300 250 200 150 205.4 184.8
244.3
264.6
275.6
299.9
294.4
12.9%
13.4%
12.2%
12.7%
13.6%
100 50 0
FY11
FY12E EBIDTA Margins
FY13E
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
On the back of improvement in margins and higher revenue growth, we expect Akzo's operating PAT to grow at a two year CAGR of 29.8% to INR 1244.0mn in FY13. Operational PAT Trend
1400 1200 1000 800 600 400 200 0 FY08 FY09 FY10 FY11 FY12E FY13E Grow th (%) -2.2% 13.3% 9.2% 6.6% 31.3% 28.4% 35% 30% 25% 20% 15% 10% 5% 0% -5%
4) Refinish paint business to ride the growth of auto ownership Refinish paint business which caters to refinish paint for automotives contributes ~15% to Akzo's overall revenues. Company has enhanced its focus to cater this business segment and is focusing to revamp the brand strategy for 'Eterna' with clear market segmentation. The business continued its focus on demand generation through programmes like "The Great Finishers Club", colour workshops and training in colour matching skills for painters. Total Vehicles Ownership (mn)
400 350 300 250 200 150 102.4 125.2 100 50 0 2001 2003 2006 2013E 168.4 372.2
Operational PAT
3) Strong balance sheet with liquid investments of INR 10bn Over the years, the company had divested several of its businesses accumulating significant cash surplus on its balance sheet. Hence, as per FY2011 balance sheet, Akzo's cash and liquid investments stood close to ~INR10.2bn transforming into INR 275.6 per share (30% of market capitalisation). Going ahead, we expect the cash and liquid investments surplus to increase to INR 10.8bn (INR 294.4 per share) in FY2013, despite accounting for a capex of INR 2.2bn over next two years, driven by strong operating cash flows, high treasury income and improvement in margins.
Source: Industry, SPA Research
With increasing ownership of automotives and tough road travelling conditions, we expect good demand for refinish paints. Therefore, we expect the business to perform well going forward. 5) Renewed focus to grow Renewed focus to grow: Company is backed by the parent company Akzo Nobel, Netherlands which has consistently ranked as world's largest paint company for many years and has strong global brands. Backed by the renewed efforts from parent company with its strong plans for Indian market, Akzo Nobel management has guided to become Euro 1bn entity by 2015. Currently it's trading at MCap of 2.9x Net Sales. Assuming it maintains the same MCap to Net Sales ratio in FY15, company needs to grow its revenue at a CAGR of ~20% for next four years.
16
Executive Summary
Asian Paints
Doubling Capacity: To achieve the target company is undergoing massive capacity expansion plans. It plans to double its capacity from current ~80,000 MT to ~160,000 MT by FY13. It is quadrupling the capacity of its Hyderabad plant to 40,000 MT per annum. The additional capacity is slated to be available by Q2FY12 in this facility. Akzo plans to set up a green-field manufacturing facility in Madhya Pradesh or Karnataka with capacity between 0.05-0.1mn MT at an investment of up to INR 2.5bn, to be commissioned by FY13. Capacity & Utilization
200000 150000 100000 50000 0 FY08 FY09 FY10 FY11 FY12 FY13 89.5% 90.0% 76.5% 85.4% 72.8%
y cit pa Ca g lin ub Do
2) Inability to successfully launch new product categories Company's attempt to regain the market share by launching mid-segment products would be failed if it's unable to launch and market the products at the right price points and increase its distribution reach to Tier II and Tier III cities with higher growth rates.
Financial Overview
Net Sales Trend
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 22.7% 18.4% 15.8% 25% 20% 15% 4.7% -3.6% 10% 4.2% 5% 0% -5% FY08 FY09 FY10 FY11 FY12E FY13E Grow th (RHS) Net Sales (INR mn)
100% 58.0% 80% 60% 40% 20% 0%
Capacity (MT)
Utilization (RHS)
Operational PAT Trend

1400 1200 1000 800 600 400 200 0 FY08 FY09 FY10 FY11 FY12E FY13E Grow th (%) -2.2% 13.3% 9.2% 6.6% 31.3% 28.4% 35% 30% 25% 20% 15% 10% 5% 0% -5%
Investment Risk
1) High raw material cost inflation Higher than expected increase in raw material cost inflation along with inability to pass the same could pose a downside risk to our profit projections. Akzo is at higher risk from increase in prices of titanium dioxide compared to its peers. This is because TiO2 has highest percentage of ~19% in raw material cost (compared to ~14%-17% for others) RM breakup (FY10)
Operational PAT
Margin Trend
60%
Pigments, Tinters, Extenders
49.0% 43.9%
47.3%
46.8%
47.2%
50% 40% 30%
16% 19% 16%
16% 17% 16%
Latex, Monomers Resins Solvents Titanium Dioxide Others
20% 10% 0%
12.9% 6.7%
13.4% 7.3%
12.2% 6.7%
12.7% 7.2%
13.6% 7.8% FY13E
FY09 FY10 Gross Margins Operational PAT Margins
FY11 FY12E EBIDTA Margins
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
17
Return profile
20% 15% 15.5% 10% 11.0% 5% 0% FY09 FY10 RoACE FY11 FY12E RoANW FY13E 15.7% 14.0% 16.2% 15.8% 17.1% 16.9% 17.7% 17.5%
Company Brief
Akzo Nobel known for its premium segment product Dulux has a market share of ~9-10%. Company's business can be divided into decorative paints and refinish auto paints in the ratio of 85:15. Erstwhile ICI, the companies name was changed to Akzo Nobel in FY10 after it was acquired by largest paint company in the world in 2008. Akzo has three manufacturing facilities in Hyderabad (AP), Thane (Maharashtra) and Mohali (Punjab). Company is planning to launch new products to cater fast growing mid-market segment to regain its market share.
Valuations
Expect re-rating of valuation multiple: At CMP of INR 910, Akzo is trading at a PEG of 0.6 compared to 1.2, 1.2 and 0.7 for Asian Paints, Kansai Nerolac and Berger Paints respectively. We expect company to trade atleast on a PEG of 0.85 (avg growth of 29.8% in next two years), which is 30% discount to market leader Asian Paints. We believe the valuations are justified on back of higher growth in revenue and profits, improved margins and return on networth, and lowest capital employed amongst peers. This implies 25.4x FY13 EPS of INR 33.8 translating into target price of INR 1,157 (25.4x FY13 core EPS + 300/share from Investment surplus) giving an upside of 28%.We initiate the coverage with BUY.
Companies Asian Paints Kansai Nerolac Berger Paints Akzo Nobel

CMP (INR) 3,070 875 103 907
PAT Gr FY12E 19.2% 11.4% 21.4% 31.3%
PAT Gr FY13E 20.9% 19.4% 24.6% 28.4%
EPS (INR) FY12 104.8 38.8 5.1 26.3
EPS (INR) FY13 126.7 46.3 6.4 33.8
P/E (x) FY12 29.3 22.6 20.2 24.0
P/E (x) FY13 24.2 18.9 16.1 18.0
PEG (x) 1.2 1.2 0.7 0.6
18
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
Financials
Profit & Loss
Y/E March (INR mn) Net Sales Growth (%) Cost of Goods Sold Gross Profit Gross Profit Margin (%) Employee Cost Other Operating Exp EBIDTA EBIDTA Margin (%) Dep./Amortization EBIT Interest Expense Other Income Exceptionals EBT Tax Expenses PAT Adjustment to PAT APAT Growth (%) APAT Margin (%) Operating PAT Growth (%) Operating PAT Margin (%) FY09 9,087.0 -3.6% 5,099.0 3,988.0 43.9% 446.0 2,384.0 1,158.0 12.9% 213.0 945.0 29.0 876.0 1,995.0 3,787.0 841.0 2,946.0 (1,995.0) 951.0 20.5% 10.5% 611.0 9.2% 6.7% FY10 9,471.0 4.2% 4,826.0 4,645.0 49.0% 608.0 2,776.0 1,261.0 13.4% 212.0 1,049.0 11.0 962.0 2,000.0 407.0 1,593.0 1,593.0 67.5% 16.8% 692.3 13.3% 7.3% FY11 10,968.2 15.8% 5,775.3 5,192.9 47.3% 696.6 3,165.8 1,330.5 12.2% 216.6 1,113.9 7.6 967.8 112.8 2,186.9 432.6 1,754.3 (112.8) 1,641.5 3.0% 15.0% 737.9 6.6% 6.7% FY12E 13,456.8 22.7% 7,161.5 6,295.2 46.8% 798.3 3,800.2 1,696.7 12.7% 244.5 1,452.2 17.2 1,113.0 2,548.1 579.6 1,968.4 1,968.4 19.9% 14.6% 968.6 31.3% 7.2% FY13E 15,928.3 18.4% 8,415.3 7,513.0 47.2% 918.0 4,442.5 2,152.5 13.6% 294.3 1,858.2 15.3 1,105.5 2,948.4 684.9 2,263.5 2,263.5 15.0% 14.2% 1,244.0 28.4% 7.8%
Balance Sheetmn)
Y/E March (INR mn) Share Capital Reserves and Surplus Total Networth Total Debt Current Liabilities Provisions Deferred Tax Liability (Net) Total Liabilities Gross Block Acc. Depreciation Net Block CWIP Investments - Cash - Inventory - Debtors - Loans and Advances Total Current Assets Total Assets FY09 381.0 9,330.0 9,711.0 2,019.0 1,537.0 58.0 FY10 368.0 FY11 FY12E 368.0 368.0 FY13E 368.0
9,553.0 10,548.2 11,740.9 13,142.5 9,921.0 10,916.5 12,108.9 13,510.5 -
2,236.0 2,744.9 3,509.7 3,807.9 1,552.0 1,696.8 1,528.0 1,228.0 21.0 41.0 64.6 92.6
13,325.0 13,730.0 15,399.2 17,211.3 18,639.0 3,255.0 1,924.0 1,331.0 16.0 9,152.0 147.0 1,008.0 757.0 914.0 2,826.0 3,495.0 3,725.0 4,425.0 5,385.0 2,114.0 2,330.6 2,575.1 2,869.4 1,381.0 1,394.4 1,849.9 2,515.6 23.0 9,602.0 143.0 169.1 300.0 240.0
9,849.9 10,900.4 10,696.2 303.1 147.4 147.6
972.0 1,531.8 1,489.9 2,106.3 808.0 701.4 1,138.5 1,039.3
801.0 1,449.5 1,385.0 1,893.9 2,724.0 3,985.8 4,161.0 5,187.2
13,325.0 13,730.0 15,399.2 17,211.3 18,639.0
Key Ratiomn)
Y/E March (INR mn) Per Share Data (INR) Reported EPS Adj. EPS Growth (%) Operational EPS Growth (%) CEPS DPS BVPS Return Ratios (%) RoACE RoANW RoIC Liquidity Ratios Net Debt/Equity Interest Coverage Ratio Current Ratio Quick Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Payable Days Valuation Ratios P/E (x) P/BV (x) MCap/Net Sales (x) P/CEPS (x) Dividend Yield (%) EV/Net Sales (x) EV/EBIDTA (x) FY09 77.0 25.0 21.5% 16.0 9.2% 305.8 16.0 255.1 15.5% 11.0% 38.6% (1.0) 32.6 0.8 0.3 0.7 80.4 36.5 167.5 36.3 3.6 3.8 3.0 1.8% 2.8 21.8 FY10 42.6 43.2 73.1% 18.8 13.3% 490.0 16.0 269.3 15.7% 16.2% 16.4% (1.0) 95.4 0.7 0.3 0.7 74.9 30.4 160.9 21.0 3.4 3.6 1.9 1.8% 2.5 18.8 FY11 FY12E 47.6 45.2 4.5% 20.0 6.6% 510.6 18.0 296.4 14.0% 16.0% 17.7% (0.9) 146.6 0.9 0.2 0.7 79.1 25.3 157.4 20.1 3.1 3.1 1.8 2.0% 2.1 17.5 53.4 53.4 18.3% 26.3 31.3% 600.8 18.0 328.7 16.9% 17.1% 18.0% (0.9) 84.4 0.8 0.3 0.8 77.0 25.2 159.4 17.0 2.8 2.5 1.5 2.0% 1.7 13.2 FY13E 61.5 61.5 15.0% 33.8 28.4% 694.4 20.0 366.8 17.5% 17.7% 18.7% (0.8) 121.4 1.0 0.2 0.8 78.0 25.2 158.7 14.8 2.5 2.1 1.3 2.2% 1.4 10.5
Cash Flowmn)
Y/E March (INR mn) EBT Less: Other Incm/Excp Add: Depreciation Add: Interest Paid Taxes Paid Change in WC Others CFO (a) Capital Expenditure Asset Sales Change in Investment Others CFI (b) Change in Equity Debt Raised/(Repaid) Dividend paid (inc. tax) Interest Paid CFF (c) Change in Cash (a+b+c) Opening Cash Closing Cash FY09 1,792.0 965.0 213.0 29.0 (858.0) (210.0) 19.0 20.0 (297.0) 2,272.0 908.0 (54.0) 2,829.0 (154.0) (356.0) (29.0) (539.0) 2,310.0 6,987.0 9,297.0 FY10 2,000.0 959.0 212.0 11.0 (456.0) 160.0 140.0 1,108.0 (271.0) (7.0) 823.0 210.0 755.0 (696.0) (710.0) (11.0) (1,417.0) 446.0 9,297.0 9,743.0 FY11 2,186.9 1,080.6 216.6 7.6 (412.6) (592.8) 325.1 (376.1) 112.8 46.2 1,080.6 863.5 (771.0) (7.6) (778.6) 410.0 9,743.0 10,153.0 FY12E 2,548.1 1,113.0 244.5 17.2 (556.0) 434.0 1,574.7 (1,000.0) 1,113.0 113.0 (775.7) (17.2) (792.9) 894.9 10,153.0 11,047.9 FY13E 2,948.4 1,105.5 294.3 15.3 (657.0) (727.9) 767.6 (1,200.0) 1,105.5 (94.5) (861.9) (15.3) (877.2) (204.1) 11,047.9 10,843.8
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
19
June 15, 2011
Kansai Nerolac Paints

CMP: INR 875 Recommendation: HOLD Target: INR 926
Paint Industry Kansai Nerolac Paints (KNP), formerly known as Goodlass Nerolac became a wholly-owned subsidiary of Kansai Paint Company (Japan) after it took over the entire stake of the company in 1999 and changed its name in 2006. The company has presence in both decorative and industrial paints segment which contributes equally to its revenues. In India, it is third largest player in decorative segment and largest player in Industrial paints segment with a market share of ~14% and ~42% respectively. It has the dominant share in auto paint segment of ~60%. Dominant player in Industrial Paint Segment
KNP is the dominant player in industrial paints segment with market share of more than 40% and contributes ~50% to its overall revenue. It is a leader in automotive paints and powder coatings with a market share of ~60% and ~27% respectively. KNP has a strong technological backup from its parent company Kansai (Japan) which is the largest paint company in Japan and has been featured in top 10 paints companies in the world.
Increasing capacity on higher demand anticipation

In order to fulfill higher demand for paints both in industrial and decorative segments, company plans to add ~0.1mn MT of capacity to its current capacity of ~0.2mn MT/annum. In order to increase the capacity company is setting up a greenfield plant in Hosur (TN) at an estimated capex of ~INR 6bn. The plant is expected to be fully commissioned by FY13.
Growth momentum to moderate in FY12

KNP has registered robust revenue growth on the back of strong demand for automotives, consumer durables and infrastructure development. In line with expected slowdown in auto segment and other industrial segments in the current year, we expect KNP revenue growth to slow down to 20.3% in FY12 from 25.3% in FY11 on back of lower volume growth.
Valuations
Kansai Nerolac is expected to maintain its dominant share in industrial paints segment and benefit from strong growth of automotive and consumer durables industry. Also, with company's focus to increase contribution from decorative paint segment will reduce RM cost pressure due to better ability to pass cost through price increases. We expect KNP to grow at revenue CAGR of 19.3% in the next two years. On back of long term growth in industrial segment and dominant position of KNP in industrial paints, we value the stock at 20x FY13E. This works out to be a 1 year target price of INR 926 with an upside of 6% from CMP of INR 875. We therefore, initiate the coverage with a Hold rating.
Y/E Mar (INR mn) FY09 FY10 FY11 21,398.8 25.3% 13.6% 1,853.0 14.3% 8.7% 34.4 10.0 1.1% 25.4 5.1 16.5 (0.4) 20.0% 21.9% FY12E FY13E
Focus towards increasing decorative paints contribution

Company has plans to increase sales in decorative segment by launching aggressive nationwide campaign and increasing distribution reach. KNP recently roped in Shahrukh Khan to promote its product in decorative segment. Kansai has plans to open 30 new exclusive Nerolac brand stores in South.
130 120 110 100 90 80 Oct-10 Aug-10 May-11 Feb-11 Nov-10 Dec-10 Sep-10 Mar-11 Jun-10 Jan-11 Jul-10 Apr-11
500165 KANSAINER KNPL IN KANE.BO 53.9 10 47.2 1,055/720 1,207 18,132.2
Net Sales Growth (%) EBIDTAM (%) Adj. PAT Growth (%) Adj. PATM (%) Adj. EPS (INR) DPS
13,756.3 17,074.1 4.2% 11.5% 954.3 -20.3% 6.9% 17.7 6.0 0.7% 49.4 7.2 30.3 (0.4) 13.5% 15.3% 24.1% 15.5% 1,621.2 69.9% 9.5% 30.1 7.5 0.9% 29.1 6.1 18.2 (0.4) 20.0% 22.7%
25,753.2 30,519.8 20.3% 13.2% 2,090.0 12.8% 8.1% 38.8 10.0 1.1% 22.6 4.4 14.1 (0.2) 19.5% 21.1% 18.5% 13.9% 2,504.3 19.8% 8.2% 46.5 12.0 1.4% 18.8 3.8 11.4 (0.2) 20.2% 21.8%
Face Value Mcap (INR bn) 52 Week H/L 2W Avg. Qty, BSE Sensex
Dividend Yield (%) P/E (x) P/BV (x) EV/EBIDTA Net Debt/Equity RoACE (%) RoANW (%)
KNP
Sensex
Sumit Duseja
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
21
1) Dominant player in Industrial Paint Segment KNP is the dominant player in industrial paints segment with market share of more than 40% and contributes ~50% to its overall revenue. It caters mainly to automotive (automotive coatings) and consumer durables (powder coatings) industry and also has presence in general industrial coatings and high performance coatings. Industrial paints market share
Segmentwise Revenue Breakup - Kansai Japan (FY09)
9% 7% 17% 22% 45% Automotive Coatings Industrial Coatings Decorative Coatings Marine and Protective Coatings Others
24% 42% 5% 13% 16%
Kansai Nerolac Berger Paints Asian Paints Shalimar Paints Others
KNP has also entered into a technical collaboration with PPG, USA and Oshima Kogya Company, Japan for high performance coatings and heat resistant coatings (for motor cycle engines) respectively. Due to slowdown in sales from Japan and other economies, Kansai has aggressive plans to grow in fast growing and higher margins Indian market which contributes ~12% to its overall revenue and more than 15% to its operating income. 2) Growth momentum to moderate in FY12 KNP has registered robust revenue growth on the back of strong demand for automotives, consumer durables and infrastructure development. Automotive segment has witnessed a robust 2 year CAGR of 29.2% and 22.5% in 2 wheeler segments and passenger cars respectively. Consumer durables industry has also grown at a CAGR of 22.7% in last 2 years (Source: CSO). Passenger Cars Sales
300000 250000 20.5% 200000 150000 13.5% 6.1% 19.1% 15.6% 6.9% 20.1% 25.0% 30% 25% 20% 15% 10% 5% 0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
It is a leader in automotive paints and powder coatings with a market share of ~60% and ~27% respectively. The list of clients in automotive segment includes major auto players like Maruti Suzuki, Toyota, Tata Motors, Mahindra and Mahindra, Hero Honda and Bajaj Auto to name a few. Auto Paints Market Share
24% 65% 35% 60% 7% 9%
100000 50000 0
Other Industrial Paints Asian Paints Others
Kansai Nerolac Berger
Passenger Cars Volume

Grow th (RHS)
2 Wheeler Sales
1400000 1200000 33.4% 1000000 800000 600000 400000 200000 0 -1.2% 16.1%18.2% 3.0% 2.5%
40.6%
50% 40% 18.7% 30% 20% 10% 0% -10%
Backup of strong parent: KNP has a strong technological backup from its parent company Kansai (Japan), the largest paint company in Japan and has featured in top 10 paint companies in the world since many years. It provides automotive paints to major global auto companies in the likes of Suzuki, Toyota and Honda. Automotive segment contributed ~45% to its overall FY09 sales of USD 2.5bn.
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 2 Wheeler Volumes
Grow th (RHS)
22
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
Based on estimates of SIAM, four wheeler segment is expected to grow at ~16% and 2 Wheeler segment at ~12% in volume terms in FY12 after reporting more than 20% volume CAGR in last two years. In line with expected slowdown in auto segment and other industrial segments in the current year, we expect KNP revenue growth to slow down to 20.3% in FY12 from 25.3% in FY11 on back of lower volume growth. Further we expect volume growth to pick up in FY13 but lower value growth component to result revenue to grow at 18.5% in FY13 to INR 30,519.8mn. Net Sales Trend
35000 30000 25000 20000 15000 10000 5000 0 FY09 FY10 FY11 FY12E FY13E 4.2% 24.1% 25.3% 20.3% 18.3% 30% 25% 20% 15% 10% 5% 0%
Kansai (India) Revenue Breakup
25% 50% 50% 32%
12% 31%
Industrial Paints Enamles Others (primers, putty, fillers etc)

Emulsions Distempers
Net Sales (INR mn)

Grow th (RHS)
3) Focus towards increasing Decorative Paints contribution KNP has a market share of ~14% in decorative paints segment and contributes another 50% to its overall revenue. KNP offers products across all categories through some renowned brands like Nerolac Impressions, Pearls, Beauty, Suraksha and Excel (Chart).
Product Category Interior Emulsions Exterior Emulsion Enamels Distempers
Decorative segment has short cycle of payment which reduces working capital needs and ability to pass higher raw material cost inflation compared to industrial paints segment. Company was able to pass 80% of raw material cost increases in decorative segment while passing the cost increase in industrial segment comes with a lag due to long term contracts with institutions. Also, in industrial paints segment there is continuous pressure from the companies to reduce cost of paints. Company has plans to increase sales in decorative segment by launching aggressive nationwide campaign and increasing distribution reach. KNP recently roped in Shahrukh Khan to promote its product in decorative segment. Increasing reach: Traditionally it has higher presence in north markets which contributes 26% to overall decorative paint industry sales. Company however has aggressive plans to increase its presence in south markets and increase its share from decorative segment in its overall revenue. Kansai has planned to open 30 new exclusive Nerolac brand stores in south to increase awareness of products. It also setting up its manufacturing facility is Hosur, Tamil Nadu to improve its distribution reach in the south markets. 4) Increasing capacity on higher demand anticipation KNP is the second largest player in India and has an overall market share of ~18% in the paint industry. In order to fulfill higher demand for paints both in industrial and decorative segments, company plans to add ~0.1mn MT of capacity to its current capacity of ~0.2mn MT/annum. In order to increase the capacity company is setting up a greenfield plant in Hosur (TN) at an estimated capex of ~INR 6bn. The plant is expected to be fully commissioned by FY13.
Brands Impression, Beauty Suraksha, Excel Impressions, Satin, Synthetic Beauty, Pearls
In decorative paint segment, emulsions contribute around 32%, Enamels 25% and distemper 12%. Remaining is contributed by primers, putty, fillers etc. Similar for the industry, emulsions are growing at faster rate and have higher margins compared to other paints.
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
23
Capacity & Utilization

350000 300000 250000 200000 150000 100000 50000 0 FY08 FY09 Capacity
69.4%
78.4% 69.0%
87.2%
84.8%
86.3%
100% 80% 60% 40% 20% 0%
clients which affect its margins. In decorative paints segment, company was able to pass 80% of cost inflation in FY11. Increase in cost of key raw material like titanium dioxide and crude based derivatives by ~29% and ~40% in FY11 resulted in gross profit margins falling by 267 bps from 37.2% to 34.6%. Company however is intending to take calibrated price hike in contracts in industrial segment. 2) Rising competition With increasing competitive environment in the paint industry, KNP like all other players is at risk of losing market share to other competitors.
FY10
FY11
FY12
FY13
Utilization (RHS)
Financial Overview
Company's revenue has grown at a 2 year CAGR of 24.7% to INR 21,398.8mn in FY11. Going forward, with expected slowdown in automotive industry on back of rising fuel prices and interest rate cost along with some slowdown in other industrial segment, we expect company to witness a moderate growth in revenues compared to last two years. We expect its revenue and profit to grow at a 2 year CAGR of 19.4% and 16.3% in next two years to INR 30,519.8mn and INR 2,504.3mn respectively. Net Sales Trend
65.4% 35000 30000 25000 20000 15000 10000 5000 0 FY09 FY10 FY11 FY12E FY13E 4.2% 24.1% 25.3% 20.3% 18.3% 30% 25% 20% 15% 10% 5% 0%
Investment Concerns
1) Rising raw material cost KNP is at higher margin erosion risk compared to other players in the industry in the environment of high raw material cost inflation. Company has highest raw material as a % net sales among the paint companies under our coverage. Raw material as a % of sales (FY11)
70% 60% 50% 40% 30% 20% 10% 0% Akzo Nobel Asian Paints Berger Kansai Nerolac 52.7% 57.7% 63.7%
Net Sales (INR mn)

S
Grow th (RHS)
RM breakup (FY10)
APAT Trend
3000 2500 2000 69.7% 80% 60% 15.4% -20.0% 11.4% 19.4% 40% 20% 0% -20% -40% FY09 FY10 FY11 FY12E FY13E
7% 34% 6% 53%
Pigments, Extenders and Resins Organic Acids and Anhydrides Solvents, Oils and Fatty Acids Others
1500 1000 500 0
APAT (INR mn)

Grow th (RHS)
Due to 50% contribution from industrial paints segment and long term nature of contracts, company is not able to immediately pass the raw material cost to its institutional
24 Executive Summary Industry Description Asian Paints Akzo Nobel Kansai Nerolac Berger Paints
Due to continued pressure on raw material cost, we expect company's EBIDTA margins to shrink by 38bps YoY in FY12, cushioned partly by passing on raw material cost inflation but regain 63bps in FY13 on back of expected improvement in economic environment. Margin Trend
40% 30% 20% 10% 0% 7.0% FY09 9.5% FY10 8.8% FY11 8.1% FY12E 8.2% FY13E 11.5% 15.5% 13.6% 13.2% 13.9% 34.6% 37.2% 34.6% 34.0% 34.4%
Valuations
Kansai Nerolac is expected to maintain its dominant share in industrial paints segment and benefit from strong growth of automotive and consumer durables industry. Also, with company's focus to increase contribution from decorative paint segment will reduce RM cost pressure due to better ability to pass cost through price increases. We expect KNP to grow at revenue CAGR of 19.3% in the next two years. On back of long term growth in industrial segment and dominant position of KNP in industrial paints, we value the stock at 20x FY13E. This works out to be a 1 year target price of INR 926 with an upside of 6% from CMP of INR 875. We therefore, initiate the coverage with a Hold rating.
1200 1000 25 20 15 10
Gross Margins
EBIDTA Margins
APAT Margins
800 600 400 200
KNP has been able to maintain good return profile of more than 20% in last two years. We expect company to continue to maintain more than 20% return on average networth (RoANW) in next 2 years. Return Profile
25% 20% 15.4% 15% 10% 5% FY09 FY10
RoACE
0 04Apr07 04Apr08 04Apr09 04Apr10 04Apr11

22.8% 22.2% 21.1% 21.7%
20.0%
20.0%
19.5%
20.1%
Company Brief
Kansai Nerolac Paints was formerly known as Goodlass Nerolac Paints. Goodlass Nerolac Paints became a whollyowned subsidiary of Kansai Paint Company (Japan) after the latter took over the entire stake of the company in 1999 and changed its name in 2006. It has current shareholding of 70% in the company. The company has presence in both decorative and industrial paints segment which contributes equally to its revenues. In India, it is third largest player in decorative segment and largest player in Industrial paints segment with a market share of ~14% and ~42% respectively. Company has overall market share of ~18% in paint industry. It has five strategically-located manufacturing units in India and a strong dealer network of over 11,000 dealers across the country.
13.5%
FY11
FY12E
RoANW
FY13E
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
25
Financials
Profit & Lossn)
Y/E March (INR mn) Net Sales Growth (%) Cost of Goods Sold Gross Profit Gross Profit Margin (%) Employee Cost Other Operating Exp. EBIDTA EBIDTA Margin (%) Dep./Amortization EBIT Interest Expense Other Income Exceptionals EBT Tax Expenses PAT Adjustment to PAT APAT Growth (%) APAT Margin (%) FY09 13,756.3 4.2% 8,995.8 4,760.5 34.6% 733.0 2,442.0 1,585.5 11.5% 376.1 1,209.4 18.4 210.9 1,401.9 416.0 985.9 (31.6) 954.3 -20.3% 6.9% FY10 17,074.1 24.1% 10,718.2 6,355.9 37.2% 750.5 2,958.3 2,647.1 15.5% 442.6 2,204.5 12.0 193.5 2,386.1 731.1 1,655.0 (33.7) 1,621.2 69.9% 9.5% FY11 21,398.8 25.3% 14,002.5 7,396.3 34.6% 916.4 3,563.4 2,916.5 13.6% 493.6 2,422.9 8.4 223.1 253.7 2,891.3 831.5 2,059.8 (206.8) 1,853.0 14.3% 8.7% FY12E 25,753.2 20.3% 16,984.6 8,768.6 34.0% 1,107.4 4,249.5 3,411.7 13.2% 615.1 2,796.6 10.5 191.0 2,977.1 887.1 2,090.0 2,090.0 12.8% 8.1% FY13E 30,519.8 18.5% 20,031.9 10,487.9 34.4% 1,312.4 4,941.1 4,234.5 13.9% 792.0 3,442.5 8.3 164.5 3,598.6 1,094.3 2,504.3 2,504.3 19.8% 8.2%
Balance Sheetmn)
Y/E March (INR mn) Share Capital Reserves and Surplus Total Networth Total Debt Current Liabilities Provisions Total Liabilities Gross Block Acc. Depreciation Net Block CWIP Investments - Cash - Inventory - Debtors - Loans and Advances Total Current Assets Deferred Tax Asset (Net) Total Assets FY09 269.5 6,275.0 6,544.5 936.3 2,442.3 838.5 10,761.6 5,419.8 3,033.6 2,386.2 309.4 2,944.3 761.6 1,706.3 2,095.7 417.1 4,980.8 106.0 10,761.6 FY10 269.5 7,458.7 7,728.2 1,099.8 3,043.2 936.7 12,808.0 6,376.7 3,473.5 2,903.2 97.0 4,015.4 410.8 2,474.4 2,323.7 410.9 5,619.9 115.2 12,808.0 FY11 538.9 8,622.8 9,161.7 824.8 3,635.4 1,091.1 14,713.0 7,021.4 3,967.1 3,054.2 763.6 3,718.2 396.9 3,541.0 2,602.6 502.3 7,042.8 134.2 14,713.0 FY12E 538.9 10,082.3 10,621.2 953.6 4,357.4 607.3 16,539.5 9,671.4 4,582.3 5,089.1 241.8 2,865.6 380.5 4,007.7 3,116.9 665.7 8,170.9 172.1 16,539.5 FY13E 538.9 11,830.0 12,368.9 959.4 5,136.4 863.0 19,327.8 11,821.4 5,374.3 6,447.1 295.5 2,731.9 400.4 5,309.4 3,783.9 111.5 9,605.2 248.0 19,327.8
Key Ratio)
Y/E March (INR mn) Per Share Data (INR) Reported EPS Adj. EPS Growth (%) CEPS DPS BVPS Return Ratios (%) RoACE RoANW RoIC Liquidity Ratios Net Debt/Equity Interest Coverage Ratio Current Ratio Quick Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Payable Days Valuation Ratios P/E (x) P/BV (x) MCap/Net Sales (x) P/CEPS (x) Dividend Yield (%) EV/Net Sales (x) EV/EBIDTA (x) 49.4 7.2 3.4 35.4 0.7% 3.1 30.3 29.1 6.1 2.8 22.8 0.9% 2.4 18.2 25.4 5.1 2.2 20.1 1.1% 1.9 16.5 22.6 4.4 1.8 17.4 1.1% 1.6 14.1 18.8 3.8 1.5 14.3 1.4% 1.4 11.4 1.4 69.8 56.1 83.8 1.4 71.2 47.2 93.4 1.6 78.4 42.0 87.0 1.6 81.1 40.6 85.9 1.7 84.9 41.3 86.5 (0.4) 65.8 1.5 0.9 (0.4) 183.7 1.4 0.7 (0.4) 288.4 1.5 0.6 (0.2) 266.5 1.6 0.7 (0.2) 413.7 1.6 0.7 13.5% 15.3% 16.1% 20.0% 22.7% 24.8% 20.0% 21.9% 24.0% 19.5% 21.1% 22.8% 20.2% 21.8% 23.6% 18.3 17.7 -20.3% 24.7 6.0 121.4 30.7 30.1 69.9% 38.3 7.5 143.4 38.2 34.4 14.3% 43.5 10.0 170.0 38.8 38.8 12.8% 50.2 10.0 197.1 46.5 46.5 19.8% 61.2 12.0 229.5 FY09 FY10 FY11 FY12E FY13E
Cash Flow)
Y/E March (INR mn) EBT Less: Other Inc./Excep. Add: Depreciation Add: Interest Paid Taxes Paid Change in WC Others CFO (a) Capital Expenditure Asset Sales Change in Investment Others CFI (b) Debt Raised/(Repaid) Dividend paid (inc. tax) Interest Paid CFF (c) Change in Cash (a+b+c) Opening Cash Closing Cash FY09 1,401.9 210.9 376.1 18.4 (418.5) 861.3 17.8 2,046.1 (747.0) 0.3 (586.3) 155.4 (1,177.5) (43.3) (379.0) (18.4) (440.7) 427.9 333.8 761.6 FY10 2,386.1 193.5 442.6 12.0 (770.3) (366.2) (6.0) 1,504.6 (757.0) 0.1 (1,029.2) 157.2 (1,628.9) 163.6 (378.0) (12.0) (226.5) (350.8) 761.6 410.8 FY11 2,891.3 476.8 493.6 8.4 (831.5) (907.0) 11.5 1,189.5 (1,243.9) 21.3 297.2 476.8 (448.7) (275.0) (471.3) (8.4) (754.8) (13.9) 410.8 396.9 FY12E 2,977.1 191.0 615.1 10.5 (887.1) (422.5) 2,102.2 (2,650.0) 852.6 191.0 (1,606.4) 128.8 (630.5) (10.5) (512.2) (16.4) 396.9 380.5 FY13E 3,598.6 164.5 792.0 8.3 (1,094.3) (635.4) 2,504.8 (2,150.0) 133.7 164.5 (1,851.9) 5.8 (630.5) (8.3) (633.1) 19.9 380.5 400.4
26
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
June 15, 2011
Berger Paints India

CMP: INR 103 Recommendation: BUY Target: INR 128
Paint Industry Berger Paints India (Berger) is the second largest decorative paint company in India. Company has an overall paint industry market share of ~17%. The company's decorative business is further classified into retail and pro-links. In the latter, the company deals directly with major projects both in public and private sector. It has seven manufacturing facilities spread across India and more than 82 depots besides four overseas manufacturing facilities. Company has second highest distribution network of ~14,500 dealers spread across the country Margins expansion to boost profits
Berger is aggressively focusing towards premium emulsion paints category and cost cutting measure in terms of raw material procurement the effect of which would be visible from FY12 onwards. We therefore believe that standalone EBIDTA margins to improve by 52bps in next two years to 10.9% on the back of gross margins expansion. Company also plan to expand in South region where it has weaker presence. We expect Berger's standalone net sales to grow at a 2 year CAGR of 20.0% to 30,274.7mn in FY13. segment is highly correlated with growth in industrial segment and found its application in all types of industries. We expect industrial division to report good growth going forward on back of high GDP growth rate and infrastructure spend.
Capacity addition plans

In a bid to increase its sales of emulsion paints, company is augmenting capacity by constructing a green-field water based paints facility in Hindupur, AP with a capacity of 0.1mn MT/ annum (scalable to 0.15mn MT/annum), is expected to commence operations by H1FY14. Apart from expansion in Hindupur, company is also augmenting its capacity in its manufacturing facilities at Goa and Rishra in FY12. This would result in cumulative capacity of 0.43mn MT/annum by FY14 against 0.26mn MT/annum in FY11.
Subsidiaries to be EPS accretive going forward

Other businesses have grown at a 2 year CAGR of 41.6% in revenue terms to INR 2319.0mn in FY11. After reporting loss at PAT level in FY09, company has reported improvement in its net profit to 17.8mn in FY11. Major portion of revenue comes from Bolix (~7% of consolitated revenues). With expected improvement in economic environment going forward, we expect Bolix business to add to the growth of consolidated profits.
Valuations
Berger has been growing at a 2 year CAGR of 19.7% in revenue terms. Going forward, we expect Berger to maintain the good growth momentum on the back of new product offerings in premium segment and its expansion plans in south region. Increased contribution from high end products along with backward integration will help company to improve its overall margins resulting in higher profitability. We therefore initiate the coverage on the company with a BUY and a target price of 128 (20x FY13E EPS of 6.4), giving an upside of 24% from the CMP of INR 103.
Y/E Mar (INR mn) FY09 16,281.1 16.3% 8.4% 792.0 -14.4% 4.9% 2.5 0.6 0.6% 41.5 8.4 26.4 0.8 15.6% 24.6% FY10 18,958.1 16.4% 10.8% 1,202.5 51.8% 6.3% 3.5 1.1 1.1% 29.6 6.0 18.1 0.2 16.3% 16.1% FY11 23,327.2 23.0% 10.4% 1,466.1 21.9% 6.3% 4.2 1.3 1.3% 24.3 5.2 15.4 0.2 18.0% 18.7% FY12E FY13E
Industrial paints segment to benefit from high industrial growth

Berger is the leading player in protective coating for over 45 years. The segment contributes ~15% to its standalone revenues and has a market share of more than 25%. This
180 160 140 120 100 80 Oct-10 Feb-11 Mar-11 May-11 Jun-10 Jul-10 Nov-10 Dec-10 Sep-10 Jan-11 Aug-10 Apr-11
509480 BERGEPAINT BRGR IN BRGR.BO 346.1 2 35.6 123.0/69.4 0.16 18,132.2
Net Sales Growth (%) EBIDTAM (%) Adj. PAT Growth (%) Adj. PATM (%) Adj. EPS (INR) DPS
28,051.5 33,381.2 20.3% 10.5% 1,779.9 21.4% 6.3% 5.1 1.5 1.5% 20.0 4.4 12.6 0.2 18.8% 19.6% 19.0% 10.9% 2,217.9 24.6% 6.6% 6.4 1.7 1.7% 16.1 3.7 10.0 0.0 20.4% 20.2%
Face Value Mcap (INR bn) 52 Week H/L 2W Avg. Qty, BSE (mn) Sensex
Dividend Yield (%) P/E (x) P/BV (x) EV/EBIDTA Net Debt/Equity RoACE (%) RoANW (%)
Berger
Sensex
Sumit Duseja
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
28
Investment Rationale:
1) Margins expansion to boost profits Berger is the second largest player in decorative paint segment with an overall market share of ~17%. Berger is known for its products offering in economy segment (Avg price/lt is lowest compared to peers at ~INR 80 for FY11).
Product Category Interior Emulsions Exterior Emulsion Enamels Distempers Brands Silk, Breathe Easy, Rangoli, Illusions Weather Coat, Walmasta Luxol, Butterfly, Jadoo Bison, Jadoo
We expect full benefits of aggressive focus towards premium emulsion paints category and cost cutting measure in terms of raw material procurement would be visible from FY12 onwards. We therefore believe that EBIDTA margins to improve by 52bps in next two years to 10.9% on the back of gross margins expansion. Expanding Reach: Company traditionally has higher presence in north and east market which accounts for 40% of overall paint industry market. In a bid to balance its geographical presence through focused penetration in western and southern Indian markets, Berger is planning to open exclusive brand outlets (250-300 in the next couple of years) through franchise routes. Presently company has 40 franchise stores spread across major cities of Tamil Nadu. On the back of aggressive stance of the company to promote fast growing emulsions and along with expansion in other regions, we expect Berger's standalone net sales to grow at a 2 year CAGR of 20.0% to 30,274.7mn in FY13. Standalone business on strong footing
35000 30000 25000 20000 15000 10000 5000 0 FY09 FY10 FY11 FY12E FY13E 12.6% 11.6% 24.4% 20.8% 19.3% 30% 25% 20% 15% 10% 5% 0%
However, having realized potential and growth of emulsion paints, company is now aggressively marketing its higher margin premium products (Silk, Breathe Easy, Weather Coat etc) through new product launches and higher advertisement and promotional spend. Emulsion paints are the fastest growing category in decorative paints segment. Among emulsion paints, exterior emulsions are growing faster than interior emulsions. Emulsion paints also have higher realization and margins compared to enamels and distempers. Company reported an increase of 7bps in its gross margin in FY11 despite tough raw material cost environment on back of improved sales mix towards premium emulsions, improvement in distribution network and some cost reduction initiatives in way of raw material procurement. However, EBIDTA margins declined by 36bps due to higher ad and promotional spend. Standalone business margins
40% 35% 30% 25% 20% 15% 10% 5% 0%
Net Sales (INR mn)
Grow th (%)
33.4%
36.2%
36.3%
36.5%
36.8%
2) Subsidiaries to be EPS accretive going forward Berger operates through its four direct subsidiaries, two indirect subsidiaries and two joint ventures which accounts for ~11% (INR 2071mn in FY10) of its consolidated revenues.
8.7% FY09
10.7% FY10 Gross Margins
10.4% FY11
10.5% FY12E EBIDTA Margins
10.9% FY13E
Source: Company, SPA Research Particulars Direct Subsidiaries Beepee Coatings Private Ltd Berger Jenson & Nicholson (Nepal) Berger Paints (Cyprus) Ltd Lusako Trading Ltd Indirect Subsidiaries Bolix S.A. Berger Paints Overseas Ltd Joint Ventures Berger Becker Coatings Pvt Ltd BNB Coatings India Ltd Pnb Principal Advisory Company Source: Company, SPA Research Business Processing of company's products For business in Nepal SPV for the purpose of making investments in companies interest abroad SPV for the purpose of making investments in companies interest abroad External Insulation finishing System For operations in Russia (49:51) with Becker Coatings for manufacturing coil coatings for steel surfaces (49:51) with Nippon Bee Chemicals Co. of Japan, for manufacturing of coatings for plastic substrates of automobiles Direct Broking (Insurance ) FY10 Revenue (INR mn) 102 305 NA NA 1326 24 232 23 NA
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
29
Other businesses have grown at a 2 year CAGR of 41.6% in revenue terms to INR 2319.0mn in FY11. Major portion of revenue comes from Bolix (~7%), one of the technology leaders in External Insulation Finishing Systems (EIFS) in Europe which Berger acquired in 2008. Bolixs' EIFS products provide significant insulation solutions while at the same time offering a decorative finish suitable for traditional brick or concrete structures. External Insulation business reported slight fall in its revenue by 2.9% to INR 1237.2mn in FY11 on the back of tough economic environment in Poland in last two years as a result of the slowdown. The businesses however have shown a turnaround in the last quarter with a double digit growth as conveyed by the management. With expected improvement in economic environment going forward, we expect Bolix business to add to the growth of consolidated profits. Second major contribution in other business segment comes from BJN - Nepal. The business in Nepal has been performing well and is expected to sustain the growth momentum. To cater to increasing demand in Nepal, company built its second manufacturing facility with annual capacity of 18,000 MT during FY10. PAT of Other Businesses (mn)
3000% 2000% 1000% 0% -1000% -2000% -3000% -4000% -5000% -6000% -7000% 17.8 2.5 FY09 FY10 FY11
IIP Growth (%)

14% 12% 10% 8% 6% 4% 2% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 3.2% 8.0% 8.7% 11.7% 11.9% 10.5% 7.7%
Source: CSO, SPA Research
Beside protective coatings segment, Berger also caters to automotive industry and has a market share of ~7% in this segment. Berger has a technological collaboration with DuPont, USA for automotive coatings. It also has a JV (BNB Coatings India Lt.) with Nippon Bee Chemicals Co., Japan for manufacturing of coatings for plastic substrates of automobiles. The Indian government has earmarked about INR 50,000 billion according to the XII Five Year plan (2012-17) against INR 25,000 billion in the XI Five year Plan (2007-12) for infrastructure investment. We expect industrial division to report good growth going forward on back of high GDP growth rate and infrastructure spend. 4) Capacity addition plans In a bid to increase its sales of emulsion paints, company is augmenting capacity by constructing a green-field water based paints facility in Hindupur, AP with a capacity of 0.1mn MT/annum (scalable to 0.15mn MT/annum), is expected to commence operations by H1FY14. Capacity (MT/annum).
500,000 400,000 300,000 200,000 100,000 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
(59.2)
3) Industrial paints segment to benefit from high industrial growth Berger is the leading player in protective coating for over 45 years. The segment contributes ~15% to its standalone revenues and has a market share of more than 25%. Company has a technical tie-up with Orica Australia Pty for protective coatings. This segment is highly correlated with growth in industrial segment and found its application in all types of industries. Index of Industrial Production (IIP) has reported an avg. growth of 8.8% in last 7 years and expected to grow above 9% on back of higher GDP growth rate.
30
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
Apart from expansion in Hindupur, company is also augmenting its capacity in its manufacturing facilities at Goa and Rishra (West Bengal) by 65,000 MT/annum (42,000 MT/annum in Goa and 23,000 MT/annum in Rishra) in FY12. This would result in cumulative capacity of 0.43mn MT/annum by FY14 against 0.26mn MT/annum in FY11. Company has set up a resin manufacturing facility at their existing Goa plant in order to improve their margins by backward integration. The current capacity of plant is ~6,000 KL/annum - to be shored up to ~12,000 KL/annum. Company has also set up a resin manufacturing facility in Gujarat with capacity of 2,000 MT/month. The resin manufactured through these facilities would serve 50% requirement of the company. With setting up of plant, management expects improvement in gross profit margins by ~30-40bps.
Financial Overview
Company's revenue and APAT has grown at a 2 year CAGR of 19.9% and 36.1% to INR 23,327.2mn and INR 1,466.1mn respectively in FY11. Going forward, we expect company's revenue and APAT to grow at a 2 year CAGR of 19.6% and 23.0% to INR 33,381.2 and INR 2,217.9mn in FY13. Net Sales Trend
35000 30000 25000 20000 15000 10000 5000 0 FY09 FY10 FY11 FY12E FY13E 12.6% 11.6% 24.4% 20.8% 30% 25% 20% 19.3% 15% 10% 5% 0%
Investment Concerns
1) Raw Material Cost inflation Berger is lesser impacted due to the rise in titanium dioxide because the company currently has lesser contribution from emulsions. However, other raw material like crude derivatives has also shown strong up move in FY11. Company has increased prices of its products in decorative segment by ~6.8% in decorative segment and is in the process of taking some price hikes in industrial paints segment. We believe company will be able to pass the increase in raw material cost to the consumers (though with a lag). However, sharper than expected increase in raw material cost inflation could impact the profitability of the company. RM breakup (FY10)
Net Sales (INR mn)
Grow th (%)
APAT Trend
2500 2000 1500 1000 500 -14.4% 0 FY09 FY10 FY11 FY12E FY13E 21.9% 24.6% 51.8% 21.4% 60% 50% 40% 30% 20% 10% 0% -10% -20%
APAT (INR mn)
Grow th (RHS)
9% 6% 8% 24%
Acids & Chemicals
14% 16%
Resins Pigments Solvents
On the back of improved sales mix and backward integration, we expect company's consolidated margins to improve by 49bps in next two years. Margin Trend
40% 35% 30% 25% 20% 15% 10% 5% 0% 34.0% 37.1% 37.0% 37.2% 37.4%
23%
Oils Extenders Others
8.4% 4.9% FY09
10.8%
10.4% 6.3% FY11 EBIDTA Margins
10.5%
10.9%
6.3% FY10
6.3% FY12E
6.6% FY13E
2) Further slowdown in Europe to impact External Insulation business With re-emergence of fear of debt crisis impacting the European economy and with regulatory issues could negatively impact the performance of its subsidiary Bolix operations.
Gross Margins
APAT Margins
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
31
We expect returns on networth and capital employed to improve going forward with higher profit growth. Return Profile
30% 25% 20% 15% 10% 5% 0% FY09 FY10 RoACE FY11 FY12E RoANW FY13E 15.6% 16.3% 16.1% 18.0% 18.8% 20.4% 24.6% 18.7% 19.6% 20.2%
Company Brief
Berger is second largest decorative paint company with an overall paint industry market share of ~17%. The company's decorative business is further classified into retail and pro-links. In the latter, the company deals directly with major projects both in public and private sector. It has seven manufacturing facilities spread across India and more than 82 depots besides four overseas manufacturing facilities. Company has second highest distribution network of ~14,500 dealers spread across the country with ~12,000 dealer shops having installed DTS (Colour Bank). Berger has four direct subsidiaries, two indirect subsidiaries and two JV. Revenue Breakup (FY10)
Valuations
Berger has been growing at a 2 year CAGR of 19.7% in revenue terms. Going forward, we expect Berger to maintain the good growth momentum on the back of new product offerings in premium segment and its expansion plans in south region. Increased contribution from high end products along with backward integration will help company to improve its overall margins resulting in higher profitability. We therefore initiate the coverage on the company with a BUY and a target price of 128 (20x FY13E EPS of 6.4), giving an upside of 24% from the CMP of INR 103.
140 120 100 80 60 40 20 0 05-Apr-07 20 15 10 25
2% 3% 7% 4% 13% 71%
Decorative (India) Protective Coatings (India) Other Industrial (India) External Insulation Finishing Berger Nepal Others
05-Apr-08
05-Apr-09
05-Apr-10
05-Apr-11
32
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
Financials
Profit & Loss
Y/E March (INR mn) Net Sales Growth (%) Cost of Goods Sold Gross Profit Gross Profit Margin (%) Employee Cost Other Operating Exp. EBIDTA EBIDTA Margin (%) Dep./Amortization EBIT Interest Expense Other Income Exceptionals EBT Tax Expenses PAT Adjustment to PAT APAT Growth (%) APAT Margin (%) FY09 16,281.1 16.3% 10,739.4 5,541.7 34.0% 960.0 3,210.6 1,371.1 8.4% 250.7 1,120.4 186.6 191.1 1,124.8 296.4 828.4 (36.4) 792.0 -14.4% 4.9% FY10 18,958.1 16.4% 11,931.0 7,027.1 37.1% 1,245.9 3,744.8 2,036.5 10.8% 358.2 1,678.3 151.5 193.3 1,720.1 516.2 1,203.9 (1.4) 1,202.5 51.8% 6.3% FY11 23,327.2 23.0% 14,686.4 8,640.8 37.0% 1,447.4 4,774.8 2,418.6 10.4% 401.4 2,017.2 237.8 381.7 2,161.1 660.2 1,500.9 (34.8) 1,466.1 21.9% 6.3% FY12E 28,051.5 20.3% 17,615.0 10,436.5 37.2% 1,686.5 5,807.0 2,943.0 10.5% 453.2 2,489.8 268.6 341.7 2,562.8 782.9 1,779.9 1,779.9 21.4% 6.3% FY13E 33,381.2 19.0% 20,884.4 12,496.8 37.4% 1,995.0 6,878.2 3,623.6 10.9% 493.6 3,130.0 263.9 327.5 3,193.6 975.6 2,217.9 2,217.9 24.6% 6.6%
Balance Sheetmn)
Y/E March (INR mn) Share Capital Reserves and Surplus Total Networth Total Debt Current Liabilities Provisions Deferred Tax Liability Total Liabilities Gross Block Acc.Depreciation Net Block CWIP Investments - Cash - Inventory - Debtors - Loans and Advances Total Current Assets Total Assets FY09 637.7 3,163.8 3,900.6 3,502.2 2,496.3 281.5 234.1 10,414.6 6,196.5 2,129.7 4,066.8 275.3 45.1 363.8 2,944.5 2,196.4 518.4 6,023.2 10,414.6 FY10 692.1 5,272.5 5,964.7 2,673.7 3,031.1 535.0 264.4 12,468.9 6,756.6 2,461.9 4,294.7 326.0 1,286.4 412.6 3,298.6 2,423.2 432.3 6,566.7 12,468.9 FY11 692.1 6,194.3 6,895.2 3,022.2 4,068.2 451.9 263.3 14,700.8 7,246.7 2,863.3 4,383.4 776.0 526.1 1,265.1 4,437.1 2,753.3 559.9 9,015.4 14,700.8 FY12E 692.1 7,375.6 8,067.8 2,880.9 4,524.5 451.9 306.2 16,231.2 8,573.2 3,316.5 5,256.7 429.4 808.1 838.9 4,809.6 3,432.6 655.9 9,737.0 16,231.2 FY13E 692.1 8,905.2 9,597.4 2,984.4 5,420.5 451.9 358.0 18,812.2 8,655.8 3,810.2 4,845.7 449.8 1,879.5 1,052.0 5,632.6 3,888.8 1,063.8 11,637.2 18,812.2
Key Ratiomn)
Y/E March (INR mn) Per Share Data (INR) Reported EPS Adj. EPS Growth (%) CEPS DPS BVPS Return Ratios (%) RoACE RoANW RoIC Liquidity Ratios Net Debt/Equity Interest Coverage Ratio Current Ratio Quick Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Payable Days Valuation Ratios P/E (x) P/BV (x) MCap/Net Sales (x) P/CEPS (x) Dividend Yield (%) EV/Net Sales (x) EV/EBIDTA (x) 41.5 8.4 2.0 30.4 0.6% 2.2 26.4 29.6 6.0 1.9 22.8 1.1% 1.9 18.1 24.3 5.2 1.5 18.7 1.3% 1.6 15.4 20.0 4.4 1.3 16.0 1.5% 1.3 12.6 16.1 3.7 1.1 13.1 1.7% 1.1 10.0 1.8 98.7 43.7 79.4 1.7 95.5 44.6 84.5 1.7 96.1 40.6 88.2 1.8 95.8 40.3 89.0 1.9 91.3 40.1 86.9 0.8 10.8 2.3 0.9 0.2 7.0 2.2 0.9 0.2 12.4 1.8 0.8 0.2 10.1 2.0 0.9 0.0 10.5 2.0 0.9 15.6% 24.6% 21.9% 16.3% 16.1% 30.8% 18.0% 18.7% 24.6% 18.8% 19.6% 25.8% 20.4% 20.2% 27.5% 2.6 2.5 -14.4% 3.4 0.6 12.2 3.7 3.5 39.9% 4.5 1.1 17.2 4.3 4.2 21.9% 5.5 1.3 19.9 5.1 5.1 21.4% 6.5 1.5 23.3 6.4 6.4 24.6% 7.8 1.7 27.7 FY09 FY10 FY11 FY12E FY13E
Cash Flowmn)
Y/E March (INR mn) EBT Less: Other Inc./Excp. Add: Depreciation Add: Interest Paid Taxes Paid Change in WC Others CFO (a) Capital Expenditure Asset Sales Change in Investment Others CFI (b) Change in Equity Debt Raised/(Repaid) Dividend paid (inc. tax) Interest Paid CFF (c) Change in Cash (a+b+c) Opening Cash Closing Cash FY09 1,124.8 81.8 250.7 216.9 (267.8) (286.9) (276.5) 679.4 (2,741.2) 93.3 (32.0) 32.0 (2,647.9) 99.0 2,172.9 (159.5) (216.2) 1,896.2 (72.2) 436.0 363.8 FY10 1,720.1 42.4 358.2 172.0 (502.4) 34.7 66.5 1,806.6 (715.8) 93.5 (1,236.6) 39.8 (1,819.2) 1,254.6 (828.4) (191.0) (173.7) 61.4 48.8 363.8 412.6 FY11 2,161.1 381.7 401.4 237.8 (626.3) (559.2) 1,233.2 (975.0) 755.5 245.7 26.2 8.8 348.5 (526.4) (237.8) (406.9) 852.5 412.6 1,265.1 FY12E 2,562.8 341.7 453.2 268.6 (740.0) (691.5) 1,511.4 (980.0) (282.0) 341.7 (920.4) (141.3) (607.4) (268.6) (1,017.3) (426.2) 1,265.1 838.9 FY13E 3,193.6 327.5 493.6 263.9 (923.8) (791.1) 1,908.7 (103.0) (1,071.3) 327.5 (846.9) 103.6 (688.3) (263.9) (848.7) 213.1 838.9 1,052.0
Executive Summary
Asian Paints
Akzo Nobel
Kansai Nerolac
Berger Paints
33
Engineering
Girish Bhutra Srinivas Reddy
Head of Equity Head of Research
girish.bhutra@spagroupindia.com srinivas.reddy@spagroupindia.com
Tel.: +91-22-4289 5600 Ext.634 Tel.: +91-22-4289 5600 Ext. 633
Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. SPA Securities Limited (hereinafter referred as SPA) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The intent of this document is not in recommendary nature. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. SPA or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. SPA or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. SPA and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. SPA has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered
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Paint Industry Report - SPA Sec - 15 June 2011

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Paints Industry Report

June 15, 2011 SPA Securities Ltd.

Companies under coverage

Asian Paints Kansai Nerolac Berger Paints Akzo Nobel

Hold Hold Buy Buy

Decorative vs. Industrial

Decorative Paints (INR ~170bn)

Source: Industry, SPA Research

Industry vs GDP Growth

Regional Market Breakup

14% 32% 26% 28%

Automotive Paints Powder Coatings

Others (Marine, packaging etc)

Source: AC Neilson, SPA Research

2000 3000 12500 8000 2500 4000 Akzo Nobel

Dealers w ith DTS

Dealers w ithout DTS

Source: Colourworlds, SPA Research

Industrial Paints (INR ~40bn)

16.8% 18.6% High Income (> INR 200000)

Middle Income (INR 100000-200000) Low Income (<INR 100000)

800000 600000 400000 200000 0 Asian Paints Berger Paints FY11

Kansai Nerolac FY13E

Source: Ministry of Housing & Urban Poverty Alleviation, SPA Research

TiO2 Dupont India Prices (INR per Kg)

Source: Bloomberg, SPA Research

Brent Crude ($/barrel)

10/4/2008 10/4/2009 10/4/2010

Source: Bloomberg, SPA Research

This page has been intentionally left blank

June 15, 2011

International and Industrial business to gain traction

Maximum beneficiary of high GDP growth rate

High competitive advantage and positioning

Mar-11 52.34 14.45 11.56 21.66

Relative share price performance

Mcap (INR bn) 52 Week H/L 2W Avg. Qty, BSE Sensex

30% 25% 20% 15% 10% 5% 0%

Source: SPA Research *prices are in Mumbai region as on 8 May, 2011

-1.4% FY08 FY09 FY10

Revenue from APPG* + APICL

Ad & Publicity Exp. in FY10 (INR mn) as a % of Net Sales

FY10 1,612.0 5,361.0 2,008.0 719.0 9,700.0

FY11 1,568.0 5,159.0 2,403.0 750.0 9,880.0

YoY (%) -2.7% -3.8% 19.7% 4.3% 1.9%

11% 15% 36%

60000 40000 20000 0

14000 12000 10000 8000 6000 4000 2000 0 FY09 -4.1%

FY13E Grow th (RHS)

APAT (Consol; INR mn)

10.9% FY11 EBIDTA Margins

Source: SPA Research

Revenue Breakup (FY11)

Decorative Manufacturing Facilities in India Bhandup (Mumbai, Maharashtra)

13% 5% 1% APL - Paints Chemicals APPG* + APICL International 81%

Source: Company, SPA Research

(3,591.2) (4,489.0) (3,758.8) (4,515.2)

Source: Company, SPA Research

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June 15, 2011

Akzo Nobel India

Refinish paint business to ride the growth of auto ownership

Renewed focus to grow