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Company Report

Kansai Nerolac Paints Ltd

CMP (as on 10/2/12) Target Price Rs.890.00 Rs.1150.00

13th February, 2012

Kansai Nerolac has been a cherished name in millions of households across the length and breadth of India. The company manufactures a diversified range of products for every surface. It is the second largest coating company in India and the market leader in automotive and powder coating. The Mumbai-based company is the leader in the industrial paints segment with a market share of over 40%. It is the third-largest player in the decorative paints segment with a modest market share of 13%. Nearly 75% of the Indian paints industry comprises of the decorative segment. The company has registered smart numbers for the quarter ending December 2011. The company's net sales has increased to Rs 6655.90 million for the third quarter ended December 31, 2011, compared to Rs 5603.80 million for the same period previous fiscal, up by about 19%. Operating profit surged up to Rs.806 million from the same quarter previous year of Rs.687.50 million; a hike of 17.24%; while on a sequential basis it has seen a fall. The companys performance has been impacted by high input costs and a slowdown in volume growth due to a slump in the auto industry. Net profit surged about 27% y-o-y to stay at Rs.526.80 million from Rs.415.90 million clocked in a year ago quarter. Going by the industry trend, KNPLs management expects a similar double-digit growth in revenue in the next quarter as well. KNPL has been able to focus on the decorative and non auto liquid business, while consolidating its leadership in the Automotive and powder coatings business.

BSE Code NSE Code Market Cap (Rs Mn) 52 Week High/Low Industry Face Value Shares O/S

500165 KANSAINER 47963.86 973.95/720.00 Paints Rs.10.00 53891972

EPS Book Value P/E P/B

33.52 170.01 26.55 5.23

Shareholding Pattern

Valuation
With increased focus on expanding capacities while maintaining its leadership position in industrial paints segment and growth in line with industry standards; KNPLs future prospects looks promising. We believe KNPL is trading at an attractive valuation at 21.33x and 18.18x of FY12EPS of Rs.41.72 and FY13EPS of Rs.48.95.

Research Analyst: Vineeta Mahnot

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Business Details
Kansai Nerolac Paints Ltd. (KNPL), a subsidiary of Kansai Paint, Japan was established in the year 1920 as Gahagan Paints and Varnish Company. Later in 1930, three British companies were merged and Lead Industries Group was established. It is the second largest coating company in India and the market leader in Industrial Coatings. Having completed 90 years of existence, KNPL has established itself as a well known brand with a strong recall proposition. KNPL has a pan-India presence and serves its customers through its 74 sales locations and 5 factories. The manufacturing operations extend across India and are located in Bawal in Haryana, Lote in Maharashtra, Jainpur in UP, Chennai and Hosur in Tamil Nadu. The proximity of the plants to the customers base has offered logistic advantage and enabled high service levels. Product range of the company includes: Decorative paints Automotive coating General industrial coating High performance coating Powder coating Speciality coating

For the Industrial Coatings, KNPL has a series of products in the Automotive, Powder and Liquids domain. A series of innovative product launches and service capabilities like Just in Time (JIT) have been some of the key enablers for sustaining the leadership. For the Decorative business, the organization is known for its innovative products and services and has many firsts to its credit like launch of low Volatile Organic Compound (VOC), low odour and lead free (no added lead) paints. Kansai has technically collaborated with two companies Kansai Paint Co. and Oshima Kogyo Co. of Japan. In India the company has presence in Assam, Goa, Gujarat, Haryana, Himachal Pradesh, Madhya Pradesh, Orissa, West Bengal, Rajasthan, Maharashtra, Punjab, Uttaranchal, Bihar, New Delhi, Tamil Nadu, Uttar Pradesh and many more. The company markets its products under the brand name such as 'Impressions', 'Beauty', 'Excel' and 'Suraksha'.

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Sectoral Outlook
The industry size for paints is estimated at Rs. 24,000 crores wherein the organized sector accounts for 65% while the remaining is with the unorganized sector comprising of around two thousand small scale paint units. The decorative paints segment accounts for Rs. 18000 crores while industrial accounts for Rs. 6000 crores of the total paint market. The paint industry as a whole is expected to have grown by 22% in 2010-11. After a decline in last four months, the paints production grew by 8.3 per cent in November 2011. The cumulative production in the April-November 2011 period fell by 1.1 per cent as compared to a 13.7 per cent year-on-year growth. This is as per the data published by the Central Statistical Organisation (CSO). CMIE expects the paints production to grow by 11.3 per cent in 2011-12, after an estimated growth of 15.3 per cent in 2010-11. The growth will be a little slower due to subdued demand from the automobile industry. Demand for both decorative (70%) and industrial paints (30%) is expected to accelerate during the 2012-14 period. Further, it is also expected that the paints production to rise by 13- 15 per cent per annum during this period. The sales volumes are expected to grow around 14-15 per cent per annum over the two years ending March 2014. The demand is likely to rise from refurbishment (repainting of existing houses), which accounts for 65 per cent of the total demand for decorative paints (70%), during 2012-14. Demand for industrial paints is likely to surge during the 2012-14 period. During the 2011-14, 22 projects are slated for completion in the paints industry. Of these, the industry witnessed completion of six projects during April-December 2011 period. The larger companies in the paints industry namely Asian Paints, Kansai Nerolac Paints and Berger Paints are expected to commission five projects in the March 2012 quarter itself. During 2013-14, five projects are slated for completion with an estimated costs of more than Rs.1,300 crore. The paints industrys capacity will increase by around 3.8 lakh tonnes on commissioning of these projects. The paints industrys sales is expected to grow by 20.1 per cent in 2012-13. Further the sales are likely to grow by 19.9 per cent in 2013-14. The growth will be mainly driven by higher volumes. The demand for decorative paints is expected to rise with the rising demand from refurbishment and real estate sector. The expected rise in the automobile industry will drive the volume growth for industrial paints. Rise in unit realizations will support the overall growth in sales.

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Huge capacity expansion plans

Kansai Nerolac Paints is planning an investment of Rs.400 crore for capacity expansion. It plans to increase the capacity to three lakh tonnes from the existing 2.05 lakh tonnes by September this year. Capacity expansions took place at Jainpur and Hosur. KNPL got statutory clearances for expanding the plant capabilities and commissioning at Hosur. KNPL believes that this will be helpful in catering to future customer demands. KNPL has maintained its technology leadership through introduction of new products and technologies at Key Original Equipment Manufacturers (OEMs). The company is focusing on new dealer openings, placement of computerized color dispensing machines, reaching out to new sites, contractors and establishing corporate tie ups.

Growth triggers ahead

KNPLs management believes that the topline is not an issue; it would continue to grow. The paint industry has been growing at double digit for the last two decades. So the company wont be seeing any headwinds as far as topline is concerned. The company is eyeing a double-digit revenue growth in FY12. The industry is growing by 15 per cent and management expects a similar revenue growth for the firm in FY13. The company has five manufacturing units and it might go for another one depending on the need. Kansai Nerolac is planning to open 5-10 exclusive Nerolac Impressive Zone every year, adding to the existing 28. The company is planning to have 600 smaller stores Nerolac Colour Stylers - on franchise basis - by the next year, up from the present 300. Further, the whole raw material segment for the industry has been going up. Titanium Dioxide has been going up exceptionally as well. KNPL believes that going forward it should go down in line with slowdown worldwide. The only concern for KNPL is margins. It is expecting pressure on the margins due to rise in commodity prices, especially crude oil and the company is worried if it would be able to pass on it to consumers.

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Standalone Profit & Loss Account

Rs. Million Particulars
Net sales Growth Expenditure EBITDA Growth EBITDA margin Other income Depreciation & Amortization EBIT EBIT margin Interest PBT Tax PAT Minority interest Adjusted PAT Growth Net Profit margins Extraordinary item Reported PAT Equity Capital Res. & Surplus Equity Shares EPS*
*Adjusted for bonus

FY09
13745.19 12170.82 1574.37 11.45% 221.95 376.05 1420.27 10.33% 18.38 1401.89 416.00 985.89 0.00 985.89 7.17 0.00 985.89 269.46 6275.03 26.95 18.29

FY10
17063.84 24.14% 14426.97 2636.87 67.49% 15.45% 203.82 442.60 2398.09 14.05% 12.00 2386.09 731.09 1655.00 0.00 1655.00 67.87 9.70 0.00 1655.00 269.46 7458.71 26.95 30.71

FY11
21387.30 25.34% 18482.28 2905.02 10.17% 13.58% 234.61 493.55 2646.08 12.37% 8.43 2637.65 831.48 1806.18 0.00 1806.18 9.13 8.45 253.67 2059.84 538.92 8622.75 53.89 33.52

FY12E
25664.76 20.00% 22174.35 3490.41 20.15% 13.60% 269.48 536.28 3223.61 12.56% 11.85 3211.76 963.53 2248.23 0.00 2248.23 24.47 8.76 0.00 2248.23 538.92 10,224.30 53.89 41.72

FY13E
29514.47 15.00% 25382.45 4132.03 18.38% 14.00% 295.14 641.62 3785.55 12.83% 17.03 3768.52 1130.56 2637.97 0.00 2637.97 17.34 8.94 0.00 2637.97 538.92 12,053.91 53.89 48.95

Ratios
Particulars
Return on Equity Return on Capital employed Debt/Equity Asset turnover Current Ratio

FY09
15.06 18.99 0.14 1.28 1.52

FY10
21.42 27.16 0.14 1.33 1.41

FY11
19.71 26.50 0.09 1.45 1.49

FY12E
20.89 27.43 0.09 1.50 1.55

FY13E
20.95 27.58 0.09 1.50 1.62

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Balance Sheet
Rs. Million Particulars
Share Capital Reserves & Surplus Shareholders funds Borrowings Minority Interest Deferred tax Liability Sources of funds Gross block Accumulated Depreciation Net block Capital work in progress Investments Projects in progress Inventories Sundry debtors Cash and bank balance Other current assets Loans and advances Total current assets Deferred tax asset Current liabilities and provisions Net current assets Goodwill Uses of funds

FY09
269.46 6275.03 6544.49 936.26 0.00 0.00 7480.75 5,466.65 3,045.49 2421.16 309.44 2,944.26 0.00 1,706.34 2,095.73 761.64 0.00 417.07 4,980.78 105.96 3,280.84 1,699.94 0.00 7,480.75

FY10
269.46 7458.71 7728.17 1099.85 0.00 0.00 8828.02 6,444.08 3,483.49 2960.59 96.95 4,015.37 0.00 2,474.44 2,323.66 410.83 0.00 410.93 5,619.86 115.23 3,979.99 1,639.88 0.00 8,828.02

FY11
538.92 8622.75 9161.67 824.84 0.00 0.00 9986.51 7,036.87 3,970.70 3066.17 751.65 3,718.23 0.00 3,541.03 2,602.60 396.91 0.00 502.32 7,042.85 134.13 4,726.51 2,316.33 0.00 9,986.51

FY12E
538.92 10,224.30 10763.22 987.11 0.00 0.00 11750.33 7661.12 4,506.98 3154.14 972.96 4,553.15 0.00 4,095.64 3,144.12 455.07 0.00 579.18 8,274.01 134.13 5,338.07 2,935.94 0.00 11,750.32

FY13E
538.92 12,053.91 12592.83 1135.17 0.00 0.00 13728.00 8554.92 5,148.60 3406.32 1,130.95 5,389.60 0.00 4,704.52 3,640.97 546.15 0.00 689.87 9,581.51 134.13 5,914.51 3,667.00 0.00 13,728.00

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Quarterly Financial Highlights

Rs. Million Particulars
Revenues Expenditures Operating Profit Net Profit OPM% NPM % EPS* Q3FY12 6656.90 5850.90 806.00 526.80 12.11 7.91 9.78 Q3FY11 5603.80 4916.30 687.50 415.90 12.27 7.42 7.72 Q2FY11 6160.50 5245.90 914.60 571.10 14.85 9.27 10.60 YoY% 18.79 19.01 17.24 26.67 (16bps) 49bps 26.68 QoQ% 8.06 11.53 (11.87) (7.76) (274bps) (136bps) (7.74)

*EPS adjusted with current equity shares

Past Price movement of the stock

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