Kansai Nerolac Paints - Spreading Colours All Around Company Report - e-research
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Company Report
Industry: FMCG
Kansai Nerolac Paints
Spreading Colours All Around
Amnish Aggarwal (amnishaggarwal@plindia.com) Gaurav Jogani (gauravjogani@plindia.com)
+91-22-66322233 +91-22-66322238
Kansai Nerolac Paints
Contents
Page No.
Kansai Nerolac: Play on Consumption and Infrastructure ........................................ 4
Decorative Paints industry to grow at 14% CAGR ............................................................................. 5
Kansai focusing on branding and distribution to gain share ............................................................. 7
1) Investments in branding and consumer connect .................................................................... 7
2) Distribution reach and product endorsements ....................................................................... 9
3) Kansai has a wide portfolio, increases focus on entry level paints........................................ 10
Kansai to gain from pick up in Industrial demand ........................................................................... 11
Automotive paints .................................................................................................... 12
Kansai has 60% market share in Auto OEM paints .......................................................................... 12
Automotive paints demand to grow in low teens ........................................................................... 12
Kansai to grow ahead of industry growth ....................................................................................... 13
Auto refinish segment ..................................................................................................................... 14
Other Industrial paints..................................................................................................................... 15
Powder Coatings; 15% CAGR likely on durables and home improvement demand .................. 15
Performance coatings to grow at 19% CAGR ............................................................................. 16
General Industrial coatings to grow at 15% CAGR ..................................................................... 17
Industrial paints - emerging opportunities ............................................................... 18
Railways: Modernisation and transparent bidding to drive growth ............................................... 18
Road/ Infra: Increased outlay to improve demand ......................................................................... 18
Public Transport Authorities............................................................................................................ 18
Building capacities to service Future demand.......................................................... 19
Financials and Valuations ......................................................................................... 20
Revenues to grow at 16.5% CAGR post FY16 .................................................................................. 20
Margins to expand on changing product mix and low crude oil prices ........................................... 20
Adj. PAT to grow at 30.9% in FY16, 18.8% CAGR over FY16-18 ....................................................... 21
Valuation Thesis: 15% discount to APNT, Accumulate .................................................................... 22
Q3FY16; 190bps margin expansion enables 28.6% PAT Growth ..................................................... 23
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that
the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report
April 11, 2016 2
Company Report
April 11, 2016
Kansai Nerolac Paints
Kansai is a pure play on Paints demand in India, being the third largest player in
Rating Accumulate Decorative Paints (Nerolac), 40% share in Industrial paints and 60% share in
Price Rs282
Automotive Paints. Kansai gains from technology and innovation of its parent
Target Price Rs288
(Kansai Paints, Japan-71.3% stake) which lists in top 10 paint companies globally.
Implied Upside 2.1%
Sensex 24,674
Nifty 7,555 Kansai has launched “Little Master” to compete with ‘Tractor’ in the lower end
emulsions, thus, filling a portfolio gap. Kansai is improving efficacy of its
(Prices as on April 08, 2016)
distribution as the proportion of dealers with Tinting machines will increase to 80%
by FY18 (41% in FY11). Product innovations, distribution and brand building will
enable 17.5% sales CAGR for Kansai post FY16.
Trading data
Market Cap. (Rs m) 151,975.4 Automotive paint sales should gain from 1) expected demand recovery 2) imbibed
Shares o/s (m) 538.9 service component in its OEM package and 3) new client additions, more so among
3M Avg. Daily value (Rs m) 134.6 non-Japanese auto makers. Powder coatings offer immense scope once the
consumer demand for white goods and home improvement picks up. Kansai should
gain from emerging opportunities in Railways, State transport, Roads and
Major shareholders Infrastructure, given rising spends and introduction of e-bidding and payment
Promoters 69.27% system. We estimate 17% sales CAGR in industrial paints post FY16.
Foreign 9.51%
Domestic Inst. 6.54% Kansai is expected to post 30.9% PAT growth on 500bps gross margin and 250bps
Public & Other 14.68%
EBITDA margin expansion in FY16. We expect margin expansion of 50bps in FY17
and a decline of 80bps in FY18 which would enable 25% PAT growth in FY17 and
12.5% in FY18. Kansai has ROCE of 25.8% and ROE of 18.4%, dividend payout of
Stock Performance
33% and net cash of Rs6bn. Kansai trades at 30.4x FY18 EPS and trades at 15%
(%) 1M 6M 12M
Absolute 2.5 17.1 21.9
discount to Asian paints as against 20% discount in the last five years. We value
Relative 2.5 25.2 35.9 the stock at 31x FY18 EPS and arrive at a target price of Rs288. We initiate
coverage on Kansai Nerolac Paints with an ‘Accumulate’ rating.
How we differ from Consensus Key financials (Y/e March) 2015 2016E 2017E 2018E
EPS (Rs) PL Cons. % Diff. Revenues (Rs m) 35,491 38,204 44,167 52,327
2017 8.3 7.6 8.6 Growth (%) 12.2 7.6 15.6 18.5
2018 9.3 9.8 -5.2 EBITDA (Rs m) 4,448 5,738 6,846 7,667
PAT (Rs m) 2,717 3,557 4,449 5,004
EPS (Rs) 5.0 6.6 8.3 9.3
Growth (%) 31.5 30.9 25.1 12.5
Price Performance (RIC: KANE.BO, BB: KNPL IN) Net DPS (Rs) 1.4 1.8 2.3 2.6
(Rs)
350
Profitability & Valuation 2015 2016E 2017E 2018E
300
250
EBITDA margin (%) 12.5 15.0 15.5 14.7
200 RoE (%) 18.0 18.4 18.4 18.4
150 RoCE (%) 17.4 18.1 18.2 18.2
100 EV / sales (x) 4.3 3.9 3.4 2.9
50 EV / EBITDA (x) 34.2 25.7 22.2 19.8
0 PE (x) 56.0 42.7 34.2 30.4
Dec-15
Jun-15
Oct-15
Apr-15
Apr-16
Feb-16
Aug-15
P / BV (x) 9.5 6.7 5.9 5.3
Net dividend yield (%) 0.5 0.6 0.8 0.9
Source: Bloomberg Source: Company Data; PL Research
Kansai Nerolac Paints
Kansai Nerolac: Play on Consumption and Infrastructure
Kansai is a play on demand recovery in Decorative as well as in the Industrial paints.
The company is expected to be a major beneficiary of pick-up in the Industrial
demand being the market leader in automotive paints with 60% market share and
overall Industrial paints with 40% market share. Kansai has increased the share of
decorative paints in its sales mix (from ~50% in FY10 to ~55% in FY15) and is
gradually increasing distribution reach and dealers with tinting machines. Its
decorative paints portfolio has products straddling across various price points and
addressing multiple painting needs. Reduction in interest rates, bottomed-out rural
economy and revival in the infrastructure and capital goods space is expected to
increase demand for both Industrial and decorative paints.
Kansai is a player focused on paints, while other companies are diversifying into
Adhesives, Sealants, Waterproofing, Bath and Sanitary fittings and Kitchen. Focused
approach, technology back-up of parent in industrial paints, expanding distribution
in decorative paints and strong relationships with global automotive giants will
enable Kansai to record sustained growth in the coming years. The company,
therefore, emerges as a compelling play on revival in both Consumption demand and
Infrastructure development.
Exhibit 1: Kansai: Decorative paints are 55% of sales, Auto paints are 75% of Industrials
Automobile
Decorative Industrial 75%
55% 45% Other
Industrial
25%
Source: Company, PL Research
April 11, 2016 4
Kansai Nerolac Paints
Decorative Paints industry to grow at 14% CAGR
Decorative paints account for over 70% share in Rs350bn Indian paint industry. Organized
players dominate with ~70% of the decorative market, while 30% share is accounted for by
unorganized players who are present in less technology intensive distemper segment.
Sustained Upgradation: Decorative paints include Enamels, Exterior emulsions, Interior
Emulsions, Primer, Distempers, Wall Putty and Wood coatings etc. Large organised players
have reduced focus on Distempers and are instead promoting economy range of emulsions,
given low margins in this segment. Paints Industry is witnessing sustained upgradation from
Distempers to Emulsions and premium emulsions in the past few years.
High Involvement Category: Paints industry has come a long way from being a low
involvement product to a high involvement product. Paints now occupy centre stage of home
decor as against earlier trend where painters used to dictate the brand, colour and type of
paint to be used in the residential buildings. Sustained investments in advertising, Tinting
machines, Consumer education and Signature stores have increased the consumer interest in
the category and boosted upgradation and growth.
Oligopolistic Industry: Paints industry is an Oligopoly as four major players have 92% of
organised market share. Decorative paints market in India is dominated by Asian Paints with
~52% market share, followed by Berger and Kansai, with 17% and 15% share, respectively.
Market leader Asian paints has focus on volumes and not on expanding gross margins which
has promoted healthy competition and focus on production and marketing efficiencies in the
Industry. Although global players like Sherwin Williams, Nippon, and Juton etc. have entered
the Indian market, existing players have strengthened their market share and dominance.
Exhibit 2: Asian paints controls 52% of organised share, Kansai has 15%
Decorative Paints market share
Others
Akzo Nobel 8
8
Kansai Nerolac
15 Asian paints
52
Berger Paints
17
Source: Industry Data, PL Research
April 11, 2016 5Kansai Nerolac Paints
Decorative paints to grow sales at 14% CAGR: The Indian paint industry has
benefited from a gradual shift in the consumer preference from traditional
whitewash to entry level distempers and higher quality paints like emulsions and
enamels. Decorative paints industry has grown sales at 16% CAGR in the past five
years. The major drivers for growth of the Decorative paint industry are 1) increased
urbanization and shift towards paints in rural markets 2) Rise in the disposable
income of the consumers 3) India’s per capita consumption at 1.3kg is lower by 55%
than SE Asia and 70% than China) 4) Reduction in repainting cycle from earlier level
of seven years 5) Aggressive marketing and enhanced distribution network 6)
Innovative products 7) Expected growth in housing construction, given Housing for
all and smart cities initiative of GOI.
Exhibit 3: Decorative market expected to grow at 14% CAGR
500 460
450
400
350
300
(Rs bn)
240
250
200 180
160
140
150 115
100
50
0
CY10 CY11 CY12 CY13 CY15 CY20
Source: Akzo Nobel, PL Research
Exhibit 4: Decorative Paint Industry volumes have GDP multiplier of 1.6-2x
Real GDP Gr Paint Industry Volume growth GDP Multiplier
20.0% 2.5
2.0 1.9 2.0
1.8 1.7 1.7 1.7 2.0
15.0% 1.6 1.6 1.6 1.6 1.6
1.5
10.0%
1.0
5.0%
0.5
0.0% 0.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: PL Research, Company Data
April 11, 2016 6Kansai Nerolac Paints
Kansai focusing on branding and distribution to gain share
Kansai is the no.3 player in decorative paints segment with ~15% market share under
the “Nerolac” brand. Decorative paints sales have grown at 15.7% CAGR in the last
five years which has increased its share in sales mix from 50% in FY10 to 55% in
FY15.
Kansai is looking at increasing its revenue from decorative paints given that 1)
decorative have higher margins than industrial paints and 2) decorative have higher
pricing power and low margin volatility than industrial paints. Decorative paints
provide relative margin stability during volatility in raw material prices. Kansai’s
portfolio mix is improving as the share of emulsions has increased from 20% to 38%
of sales even as the share of Enamels and Distemper has come off by 13%.
Exhibit 5: Emulsions have significantly increased share in decorative sales
FY10 FY15
45% 40%
40% 38%
35% 30%
30% 25%
25% 20% 20%
20% 15%
15% 12%
10%
5%
0%
Emulsion Enamel Distamper Other
Source: Company, PL Research
1) Investments in branding and consumer connect
Kansai has increased investments in advertising and brand-building initiatives to
enhance its brand image and improve consumer perception and appeal for its
products.
Kansai launched Nerolac Impressions with HD technology by using a 360 degree
campaign with its brand ambassador “Shahrukh Khan” and dedicated webpage
about the product. It also launched region specific TV campaigns for Andhra
Pradesh, Tamil Nadu and Kerala.
During the year, Kansai launched “U Can”, an initiative aimed towards further
reducing the impact of painting on the environment by recycling its paint cans
into attractive flower pots. The campaign garnered a thumping response from
the consumers with improved affinity with “Nerolac”.
April 11, 2016 7Kansai Nerolac Paints
Nerolac introduced QR codes in its shade cards and guides to enable the Nerolac
app users to flip through the entire range of colours and combos online. This has
made the visualization process much easier for the consumer enhancing their
home painting experience.
Nerolac tied-up with one of the leading interior magazines and “BBC Good
Homes” by launching a special “High-definition living” issue to give out home
decor tips on painting to directly reach out to the consumers.
Nerolac launched the Colour of the Year and Colour Trends 2015 to set the
trends for the New Year for consumer reference.
Nerolac further aligned its communication to reach out to the end user by
coming up with campaigns like ‘Wish in HD language of colours’. The campaign
allowed people to send messages and greet their friends, whereby, each
alphabet had a designated HD shade of Kansai assigned to it.
Kansai is investing gains from benign raw materials into advertising and marketing to
strengthen its Nerolac brand. The company’s ad-spends has increased by 50bps to
4.1% of sales over FY13- FY15 and is expected to increase to 5% in FY16.
We believe that Kansai is looking to increase its market share by increasing its
presence in South and East India where it has low market share. The company has
the product portfolio and is competitively priced to Asian paints. However, Asian
Paints has strong dealer connect, wide spread distribution network and brand
visibility. Increased brand visibility and endorsements can boost sales for Kansai.
Exhibit 6: Kansai’s adspend shows rising aggression in brand building
Advertising % of Sales
6.0
5.0 4.9
4.6
5.0 4.1
4.0 3.9 3.9 3.9
3.6
4.0
3.0
2.0
1.0
0.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Source: Company, PL Research
April 11, 2016 8Kansai Nerolac Paints
2) Distribution reach and product endorsements
Breadth and depth of distribution has been one of the key advantages of Asian
paints, despite higher dealer incentives offered by its competitors. Kansai has been
increasing its distribution reach and adding depots and dealers steadily. Its
distribution network has increased from ~11000 dealers in FY11 to 15000 dealers in
FY15 and has installed 11000 tinting machines, which are owned by Kansai. The
proportion of dealers having tinting machines has increased from 40% in FY11 to
73% in FY15. We estimate an increase in the number of dealers to ~20000 with 80%
having a Tinting machine by 2018.
Kansai has initiatives to reach out and collaborate with “influencers" such as
interior decorators and architects. Product endorsement by the interior
decorators and painters goes a long way in increasing consumer confidence into
using “Nerolac” brand of products.
Kansai has entered into a tie-up with the e-commerce major, ‘Flipkart’, during
the festive season. The company provided an interactive consumer interface,
consumer offers and painting service. This broadened the distribution channel
and improved consumer interface, although the impact on sales is not
meaningful.
Kansai modified its painter reward program Nerolac Premium Painters (NPP) to
include benefits like sponsoring scholarships for the painters’ children and
accidental insurance for painters and their families selectively. Kansai expects
this to increase the painter’s affinity with Nerolac brand.
Exhibit 7: 73% of Dealers have Tinting machines in FY15 as against 41% in FY11
Dealer Network Tinting machines Tinting Machines %
25,000 78.2 80.1 90.0
73.3 75.8
80.0
20,000 64.3
57.7 70.0
50.0 60.0
15,000
40.9 50.0
40.0
10,000
30.0
5,000 20.0
10.0
0 0.0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Source: Company Data, PL Research
April 11, 2016 9Kansai Nerolac Paints
3) Kansai has a wide portfolio, increases focus on entry level paints
KNPL is using technological expertise of its parent Kansai in launching new products
like Nerolac Impressions HD Colour, Excel Rain guard (waterproofing to protect
against rainfall) and statue paint for coating statues. Kansai is looking to enter into
categories where it can create a niche for itself and have the first-mover advantage.
Kansai’s product portfolio straddles across various categories and price points. The
company’s Impressions and Pearl compete with Asian Paints ‘Royale’ and ‘Apcolite’
in the interior paints. It has Excel exterior paints which compete with Apex from
Asian Paints and Weather Coat from Berger.
Kansai has been weak in the economy segment of paints. The company has launched
“Little Master” in the economy paint segment to compete with Asian Paint’s “Tractor
Emulsion” which aims at upgrading the customer who is using Distemper to an
Emulsion-based paint. Little Master has been priced at 10-20% discount to its peers.
The company has introduced products in the coating space like High Solid metallic
base coats and clear coats, resulting in significant reduction in VOC (Volatile Organic
Compounds), paint consumption and improvement in productivity. Kansai also
introduced a new range of eco-friendly paints which are lead free and with low VOC.
Exhibit 8: Kansai’s products straddle across segments and price points in Decorative paints
Interior Paints Price range (Rs/ Liter) Kansai Nerolac Asian Paint Berger
Silk Illusion range- Design
Impressions- Hi Gloss enamel,
Designer finishes 980-1049 Royale Play Metallica, Metallica, Non-Metallica
Disney, Metallic Finish
and Marble Finish
Apcolite -Gloss and Satin Enamel,
Enamels 240-450 Pearl Luster Finish
Royale Luxury Enamel
Premium Emulsion 430-600 Impression-24 carat, Eco clean Royale - Aspira, Shyne, Luxury Breathe Easy, Silk Luxury Emulsion
Little master, Beauty - Silver,
Tractor, Apcolite - Advanced and Easy Clean, Rangoli Total care,
Emulsion 95-300 Gold, Smooth Finish and Lotus
Premium Bison Emulsion
Touch
Goody Synthetic Distemper,
Distempers 50-90 Tractor- Acrylic and Synthetic Jadoo Acrylic and Bison Distemper
Beauty Acrylic Distemper
Bison Wall Putty and Happy Wall
Wall Putty 35-75 Nerolac Wall Putty Asian Paints Acrylic Wall Putty
Acrylic Putty
Exterior paints
Wall Masta and Weather Coat
Excel , Excel Total, Suraksha Ace and Apex range-Ultima and
Acrylic Emulsions 120-460 range- Long life, Smooth and
Range- Plus and Advanced Protek
Allguard
Source: Industry, PL Research
April 11, 2016 10Kansai Nerolac Paints
Kansai to gain from pick up in Industrial demand
Industrial paints market is ~30% of the overall paint industry in India as against the
global average of 66%. Industrial paints are technology intensive due to which
domestic companies have tied up with global paint majors. Industrial paints can be
further sub-classified into 1) Automotive Coatings 2) Powder Coatings 3) High
performance coatings and 4) General Industrial paints. Industrial paint demand is
dependent on various industries such as Automobiles, Consumer durables and
Infrastructure spending on roads, railways, power plants etc. Industrial paints are
largely solvent-based resulting in higher fluctuation in profits due to changes in
Crude prices. Kansai is the market leader in Industrial paints with ~60% market
share. Industrial paints account for ~45% of its sales.
Exhibit 9: Leading Paint majors have global tie-ups in Industrial Paints
Company Foreign Collaboration Details
Kansai Paint (Japan) Architectural coatings, Process design and quality improvement
Kansai Nerolac Oshima Kogyo (Japan) Technical assistance for manufacturing heat resistance coatings
Cashew (Japan) Technical assistance for coating products MICRON and their thinners
PPG Industries (US) PPG Asian Paints JV for auto OEM, refinish, and industrial coatings
Asian Paints
Asian Paints PPG JV for non-auto industrial and powder coatings
Akzo Nobel India Akzo Nobel (Amsterdam) Akzo technology across segments of Decorative and Industrial Paints
DuPont Performance Coatings Technical license agreement for Automotive coatings
Berger Paints India Becker Industrifarg (Sweden) Berger Becker Coatings JV (49% Berger stake) for coil coatings segment
J.V – BNB Coatings India Ltd for manufacture of coatings for plastic
Nippon Bee Chemicals Co. Ltd (Japan)
substrates
Source: Industry, PL Research
Exhibit 10: KNPL is present across most of the Industrial paint segments in India
Automo
tive
Automo
Coil
tive
Coating
refinish
Marine Industri Powder
Coating al Paints Coating
General Perform
Industri ance
al Protecti coating
ve
Coating
Source: Industry, PL Research
April 11, 2016 11Kansai Nerolac Paints
Automotive paints
Kansai has 60% market share in Auto OEM paints
Automotive Paints is the largest segment in Industrial paints with a market size of
~Rs25bn. Kansai is the market leader in this segment with ~60% market share
followed by PPG Asian Paints with 20% and BASF with 10% share. Automotive paint
segment is a volume-driven business as Auto OEMs have an upper hand in price
negotiations. Price hikes come with a delay in case of sharp rise in raw material
prices impacting the margins. Automotive paints require technological capabilities
requiring domestic players to tie up with large global paint companies on one hand
and automobile majors on the other.
Exhibit 11: Kansai has 60% share of the automotive paints market
% Automotive Paints Marketshare
Others
10
BASF
10
PPG Asian paints Kansai Nerolac
20 60
Source: Industry, PL Research
Automotive paints demand to grow in low teens
Automotive paint demand has a direct correlation with the automobile sector
volume growth. Automotive industry witnessed pressure on volumes in FY15 and
FY16 due to 1) weak rural demand due to two successive weak monsoons 2) damage
to winter crop due to untimely rains 3) Little increase in MNREGA allocations and 4)
Mining ban in a few states impacted demand for commercial vehicles. We expect the
auto volumes to pick up in FY17 led by 1) expectations of normal monsoon post two
bad years 2) pick-up in Infrastructure development and economic growth and 3)
improved urban demand led by OROP and pay commission benefits. While the high
growth rates of ~26% witnessed between FY10 & FY11 might not be visible in the
near term, automotive paints are expected to grow in low teens and by 16.7% CAGR
over FY15-20.
April 11, 2016 12Kansai Nerolac Paints
Exhibit 12: Automotive paints (OEM) likely to grow at 16.7% CAGR over FY15-20
45
39
40
35
30
(Rs bn)
25
20 18
15
15 12 13
11
10
5
0
FY10 FY11 FY12 FY13 FY15 FY20
Source: Akzo Nobel Presentation, PL Research
Kansai to grow ahead of industry growth
Kansai’s sales from automotive segment have grown at a CAGR of 11.6% in the last
five years as against 7% growth in Auto Industry volumes during the same period.
Kansai has increased market share from 55% to 60% and gained rising acceptance
amongst non-Japanese companies and brands. Kansai is likely to be a big beneficiary
of any revival in the growth rates of the Automobile industry and will grow at a rate
higher than Industry average led by 1) Technological advantage 2) New client
additions & strong relationships 3) Using service as differentiator and 4) Timely
capacity additions.
Technological Advantage: KNPL gets technology support from Kansai Paint (Japan)
on a continuous basis which enables it to remain ahead of competition. The
company was a pioneer in introducing Cathodic Electro-Deposition (CED) coatings
developed for Maruti Suzuki and has recently introduced latest generation CED
primers with enhanced corrosion protection and reduced consumption. It has also
introduced Multi metal coatings and Mar & scratch resistant clear coats and other
products aimed at reduced consumption and increased durability.
New client additions and Strong relationships: Kansai Paints’ technological
superiority and strong relationships with the global auto majors has ensured its
dominance in the Indian automotive segment. Kansai had huge advantage as
Japanese majors like Suzuki, Honda, Toyota, Mazda and Nissin etc. have strong
market shares in Passenger Cars, UVs, Bikes, and Scooters in India. However, the
company has been able to make strong inroads across all players which have added
new dimensions to its growth. Kansai had been able to garner 80% volumes from the
new auto assembly line additions after 2013 enabling it to grow ahead of the
industry. Long-term strategic relationships with the major Auto OEMs and new client
additions will enable Kansai to grow ahead of the industry and gain share in the
coming years as well.
April 11, 2016 13Kansai Nerolac Paints
Exhibit 13: Auto Paints; Kansai to grow at 15.5% CAGR post FY16
Auto volume growth % Kansai Auto sales growth %
30.0 25.4 26.6
25.0
20.0 23.2 16.0
14.6 14.5 15.0
15.0 12.6
10.8
13.7 8.6 8.0
10.0 9.2 12.5
8.3
3.2 10.2
5.0 4.0
0.8 2.0
0.0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Source: Industry, PL Research
Using service as a differentiator: Kansai is taking auto painting to a different level
with service involvement from being a mere supplier of paints. The company has
deputed its technical workers with auto OEMs on their shop floor. This inculcates an
element of service in the auto paints business. This initiative has been helpful in
reducing inventory levels at the customer place; bring down painting cycles, quick
response to any client needs and resolving painting and finishing issues of vehicles.
This initiative will go a long way in maintaining strong relationship with the customer
and help it in retaining edge over its competitors.
Timely Capacity additions: Kansai is putting up a new plant in Gujarat with a
capacity of 42000 MT which would be used for Industrial paints; we believe that with
many automotive companies now operating in Gujarat, it will help Kansai to cater to
those companies and meet expected increase in demand.
Auto refinish segment
Market for Auto refinish is estimated to be ~Rs10bn with major players being Kansai,
PPG Asian paints, Akzo Nobel and BASF. PPG Asian Paints is the market leader in this
segment as it had acquired ICI’s auto refinish business. Auto refinish segment
reflects growth specific to used car sales and repair services. Revival in Auto sales
can further boost growth with a lag. Auto refinish segment has been growing at 20%
CAGR as:
Growth in auto insurance is fuelling demand for refinish paints and coatings as
increasing number of consumers have insurance claim for accidents.
Emergence of Multi-Shop Operators (MSO) chains in the service and repairs
segment is prompting consumers to opt for better services and vehicles; this is
propelling the demand for refinish coatings
April 11, 2016 14Kansai Nerolac Paints
Pessimism in the economy in the recent past changed consumer’s preference
towards used cars over new cars.
Kansai is in a good position to capitalize on this opportunity, given its technological
capabilities and product portfolio. The company has created a separate division for
the Auto refinish segment and is gaining good traction in the last 2-3 years.
Kansai has introduced Retan PG ECO Hybrid system in the super premium segment.
Kansai has developed high solid technology for both solvent and water borne
refinishing systems which has high adhesion, lower baking time and 25% lower paint
consumption. It has been approved by some major Auto OEMs for their vehicles
which would boost its demand in the coming years.
Other Industrial paints
Other Industrial paints are ~12% of Kansai’s sales and 25% of the total industrial
paints sales of the company. It consists of segments like Powder coatings,
Performance coatings and other Industrial coatings like Marine coatings, coil
coatings etc. Kansai is market leader in most of these segments and will benefit from
any revival in Industrial capex cycle.
Powder Coatings; 15% CAGR likely on durables and home improvement demand
Powder coating paints market is Rs14bn and is expected to grow at 15% CAGR over
FY15-20. Powder coating paints have application in White goods, Auto components,
Furniture and home improvement industry. High performance Powder coating is
amongst the fastest growing industrial coatings segments, given the toughness,
corrosion/ scratch resistance and finish of the products.
Exhibit 14: Powder coatings finds application in White goods, auto components, Furniture and electrical industry
White Goods Auto Components Furniture Electrical Industry
Air Conditioners Air Filter Housing, Brake Capillaries Commercial Furniture Fans
Washing machines Motorcycle Frames, Steel Wheels, Seat Frames Domestic Furniture Light Fixtures
Microwave Owens Bright Trim Molding, Engine Mirror Housings Electrical Panels
Refrigerators Bumper bars, Door Handles
Source: Company, PL Research
Kansai is the market leader in the powder coating segment for white goods industry.
Its esteemed customers include Godrej, Whirlpool, Samsung, Blue Star, Daikin,
Voltas, Haier, Videocon, Siemens, Havells and Hitachi etc. Kansai has also
strengthened its position in the auto component industry.
Kansai has acquired new range of products through technology tie-ups with Protech,
Canada which will enable it to enter new segments. It now has the technology to
address niche segments like Super Durable powders & Functional powders like pipe
coating which would enable it to cater to rising demand for premium products.
April 11, 2016 15Kansai Nerolac Paints
Cooling inflation, OROP and benefits of pay commission will increase disposable
income thus increasing consumption demand and higher growth in powder coatings.
Exhibit 15: Durables and Home Improvement to enable 15% CAGR sales growth
30 28
25
20
(Rs bn)
14
15
10
10 7 8
6
5
0
FY10 FY11 FY12 FY13 FY15 FY20
Source: Akzo Nobel Presentation, PL Research
Performance coatings to grow at 19% CAGR
Performance Coatings are Rs33bn segment and have grown at 13% CAGR in the past
five years. Core sectors like Power, Oil and Gas, OEM, Mining, Infra and SME are
major contributors to this segment. Performance and other industrial coatings are a
play on the revival of increased spending on infrastructure in the economy.
Government has announced an additional investment of Rs700bn in infrastructure
over 2016-17 along with its intention to set-up a national Investment and
infrastructure fund to ensure flow of money in the sector.
Exhibit 16: Performance Coatings
Infra
10
SME
27
Power
19
Mining & Oth
12 O&G
13
OEM
19
Source: Company Data, PL Research
April 11, 2016 16Kansai Nerolac Paints
Kansai operates in power, floor coatings, petrochemicals and infrastructure
segments in the high performance coatings segment of paints. It includes heavy
coatings for plants, refineries, distribution stations, floor covering for industrial and
commercial purposes, paints for flyovers, airports, ports, Metros etc
Exhibit 17: High Performance coatings Exhibit 18: Performance coatings to grow at 19% CAGR over FY15-20
usage
High performance 90
Usage 78
Coatings 80
Heavy Duty coatings
Power 70
for plants
Industrial/ Commercial 60
warehouses, Shop (Rs bn) 50
Floor Coatings floors,
Pharmaceuticals, 40 33
power, lab floors 30 23 24
18 20
Flyover, Airports, 20
Infrastructure
metro, Ports, Sky Buses
Refineries, Distribution 10
Petrochemicals Station, Transmission 0
Lines FY10 FY11 FY12 FY13 FY15 FY20
Source: Industry, PL Research
Source: Akzo Nobel Presentation, PL Research
General Industrial coatings to grow at 15% CAGR
General Industrial coatings segment is Rs18bn in size and is likely to grow at 15%
CAGR. Kansai is present in this segment in State Transport segment, Agriculture,
Glass coatings, material handling, security equipment and other industrial products.
Exhibit 19: Industrial Coatings application Industries
Industrial Coatings Usage
State Transport Bus Body System
Prefabricated Buildings, Sewing machines, Bicycles,
General Industrial Generators, Containers, Fans, Gas Cylinders, Helmets, , TV
Cabinets, Barrel Coatings
tractors, seeders, balers, fertilizer spreaders, Mowing and
Agriculture
plowing equipment, harvesters
Glass Coatings Cosmetics, Perfumes, Brewery, Mirror Backing
Material Handling Casting Body, Machine Lifter
Fire resistant Cabinets, Safe Deposit Lockers, ATM Safes,
Security Equipment Coatings
Strong Doors
Source: Industry, PL Research
General Industrial coatings have very large and diverse customer base and are used
by large number of players even in the SME segment.
April 11, 2016 17Kansai Nerolac Paints
Industrial paints - emerging opportunities
Railways: Modernisation and transparent bidding to drive growth
Kansai started bidding for Railway tenders on improved transparency and ease of
doing business post new government assumed power in 2014. The company is well
placed to gain from growth opportunity in Indian Railways as:
Railway ministry has made a budgetary allocation of Rs1200bn in FY17 as against
Rs480bn in FY14, a part of which will flow to improvement in existing stations
and maintenance of Rolling stock and assets which will increase demand for
paints.
Kansai has acquired fresh approvals for Coaches from Research Design and
Standards Organization (RDSO) and made successful trials for high-end
Polyurethane paints for Premium coaches; this will boost sales in coming years.
Japan is making huge investments in modernisation of Indian Railways which
would provide increased business to Japanese companies. Kansai would be a
beneficiary in paints as it is subsidiary of Kansai Japan.
Road/ Infra: Increased outlay to improve demand
GOI has announced an allocation of Rs970bn for roads sector in FY16-17 budget.
Improvement in ordering, tender pipeline and traffic growth in the Indian Road
sector is expected to open up new opportunities for the paint companies by way of
Road marking and central divider, Flyovers, bridges
Side and Centre grills to protect them from corrosion
Beautification of the areas surrounding infrastructure projects
Public Transport Authorities
Increased focus on creating good public transport system, improved road
infrastructure and increased transparency in the tendering process has opened up
new opportunity for organised sector companies like Kansai to increase sales to state
road transport corporations. The opportunity could arise from:
Repainting of the existing fleet of Buses
Modernization of Bus terminals and Bus stands
Creation of Restaurants and other amenities for the Passengers
April 11, 2016 18Kansai Nerolac Paints
Building capacities to service Future demand
Kansai has five manufacturing facilities spread across Lote in Maharashtra, Bawal at
Haryana, Jainpur in UP and Chennai and Hosur in Tamil Nadu with installed capacity
of 350K tones in FY15. It is setting up two plants - one in Gujarat and other in Punjab
and an R&D centre in Vashi near Mumbai. Kansai will meet the capex requirements
with the help of internal accruals and Rs5.4b from sale of surplus land at Chennai.
1) Gujarat plant will have a capacity of 42000 MT with a capex of Rs3.5bn which
would be used for Industrial paints and will also help in meeting the demand for one
of its key customer Maruti which has a plant coming in the nearby region.
2) Punjab plant will have a capacity of 38000 MT with a capex of Rs1.8bn which
would be for decorative paints. The Punjab plant will have a VAT benefits for a
period of 10 years.
3) Kansai is setting up an R&D unit at Vashi near Mumbai at a cost of Rs400m.
New manufacturing units are expected to be operational in phases within a period of
two years i.e. by the end of FY18. Kansai’s units are strategically located near key
automobile and consumption markets across India. New units will help in reducing
freight cost, reduce delivery time and improve service levels to its depots and
dealers. The company current capacity utilization stands at ~67-70%, upcoming
capex plans will help it to meet the increase in demand.
Exhibit 20: Kansai is adding two units at Gujarat and Punjab which would increase capacity to 430k Tones
Production (Paints – All Types) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E
Total Capacity 307,300 270,000 330,000 350,000 350,000 350,000 390,000 430,000 470,000
Production 190,023 195,000 220,000 230,000 243,800 273,056 314,014 357,976 408,093
Growth 16.3% 2.6% 12.8% 4.5% 6.0% 12.0% 15.0% 14.0% 14.0%
Capacity Utilisation 86.1% 72.2% 66.7% 65.7% 69.7% 78.0% 80.5% 83.3% 86.8%
Source: Company, PL Research
April 11, 2016 19Kansai Nerolac Paints
Financials and Valuations
Revenues to grow at 16.5% CAGR post FY16
Kansai’s revenues have grown at a CAGR of 14% between FY11-FY15; share of
decorative paints in the overall sales has increased from ~52% in FY11 to 55% in
FY15. Decorative paints have grown at a CAGR of 15.7% in the last five years as
compared to automotive paints which grew at 11.6% due to relatively slower growth
in automotive volumes. We do not expect significant changes in sales mix in the
medium term as both decorative and industrial paints are expected to grow in the
same range. Industrial paints growth will be led by economic revival, decorative
paints will see improved sales mix due to shift towards higher end premium
emulsions and enamels. We have assumed revenues to grow by 7.5% in FY16 and at
17% CAGR over FY16-18 as the impact of increase in volume growth and price
deflation gets adjusted from FY17.
Exhibit 21: Sales Break-up (Rs m)
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Decorative paints 12,777 16,228 18,472 20,464 22,863 24,463 28,377 34,053
YoY gr. 31.6% 27.0% 13.8% 10.8% 11.7% 7.0% 16.0% 20.0%
Industrial Total 12,033 13,824 15,113 16,743 19,087 20,614 23,758 27,681
YoY gr. 21.5% 14.9% 9.3% 10.8% 14.0% 8.0% 15.3% 16.5%
Automotive paints 9,180 10,518 11,419 12,651 14,263 15,404 17,715 20,549
YoY gr. 23.2% 14.6% 8.6% 10.8% 14.5% 8.0% 15.0% 16.0%
Non Automotive 2,853 3,306 3,694 4,093 4,824 5,210 6,044 7,132
YoY gr. 16.4% 15.9% 11.8% 10.8% 17.9% 8.0% 16.0% 18.0%
Total Sales 24,810 30,052 33,585 37,208 41,950 45,077 52,136 61,733
YoY gr. 26.5% 21.1% 11.8% 10.8% 12.7% 7.5% 15.7% 18.4%
Source: Company, PL Research
Margins to expand on changing product mix and low crude oil prices
Nearly two-third of Kansai’s raw materials (Pigments, extenders, solvents,
monomers, packaging) are directly or indirectly linked to Crude leading to volatility
in margins due to fluctuation in crude prices. The company’s gross margins declined
from a high of 37.2% in FY10 to 32% in FY13 as crude oil prices saw a sharp increase
from an average price of US$69.8/ barrel in FY10 to US$110.5 in FY13. This is more
so as the input cost increase is passed on with a lag in automotive paints. We note
that OEM nature of automotive paints business limits its pricing power as it is not
able to fully pass on the price increase, thus, impacting margins in the short term.
Kansai’s gross margins will get a boost from 1) shift in sales mix in favour of higher
margin decorative paints from 52% in FY11 to 55% in FY15 and 56% by FY18 and 2)
shift in the mix of decorative paint sales from low priced Distempers and Emulsions
April 11, 2016 20Kansai Nerolac Paints
to Premium Emulsions and enamels. This, coupled with decline in the prices of key
crude-linked inputs, will enable 500bps expansion in gross margins in FY16. We
expect margins to further increase to 38.7% in FY17 before it starts to taper off
gradually. We estimate 250bps increase in EBITDA margins to 15% in FY16 and
further increase to 15.5% by FY17 as adspend peak out. We estimate 110bps decline
in gross margins and 80bps decline in EBITDA margins in FY18.
Exhibit 22: Tio2 prices are down 5% YoY, trend benign Exhibit 23: HDPE prices are down ~5% QoQ and YoY
TiO2 - YoY Price Change% HDPE (Rs/ton)
20.0 14.7
15.0 110000
101461
10.0 100000 99930 91437
5.0 90000
0.0 80000 70931
-5.0 70000 75780
-5.0 60000 68226
-10.0 -6.0 -7.6 50000
-15.0
40000
-20.0 -15.6
Sep-13
Sep-14
Sep-15
Jan-13
Jan-14
Jan-15
Mar-13
Mar-14
Mar-15
Jul-13
Jul-14
Jul-15
May-13
May-14
May-15
Nov-12
Nov-13
Nov-14
Nov-15
Sep-15
Sep-13
Sep-14
Jan-14
Jan-15
Jan-16
Mar-14
Mar-15
Mar-16
Jul-13
Jul-14
Jul-15
Nov-13
May-14
Nov-14
May-15
Nov-15
Source: Bloomberg, PL Research Source: Bloomberg, PL Research
Adj. PAT to grow at 30.9% in FY16, 18.8% CAGR over FY16-18
We estimate revenues for Kansai to grow at 17% CAGR from FY16-F18 led by revival
in demand across segments and phase out impact of price cuts.
Exhibit 24: Gross margins to peak in FY17, Est PAT CAGR of 18.6% over FY16-18
2014 2015 2016E 2017E 2018E
Net Sales 31,640 35,491 38,204 44,167 52,327
YoY gr. 12.2% 7.6% 15.6% 18.5%
Gross Profit 10,301 11,846 14,673 17,092 19,651
Gross Margin 32.6% 33.4% 38.4% 38.7% 37.6%
EBIDTA 3,621 4,448 5,738 6,846 7,667
EBITDA Margin 11.4 12.5 15.0 15.5 14.7
EBITDA Growth 22.8% 29.0% 19.3% 12.0%
Interest 5 0 - - -
Depreciation 650 677 710 852 1,002
PBT from operations 2,967 3,771 5,028 5,994 6,665
Other income 103 218 210 558 705
Profit before tax 3,070 3,989 5,238 6,552 7,370
Tax 1,004 1,272 1,682 2,103 2,366
PAT 2,066 2,717 3,557 4,449 5,004
Growth 31.5% 30.9% 25.1% 12.5%
EPS (Rs) 38.3 5.0 6.6 8.3 9.3
Source: Company, PL Research
April 11, 2016 21Kansai Nerolac Paints
EBITDA is expected to grow by 29% in FY16 and 15.6% CAGR over FY16-18 as margins
would peak out in FY17 and decline by 80bps in FY18. We expect higher contribution
from other income to profits as it will increase from Rs210m in FY16 to 705m by
FY18. We estimate PAT growth 25% in FY17, and a reduced growth of 12.5% in FY18
due to contraction in margins.
Valuation Thesis: 15% discount to APNT, Accumulate
We expect ROE and ROCE at 18.4% and 25.8%, respectively and Dividend payout of
33%+. Kansai has strong balance sheet with net cash of Rs2bn in FY15 which should
increase to Rs8.8bn by FY18 enabled by internal accruals and sale of land. Kansai has
a few more land parcels including the one in Lower parel, Mumbai which can fund
growth and improve cash position in future.
Kansai currently trades at 30.4XFY18 EPS and 15% discount to 12 month forward P/E
of Asian Paints. Kansai has traded at a discount of 30% to APNT in last 10 years and
20% in the last 5 years on 12 month forward P/E. We expect the discount to narrow
down further given strong growth outlook across segments. We value the company
at 31xFY18 EPS and arrive at target price of Rs288. We initiate coverage on the stock
with an ‘Accumulate’ rating.
Exhibit 25: Kansai traded at 20% discount to APNT in past 5 years Exhibit 26: Kansai trades at premium to average and median P/E
APNT Kansai P/E (x) Peak(x) Avg(x)
47.7 50.0 Median(x) Min(x)
50.0
39.0 40.0 38.8
40.0 38.6 38.8
30.0 29.6 30.0
32.4 22.5 32.8
20.0 20.0
23.0 20.8 20.5
10.6 9.0
10.0 10.0
0.0 3.2 3.2
0.0
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Aug-08
Aug-10
Aug-12
Aug-14
Apr-07
Apr-09
Apr-11
Apr-13
Apr-15
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Dec-11
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Source: Bloomberg, PL Research Source: Bloomberg, PL Research
April 11, 2016 22Kansai Nerolac Paints
Q3FY16; 190bps margin expansion enables 28.6% PAT Growth
Net sales for Q3FY16 increased 8.7% to Rs9.7bn aided by 15% volume growth due to
late Diwali and festival season. Gross margins expanded by 570bps to 39.1% as sharp
fall in crude oil prices aided margin expansion despite price cuts. EBITDA margin
increased 190bps as 340bps increase in other expenses and 45bps increase in staff
cost curtailed input cost gains. EBITDA grew by 26.1% YoY to Rs1.36bn. PBT
increased 32% YoY to Rs1.25bn as other income increased by 55%. Adj. PAT grew
28.6% to Rs844mn as tax rate increased by 190bps to 32.7%.
Exhibit 27: Q3FY16 Result Overview (Rs m)
Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%)
Net Sales 9,681 8,903 8.7 9,713 29,392 27,372 7.4
Gross Profit 3,788 2,970 27.5 3,725 11,164 9,064 23.2
% of NS 39.1 33.4 38.3 38.0 33.1
Other Expenses 2,424 1,888 28.4 2,186 6,770 5,608 20.7
% of NS 25.0 21.2 22.5 23.0 20.5
EBITDA 1,365 1,082 26.1 1,539 4,394 3,456 27.1
Margins % 14.1 12.2 15.8 15.0 12.6
Depreciation 169 171 (1.1) 170 507 509 (0.5)
Interest - - 0 0 0 -
Other Income 59 38 54.9 61 185 160 15.6
PBT 1,255 950 32.1 1,430 4,072 3,107 31.1
Tax 411 293 40.2 461 1,319 994 32.7
Tax rate % 32.7 30.8 32.2 32.4 32.0
Adjusted PAT 844 657 28.6 969 2,753 2,113 30.3
Source: Company Data, PL Research
Exhibit 28: Late Diwali has boosted volumes in Q3FY16 Exhibit 29: Benign input costs enable 570bps, EBIDTA 190bps
Volume Growth (%) Realization Growth (%) Gross Margin EBITDA Margin Overheads
20 2.5 3.1 2.6 2.5 2.5 2.5 4.0 50.0
36.5 38.3 39.1
2.0 40.0 30.7 32.8 33.2 33.4 33.9
15 15.5 31.5
12.5 11.5 0.0 25.0
14 14.1 30.0 20.1 20.6 20.1 20.2 21.2 21.7 21.6 22.5
10 -2.0
-4.3 20.0
-4.0
5 6.5 5.5 -6.8 10.0
5 5.2 -6.0 14.9 15.8
-6.3 12.7 13.0 12.2 12.3 14.1
0 -8.0 0.0 10.6 10.9
Sep-14
Sep-15
Mar-14
Mar-15
Dec-14
Dec-13
Jun-14
Jun-15
Dec-15
Source: Company Data, PL Research Source: Company Data, PL Research
April 11, 2016 23Kansai Nerolac Paints
Exhibit 30: ROEs have remained around 20% Exhibit 31: Kansai average ROCE has been 25%
ROE ROCE
23.2
24.0 21.4 21.8 35.0
29.8
22.0 28.4 28.9
30.0
20.0 18.3 18.0 18.4 18.4 18.4 24.2 24.5 25.6 25.8 25.8
18.0 25.0 20.9
15.3
16.0 20.0
14.0
15.0
12.0
10.0 10.0
FY14
FY14
FY10
FY11
FY12
FY13
FY15
FY10
FY11
FY12
FY13
FY15
FY18E
FY18E
FY16E
FY17E
FY16E
FY17E
Source: Company Data, PL Research Source: Company Data, PL Research
Exhibit 32: Inventory mgt has shown improvement Exhibit 33: Debtors have been ~49days of sales
Inventory days Debtor Days
53 52
110
99
100 94 94 51 50
90 91 89 90 50 49
49 49
90 49
79 49 48
75 47
80
47
70
60 45
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY10
FY11
FY12
FY13
FY14
FY15
FY17E
FY16E
FY18E
Source: Company Data, PL Research Source: Company Data, PL Research
Exhibit 34: KNPL is paying faster to its suppliers Exhibit 35: Dividend payout to sustain around mid thirties
106
Payable days Dividend Payout Ratio
110 105
45.0
100 39.5
88 40.0 36.4
90 33.6 33.6
78 78 35.0 32.5 32.2 33.6 33.6 33.0
80
66 68
70 65 30.0
60 54 25.0
50 20.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY10
FY14
FY11
FY12
FY13
FY15
FY18E
FY16E
FY17E
Source: Company Data, PL Research Source: Company Data, PL Research
April 11, 2016 24Kansai Nerolac Paints
Income Statement (Rs m) Balance Sheet Abstract (Rs m)
Y/e March 2015 2016E 2017E 2018E Y/e March 2015 2016E 2017E 2018E
Net Revenue 35,491 38,204 44,167 52,327 Shareholder's Funds 15,968 22,654 25,608 28,931
Raw Material Expenses 23,644 23,531 27,075 32,676 Total Debt 415 309 209 100
Gross Profit 11,846 14,673 17,092 19,651 Other Liabilities 752 888 1,058 1,250
Employee Cost 1,433 1,825 2,111 2,476 Total Liabilities 17,135 23,851 26,875 30,281
Other Expenses 5,965 7,110 8,135 9,508 Net Fixed Assets 9,494 11,944 13,992 14,490
EBITDA 4,448 5,738 6,846 7,667 Goodwill — — — —
Depr. & Amortization 677 710 852 1,002 Investments 2,156 1,685 6,497 8,385
Net Interest — — — — Net Current Assets 5,485 10,223 6,387 7,407
Other Income 218 210 558 705 Cash & Equivalents 341 4,830 602 610
Profit before Tax 3,989 5,238 6,552 7,370 Other Current Assets 11,448 12,662 14,523 17,162
Total Tax 1,272 1,682 2,103 2,366 Current Liabilities 6,303 7,269 8,739 10,366
Profit after Tax 2,717 3,557 4,449 5,004 Other Assets — — — —
Ex-Od items / Min. Int. — 8,606 — — Total Assets 17,135 23,851 26,875 30,281
Adj. PAT 2,717 3,557 4,449 5,004
Avg. Shares O/S (m) 538.9 538.9 538.9 538.9
EPS (Rs.) 5.0 6.6 8.3 9.3
Cash Flow Abstract (Rs m) Quarterly Financials (Rs m)
Y/e March 2015 2016E 2017E 2018E Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16
C/F from Operations 3,117 8,462 5,080 5,186 Net Revenue 8,078 9,998 9,713 9,681
C/F from Investing (2,178) (2,689) (7,713) (3,388) EBITDA 992 1,491 1,539 1,365
C/F from Financing (1,147) (1,284) (1,595) (1,791) % of revenue 12.3 14.9 15.8 14.1
Inc. / Dec. in Cash (208) 4,489 (4,227) 8 Depr. & Amortization 168 168 170 169
Opening Cash 549 341 4,830 602 Net Interest — — — —
Closing Cash 340 4,830 602 610 Other Income 58 65 61 59
FCFF 2,382 3,019 810 3,094 Profit before Tax 883 1,388 1,430 1,255
FCFE 2,229 2,913 710 2,985 Total Tax 279 447 461 411
Profit after Tax 604 940 969 844
Adj. PAT 604 940 969 844
Key Financial Metrics Key Operating Metrics
Y/e March 2015 2016E 2017E 2018E Y/e March 2015 2016E 2017E 2018E
Growth Volume Growth (%) 8.5 12.0 15.5 16.0
Revenue (%) 12.2 7.6 15.6 18.5 Gross Margins (%) 32.6 33.4 38.4 38.7
EBITDA (%) 22.8 29.0 19.3 12.0 Source: Company Data, PL Research.
PAT (%) 31.5 30.9 25.1 12.5
EPS (%) 31.5 30.9 25.1 12.5
Profitability
EBITDA Margin (%) 12.5 15.0 15.5 14.7
PAT Margin (%) 7.7 9.3 10.1 9.6
RoCE (%) 17.4 18.1 18.2 18.2
RoE (%) 18.0 18.4 18.4 18.4
Balance Sheet
Net Debt : Equity — (0.2) — —
Net Wrkng Cap. (days) 84 88 84 82
Valuation
PER (x) 56.0 42.7 34.2 30.4
P / B (x) 9.5 6.7 5.9 5.3
EV / EBITDA (x) 34.2 25.7 22.2 19.8
EV / Sales (x) 4.3 3.9 3.4 2.9
Earnings Quality
Eff. Tax Rate 31.9 32.1 32.1 32.1
Other Inc / PBT 5.5 4.0 8.5 9.6
Eff. Depr. Rate (%) 4.8 4.7 4.5 4.8
FCFE / PAT 82.1 81.9 16.0 59.6
Source: Company Data, PL Research.
April 11, 2016 25Kansai Nerolac Paints
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
60% BUY : Over 15% Outperformance to Sensex over 12-months
49.1%
50% Accumulate : Outperformance to Sensex over 12-months
% of Total Coverage
37.3% Reduce : Underperformance to Sensex over 12-months
40%
Sell : Over 15% underperformance to Sensex over 12-months
30%
Trading Buy : Over 10% absolute upside in 1-month
20% 13.6%
Trading Sell : Over 10% absolute decline in 1-month
10%
0.0% Not Rated (NR) : No specific call on the stock
0%
BUY Accumulate Reduce Sell Under Review (UR) : Rating likely to change shortly
DISCLAIMER/DISCLOSURES
ANALYST CERTIFICATION
We/I, Mr. Amnish Aggarwal (MBA, CFA), Mr. Gaurav Jogani (MBA, Bcom), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report
accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this
report.
Terms & conditions and other disclosures:
Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a
subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third
party financial/other products, details in respect of which are available at www.plindia.com
This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to
others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.
The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its
affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.
Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend
upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.
Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies
referred to in this report and they may have used the research material prior to publication.
PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document.
PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014
PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities.
PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company.
PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of
publication of the research report.
PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report.
PL or its associates might have received compensation from the subject company in the past twelve months.
PL or its associates might have managed or co-managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve
months.
PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months
PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report.
PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject
Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report.
It is confirmed that Mr. Amnish Aggarwal (MBA, CFA), Mr. Gaurav Jogani (MBA, Bcom), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding
twelve months
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his
or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company
Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein,
and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o
the foregoing, among other things, may give rise to real or potential conflicts of interest.
PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving
such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any
other potential conflict of interests with respect to any recommendation and other related information and opinions.
DISCLAIMER/DISCLOSURES (FOR US CLIENTS)
ANALYST CERTIFICATION
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal
views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report
Terms & conditions and other disclosures:
This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are
resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to
satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and
trading securities held by a research analyst account.
This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and
interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon
this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas
Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").
Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.
Digitally signed by RADHAKRISHNAN SREESANKAR
April 11, 2016 RADHAKRISHNA DN: c=IN, o=Personal, cn=RADHAKRISHNAN
SREESANKAR,
serialNumber=8859da2df03122989b585ad520865a4
26
N SREESANKAR f59be69fbc1b7ba2c5315941f987f41de,
postalCode=400104, st=MAHARASHTRA
Date: 2016.04.11 11:41:06 +05'30'You can also read
