RR 2103201313

BP WEALTH
Paint Sector Overview

BP WEALTH
Paint Sector Overview
INDEX
Introduction to Paint Industry …………..……………………..……………………………………………………………………….1
Market Structure …………..……………………..……………………………………………………………………………………….3
Industry Overview …………..……………………..…………………………………………….……………………………………… 4
Business Model (Micro) Analysis…………..……………………..…………………………………………………………………. 8
Companies
⇒ Asian Paints Ltd..…………….…………………………………….………………………………………………………………10
⇒ Kansai Nerolac Paints Ltd.……………………………………………………………………………………………………….17
⇒ Berger Paints (India) Ltd…...………………………………………..……………………………………………………………25
⇒ Akzo Nobel India Ltd.……………..……………………………………………………………………………………………….31
BP Equities Private Limited (w ww .bpw ealth.com)

2nd Feb , 2011

Paint Sector
BP WEALTH
Sector Analysis 12th March, 2013
INTRODUCTION
The paint sector in India is estimated at Rs 2,910,000mn and has been witnessing robust growth to the tune of 17% CAGR over the past
seven years. Furthermore the industry is expected to grow at 12-13% per year for the next 5 years, with the volume of consumption at 1.5-
2 times the real GDP level. This can largely be attributed to the increase in demand from the consumer as well as the industrial sectors,
which form the primary segments in this industry.
As with other industries the paint sector comprises of players from the regional as well as the international landscape. Traditionally the in-
dustry had been dominated by the unorganized sector, but with the foray of foreign firms as well as the rapid industrialization and institu-
tionalization of the country there has been a restructuring. The pact has now been led by the organized sector, with the smaller and unor-
ganized players either been amalgamated or integrated as suppliers of the larger industry chain. Currently the organized players account
for 65% of the market, while the remaining belonging to the unorganized firms. The unorganized sector comprises of around 2000 small
scale paint units. Top Five players are estimated to control>80% of the organized market.
List of the public firms that compete in the industry
⇒ Asian paints.
⇒ Kansai Nerolac
⇒ Berger Paints
⇒ Akzo Nobel India
Valuation
Company Name CMP FY15E EPS Target Price Upside Potential Rating
Asian Paints 4,757 178.1 5,342 12% HOLD
Kansai Nerolac 1,171 60.7 1,518 30% BUY
Berger Paints 206 9.3 234 13% HOLD
Akzo Nobel India 991 57.6 1,152 16% BUY
Source: Company reports, Bloomberg, BP Equities Research
Peer comparison Snapshot

Key Financials (FY12) Asian Paints Kansai Nerolac Berger Paints Akzo Nobel India
YE March (Rs in Mn)

Net Sales 100,324 27,312 26,621 19,878
EBITDA 16,186 362 3,340 2,869
Net Profit 10,205 2,159 1,773 1,300
Basic EPS Restated (Rs) 97 40 97 42
Key Ratios
EBITDA (%) 16.8 12.3 10.5 9.08
NPM (%) 11.4 7.7 6.6 10.1
RoE (%) 39.3 21.8 24.4 10.3
RoCE (%) 55.2 27.5 25.6 11.9
Debt / Equity (x) 0.1 0.1 0.5 0.0
Valuation Ratios
P/E (x) 33.5 23.7 21.4 16.1
P/BV (x) 11.3 4.8 4.7 2.1
EV/EBITDA (x) 19.0 13.6 11.7 10.2
Source: Capital Line, BP Equities Research
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BP W E A LT H
Paint Sector
Brief Overview
The spurt in the economic growth over the past few years has caused a tremendous increase in the size of the industry. This phenomenon
has intensified the influx of many worldwide established firms to increase their presence here, 7 out of the top 10 global companies have
their operations set up in the country. Even though India’s share in the world paint market is estimated at 0.6% only, the promising scope of
growth has not made them apprehensive about increasing their scales and building capacities. Looking at the per capita consumption of
paint in India, which currently stands at 1.5kgs, lower than even economies like Sri Lanka and Pakistan it is expected to grow considerably.
Consumers can look forward to new products launches, some for application in special areas. Company will be increasing the value added
services available to customers by offering a variety of finishes through specialized and trained applicators. There will be more options like
ranges of colors/finishes for wood applications through the tinting machines. Additionally, the trend towards water based coatings is likely
to set in both for industrial and decorative applications. While India has not yet embraced the DIY concepts as cheaper labor is still avail-
able, exclusive retail chain stores sponsored and run by Indian paint companies will become a reality.
The Indian paint industry has progressed well and moving ahead is likely to be influenced by several factors including new technologies,
new innovative products, new associations, consolidation of industry and poor performers getting out of the market. Ultimately, in the years
ahead there will be only four or five key players operating in the Indian Paint Market. Presently the growth of the Indian paint industry is
being witnessed from new demand pockets, especially in Tier II and Tier III cities, thus, signaling the growth acceptance of quality products
among the masses. The growing popularity of quality paints and increasing income levels of people residing in Tier II and Tier III cities
have pushed the growth in premium paint market of Indian decorative paint industry.
India’s strong economic growth has propelled the paint industry to double digit growth over the past few years and has made it Asia Pacific
fastest growing paint market. Despite of fast growth, India’s per capita paint consumption is still low ~2kg a year. Due to increased govern-
ment funding for infrastructure, demand for paints both in industrial and decorative segment is set to rise, there by rendering Indian paint
industry to be poised for future growth. Nearly ~65% of the paint market is highly concentrated and a classic example of an oligopoly,
where entire barriers are high and top five players capture most of the market, while the unorganized markets is highly fragmented with
over 2,000 players.
Going Forward
The Indian paint industry has overcome a long way from the days when paints were considered a luxury item. Today the awareness level
on preventing corrosion through paints is relatively high, a development that should be a huge boost to the paint industry. The Indian paint
industry offers lucrative scope for stable revenue streams to manufacturers of both decorative and industrial paints. The industry has wit-
nessed increased activity in the industrial variety of paints with entry on MNC’s in auto, consumer durables, etc. The report covers both
decorative and industrial varieties of paints along with elaboration on products sub-segments within these two product segments. The typi-
cal features of the Indian paint industry have been discussed in depth covering typical features of the Indian industry viz. raw material in-
tensives, working capital intensives, seasonality of the current global scenario with reference to the paint industry has been covered in the
report. The share of the organized and unorganized sector has been dealt with detail, discussing the impact of recent issues and trends
(like excise duty rationalizations, quality consciousness in user segment) on the industry dynamic. The demand supply scenario existing in
the industry has been covered, detailing paint production trends in India, consumption across user segments.
Growth of the Paint Industry
300
250
250
204
200
170
148
150 137
120
95
100 82
50
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Market Size (Rs. Bn)
Source: Industry, BP Equities Research

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

BP W E A LT H
Paint Sector
Industry Overview:
The decorative and industrial paints form the primary segments within the paint industry. The decorative segment contributes 75% of the
industry revenues and the remainder 25% by the industrial segment. The decorative paint segment can be classified into applications
ranging from wood, metal and walls.
Paint for Walls can be used for interior as well as external purposes. Cement paints and emulsion are used externally, while solvent and
water based paints are used for the interior. The industrial paint segment is fragmented into automotive and non-automotive uses. The non
automotive applications comprise mainly of protective and powder coatings.
Overall market share of Competing firms
Shalimar Paints
Kansai Nerolac
3%
16%
52% Asian Paints

Berger Paints 17%
13%
Akzo Nobel
Decorative Paints:
The decorative paints segment is an important contributor to the Indian paint industry. As mentioned earlier, 75% of the industry revenue is
generated by this segment. The demand for decorative paints has been increasing tremendously over the past few years. The demand
can be divided into two categories-repainting forming 70% and fresh paintings making up the remaining 30%.
Decorative Paints segment product break-up
Others
10%
Primers, Thinners Enamels
etc
15% 32%
Cement Paints 4%
13%
26%
Distempers
Emulsion
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BP W E A LT H
Paint Sector
There are several factors that can be attributed to this phenomenon:
Rapid urbanization
⇒ Greater proportion of the population migrating to cities, due to better opportunities.
⇒ Easy availability of financing for housing loans.
⇒ Wider acceptance of nuclear families.
⇒ All in all higher demand for residential housing.
Increase in purchasing power across various income groups.
Reduced duration of repainting cycles, has further prompted customers to use paint more frequently.
Spurt in commercial construction fuelled by rampant economic growth. Various research and development facilities along with state of the
art Information Technology Enabled Services (ITES) hubs and industries have been set up in India in the recent years.
Recent developments
Over the recent years firms have been developing strong product portfolios catering to customers across the entire spectrum. The cus-
tomer’s preferences favoring premium products over value alternatives have led to a greater growth in this category improving margins of
the firms ultimately leading to greater profitability.
Branding has been an important focus of the firms as consumers consider buying paints a high involvement purchase. Hence branding not
only helps create differentiation but also promote exotic products since firms are better able to sell quality goods by passing on higher
prices especially to the urban customers.
Firms have also been investing heavily in building strong distribution networks spreading across the nation. This will enable them to pene-
trate deeper into the rural markets where their presence is weak and will also help improve customer service at various points of sales.
The main drivers for the urban customers are premium products while for the rural market the shift is towards the organized sector. Cur-
rently the rural and urban markets contribute 45% and 55% respectively.
Urban Rural Mix of the Paint Industries
Rural
45% Urban
55%
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5
BP W E A LT H
Paint Sector
Industrial Paints:
The industrial Paints segment has been growing rapidly but has not received the prominence and scale that its counterpart currently com-
mands. Rapid industrialization and demand from the other core sectors of the economy is soon changing this. The recent arrival of foreign
players into this segment has attracted some serious contribution.
Fragmentation of the Industrial Paints sector
Auto Ref inish Powder Coatings
13% 10%
21% Auto OEM

23%
Others
33%
Protective & GI
Demand Drivers for this segment
⇒ Increase in domestic production of automobiles further aided by easy financing options.
⇒ Government policy on infrastructure to boost spending.
⇒ Economic development spurting creation of new industries.
Market structure:
Industrial paints require higher investments and technological expertise compared to decorative paints. Thus the barriers to enter are tradi-
tionally higher and the segment has been dominated by foreign players, as their parent companies continue to provide them with constant
assistance and technical knowhow.
There are several differences however:
-Lesser need for branding-since the industrial paints are largely sold to businesses directly and low concentration of firms in this segment
means prospective clients can be found easily.
-Distribution-the distribution network requirements are relatively much smaller compared to the decorative segment as they use the B2B
model, but however the after sales service requirements are greater due to the stringent quality standards.
Manufacturers work closely with clients to tailor their products according to their specifications. This helps in saving time and building
stronger relations developing loyalty, ultimately leading to sustainability of earnings.
-Since majority of the players are based internationally, their revenues are largely generated by firms in other sectors based in the same
home country, hence the order flow remains consistent and the existing relations save resources
-Investing in R&D is imperative in this segment as the clients require highly specialized products. This has been one of the prime reasons
for the dominance of foreign players in the industry.

6
BP W E A LT H
Paint Sector
Raw Material Mix

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

120%
100%
7%
20%
80% 38%
45%
60%
93%
40% 80%
62%
55%
20%
0%
Asian Paints Berger Paints Akzo Nobel India Kansai Nerolac
Decorative Paints Industrial Paints

7
BP W E A LT H
Paint Sector
Sourcing
Companies that continue to source their materials from abroad are relatively more sensitive to foreign currency fluctuations and changes in
the regulatory environment. However for international firms the trend has been to increase the local sourcing eventually as the scalability
improves. KNPL has the highest sourcing risk amongst its peers because it has the strongest industrial portfolio. The materials required for
this segment are difficult to produce domestically due to technological constraints, leaving no choice but to import them.
Another observation worth noting is that APNT has reduced its domestic sourcing requirements that can be attributed to the increase in the
supply of industrial paints.
Percentage of Sourcing
90%
80%
80% 74%
67%
70%
57%
60%
50% 43%
40% 33%
30% 26%
20%
20%
10%
0%
Akzo Nobel Asian Paints Berger Paints Kansai Nerolac
Imported Local
Advertising & Brand Creation
Without any doubts APNT remains the highest spender in this area. Even though in relative terms expressed as the cost of percentage of
revenue is not that much compared to the others, in absolute terms it is still the highest. KNPL’s cost here remains the lowest, not surpris-
ingly as the industrial segment does not require high levels of advertising and branding compared to the consumer market as we have
already seen with APNT.
Advertisement & Sales Promotion of the Competing Firms
4000
3500 4.3%
3000
2500
2000
3,386
1500 5.1%
5.5% 3.8%
1000
1,367
500 1,092 1,011
0
Advertisement & sales promotion (Rs.mn) Ad Spend as % of Sales

8
BP W E A LT H
Paint Sector
Retail Network & Distribution

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

9

2nd Feb , 2011

Asian Paints Ltd. Hold
BP WEALTH
Company Overview : Stock Rating

BUY HOLD SELL
Asian Paints India Ltd (APNT) is India’s largest paint manufacturer with a 52% overall market share
covering both the industrial as well as the decorative segment. The company has a dominant posi-
tion in the decorative paints industry with a market share of 60%, 2.5x that of its nearest competitor > 15% -5% to 15% < -5%
making it an undisputed leader. Overall APNT is the 10th largest paint producer in the world with
aspirations to become the 5th largest.
Sector Outlook Bullish
Investment rational
Stock
Favorable position in the decorative paints segment CMP (Rs) 4,760
APNT is able to leverage its dominant position with in the decorative paints segment (currently 5th Target Price (Rs) 5,343
largest in the world) to drive its future growth. The decorative paints division has shown promising BSE code 500820
growth in the past, along with comfortable margin performance. In India currently the decorative NSE Symbol ASIANPAINT
paints segment is considerably bigger than the industrial paints division. The decorative paints divi-
Bloomberg APNT IN
sion is primarily driven by growth in the real estate sector, rising purchasing power and rapid urbani-
Reuters ASPN.BO
zation. These factors will continue to contribute to the revenues in the coming years as a part of
India’s growth story. Key Data
Nifty 5,957
Industrial Paints to drive next phase of growth
52WeekH/L(Rs) 4,778 / 3,004
Asian Paints is currently the market leader in the Indian paint industry. Even though its product port-
O/s Shares (mn) 96
folio is biased more towards the decorative paints segment, it is about to change that. The next
phase of growth will be embarked by the industrial paints segment. The firm has been heavily in- Market Cap (Rs bn) 424
vesting to develop a strong industrial paint product portfolio to bet on India’s rampant industrializa- Face Value (Rs) 10
tion. Recent changes in the government policy to revive the infrastructure sector will also greatly
Average volume
benefit this segment. However within the industrial paints segment, APNT has a strong foothold in
3 months 76,071
the automotive coatings segment where it operates through a joint venture with PPG, a worldwide
leader in the coating industry. 6 months 74,757
1 year 90,980
Structural changes with the industry
Share Holding Pattern (%)
Since the past few years there has been a severe consolidation in the industry causing a major shift
towards the organized sector. Even though this move is beneficial to the organized players in the
industry as a whole, APNT is to gain the most from this move. Many reasons can be attributed to
20.0%
this phenomenon
8.6% 52.8%
⇒ Firstly-Asian paints has the strongest distribution network spanning across the nation, amongst 18.6%
the paint companies. It also has a strong brand equity and diverse product portfolio relative to
its peers.
⇒ Secondly-The decorative paints segment has been traditionally dominated by the unorganized
players. APNT is the leader in this segment having the highest market share, hence it is to Promoter FII DII Others
benefit even further.
Revamping the entire product portfolio Relative Price Chart

5,000
APNT is planning to revamp its entire product portfolio to include a larger proportion of enamels and
4,500
emulsions. It will achieve this by reducing the production of distempers and focus on these two core
4,000
products to drive future growth. Enamels and emulsions command a higher value, as a result better
margins. 3,500
3,000
Outlook & Valuation
2,500
Asian Paints is an industry leader and dominant player, we have assigned a target P/E multiple of
30x to our FY15 EPS of Rs178.1 to arrive at a target price of Rs 5,343. We have a hold rating on
the stock as already high price appreciations have led us to believe that the stock’s upside potential Asian Paints Relative Nifty
is capped at 12%.

10
BP W E A LT H
Asian Paints LTD.

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

11
BP W E A LT H
Asian Paints LTD.

Asian Paints
Asian Paint’s current dealer & distribution network
Tinting
Machines
~18K
Dealers Depots
~28K Supply chain 106
Versatile product
ranges to commend
strong growth as
well as profitability
& strengthening
Factories margins.
6
Source: Company, BP Equities Research
⇒ Strong pricing power
Being a market leader APNT is able to maintain a strong pricing power in the industry. It is able to increase
prices when crude oil prices move up without impacting the volumes and holds this degree of flexibility. Despite
its dominant position APNT does not hesitate to pass on the savings to its customers whenever it can The price
reductions when the excise duty was reduced bears witness to this situation. The volatility in crude oil prices do APNT leads a domi-
affect the end prices to the consumers and thus the margins respectively. nant position in the
market, as it has
been able to effec-
tively leverage its
Asian Paints current product range along with prices infrastructure. It also
has the strongest
base of tinting ma-
User Segment Price Range Brands chines.
Royale Play, Rolyal Premium,

Texture, Interior, Exterior Premium: >Rs. 400/ ltr, Rs. 290/ ltr, Rs. 250/ ltr
Apex
Medium: >Rs. 160-290/ ltr, Rs. 140-250/ ltr, Rs. 40-

Interior, Exterior, Distemper Premium Emulsion, Ace, Tractor
60/ ltr
Interior, Exterior, Distemper Economy: > Rs. 160/ ltr, Rs. 100-140/ liter, Rs. 40ltr Tractor Emulsion, Ace, Tractor

BP W E A LT H
Asian Paints LTD.

Asian Paints
Segment wise Revenue Mix
As with the industry APNT has bifurcated its operations into two main divisions. The decorative and industrial
Strong pricing
segments contribute differently to the revenue; have non similar cost structures, demand drivers, diverse clien- power and a diversi-
tele and supply chain infrastructure. fied revenue base
ensure that share-
The industrial coatings segment is divided into Automotive and non-automotive coatings. As mentioned earlier holders get maxi-
this segment operates as APPG .The revenue from the automotive side increased to RS 65.9 MN witnessing a mum ROE
growth of 15.7%,but the PAT dropped to 2.6mn.
Segment wise revenue mix
Industrial Coat- International Opera-

Particulars Decorative Automotive Paints
ings tions
Revenue Share ~81% ~4% ~3% ~12%
Growth (CAGR) FY07-FY12:23% FY07-FY12:12% FY07-FY12:NA FY07-FY12:13%
India Powder, Pro- Middle East, Caribbean,

Key Segments India Decorative India Automotive Paints
tecting Coatings South East Asia Etc.
Key Competi- Berger, KNPL, Shalimar, Kansai Nerolac, Ber- Different players in differ-
KNPL, ANI, Others
tors ANI ger Paints, Others ent geographic
Pricing Power Very High pricing maker Moderate Price taker Low Price taker NA
On the international front, the Middle East contributes almost 50 % of the revenue
International Operations
South Pacif ic
7.80%
Caribbean
14.90%
50.10% Mddle East
27.20%
Asia

BP W E A LT H
Asian Paints
Country wise contribution
APNT Int. Operations ~12.3% of FY12 consolidated revenues Countries
Middle East Egypt, Oman, Bahrain and UAE
Barbados, Jamaica, Trinidad and

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

14
BP W E A LT H
Asian Paints
Balance sheet
YE March-Consolidated (Rs Mn) FY09 FY10 FY11 FY12
Liabilities
Equity Share Capital 959 959 959 959
Reserve & Surplus 11,073 16,141 20,915 26,526
Net Worth 12,032 17,100 21,874 27,485
Total Loans 3,086 2,292 2,334 3,411
Other Liabilities 0 0 893 918
Minority Interest 756 945 1,099 1,367
Capital Employed 15,874 20,337 26,201 33,181
Assets
Gross Block 15,120 15,371 20,249 21,458
Less: Depreciation 6,186 6,133 7,038 8,338
Less: Impairment of Assets 298 142 113 115
Net Block 8,636 9,096 13,099 13,006
Capital WIP 921 4,072 433 6,171
Investments 784 6,241 4,290 3,547
Other Assets 0 0 1,273 3,490
Current Assets 17,987 18,437 27,011 32,749
Cash 2,104 1,058 6,262 6,243
Loans & Advances 2,475 2,395 1,963 2,704
Inventories 7,690 9,559 13,054 15,989
Debtors 5,719 5,425 5,731 7,813
Total Current Liabilities 11,921 16,947 19,053 24,853
Current Liabilities 10,147 13,797 13,727 18,577
Provisions 1,775 3,150 5,327 6,275
Net Current Assets 6,066 1,490 7,958 7,896
Deferred Tax Assets 312 308 329 319
Deferred Tax Liability 845 870 1,181 1,248
Net Deferred Tax (533) (562) (852) (928)
Capital Applied 15,874 20,337 26,201 33,181
Source: Company, Capital Line
Cash Flow Statement

Cash and Cash Equivalents 2390 1283 4956 5090
Cash from Operating Activities 3252 8482 7433 7537
Cash Used in Investing Activities (2144) (2421) (4103) (4647)
Cash Used in Financing Activities (2216) (2388) (3195) (2971)
Net Inc. / (Dec.) in Cash (1108) 3673 135 (80)
Cash at End of the year 1283 4956 5090 5010

15
BP W E A LT H
Asian Paints
Income statement
YE March-Consolidated (Rs mn) FY09 FY10 FY11 FY12
Total Income 58,028 72,085 82,490 103,127

total Expenditure 50,791 58,312 68,501 86,941
EBITDA (Operating Profit) 7,237 13,773 13,989 16,186
% change (YoY) 90.3% 1.6% 15.7%
Less: Depreciation & Amortization 744 836 1,131 1,211
EBIT 6,493 12,938 12,857 14,975
% change (YoY) 99.2% -0.6% 16.5%
Less: Interest 325 368 260 434
PBT 6,169 12,570 12,597 14,541
% change (YoY) 103.8% 0.2% 15.4%
Less: Tax 1,737 3,676 3,502 4,274
% of PBT 28.2% 29.2% 27.8% 29.4%
Less: Deferred Tax 237 55 282 61
Reported PAT 4,195 8,839 8,814 10,206
% change (YoY) 110.7% -0.3% 15.8%
Minority Interest 216 483 381 319
Less: Extra Ordinary Items 22 501 22 235
Adjusted PAT 3,957 7,855 8,411 9,652
% change (YoY) 98.5% 7.1% 14.8%
Adjusted EPS 38 83 83 97
Key Ratios
YE March FY09 FY10 FY11 FY12

P/E (x) 20.4 24.7 30.6 33.5
P/BV (x) 6.3 11.5 11.1 11.3
EV/EBITDA (X) 10.6 14.3 17.1 19.0
Market Cap./Sales (x) 1.3 2.8 3.0 3.1

16

Kansai Nerolac Paints Ltd. Buy BP WEALTH
Stock Rating
Company Overview : BUY HOLD SELL
Kansai Nerolac (KNPL) is a subsidiary of Kansai Paints, Japan. With more than 92 years of strong
> 15% -5% to 15% < -5%
foundation the company is geared to set up its operations firmly in India. With continuous R&D activi-
ties, strong marketing and brand creation initiatives along with being one of the pioneers in the eco-
Sector Outlook Bullish
friendly no lead added paint space the future seems promising. KNPL has remained surefooted on its
Stock
expansionary plans and has been strengthening the supply chain infrastructure to take on its rivals.
CMP (Rs) 1,168
Aggressive expansions have helped KNPL assume a prominent scale and presence over the past
Target Price (Rs) 1,518
few years and recently it acquired the Shalimar Paints manufacturing facility located in Nepal. Maruti
BSE code 500165
Suzuki remains one of its top clients for automotive paints.
NSE Symbol KANSAINER
Investment Rationale Bloomberg KNPL IN

Reuters KANE.BO
Urban Aspirations
Key Data
Transformation of India from a rural economy to a one driven by urbanization has impacted all indus- Nifty 5,957
tries alike. The paint industry has greatly benefited from this move. Urbanization has affected the 52WeekH/L(Rs) 1,220 / 865
decorative as well as the industrial segments respectively. Since a greater proportion of the younger O/s Shares (mn) 54
population has been moving to cities in search of a better future, demand for houses and automo- Market Cap (Rs bn) 56
biles have been on a rise ever since greater demand for houses translates into a positive move for Face Value (Rs) 10
the decorative paints segment and for automobiles contributing to the growth in the industrial and
Average volume
automotive paints segment. However rampant urbanization does not mean that rural India is wit-
3 months 21.770
nessing poor growth. It should be considered that at the same time the purchasing power and dispos-
6 months 17,978
able incomes of the various segments of the population have increased considerably, even from the
1 year 14,457
rural areas. All these factors have cumulatively resulted in an optimistic outlook for KNPL and will
continue to contribute to its growth even in the future. Share Holding Pattern (%)
Dominant player in the Industrial paints segment

18.3%
KNPL is a leader in the industrial paints segment with a market share of 44% and contributing about 4.8%
7.6%
45% to its overall revenues. Within this segment its primary activities extend into automotive, indus- 69.3%
trial, powder, marine and protective coatings. KNPL also dominates the automotives coatings market
with a 60 % share. Further bifurcations within this sub segment can be classified as follow:90% share
in passenger cars,60% in LCV’s and more than 40% in two wheelers & HCV’s.
Promoter FII DII Others
The company has also been working closely with OEM’s to custom tailor products to suit their specifi-
cations leading to greater customer loyalty, a pre-requisite in this segment. For the automotive mar- Relative Price Chart
ket KNPL has developed a wide range of solutions and has also deployed technical service team
1,150
members at customers site to provide constant assistance. The powder coatings and performance
1,050
coatings segment has witnessed a substantial jump in sales over the past few years. KNPL cur-
950
rently commands a 27% market share and the firm is highly optimistic about this segment to provide
850
future growth prospects.
750
Outlook & Valuation

KNPL Relative Nifty
We have assigned a target PE multiple of 25x to our FY15 EPS of Rs 60.7 to arrive at a target price
of Rs 1,518. We have a Buy rating on the stock with a potential upside of 30% from CMP.

BP W E A LT H
Kansai
Kansai Nerolac
Nerolac PaintsLtd.
Industrial Paint Market Share of Competing Firms
Others
KNPL leads the in-
dustrial paints seg-
22% ment, specifically
automotive coat-
Kansai Nerolac ings.
44%
Shalimar Paints 7%
12%
Asian Paints 15%
Berger Paints
Streamlining operations
Ever since its inception KNPL has been on a quest to innovate and perform its operations in an efficient manner,
while also reducing its carbon foot print..The firm has risen its IT spending across various segments to reduce Cost cutting meas-
costs in numerous processes and is anticipating it to translate into a 50-60 bps rise in EBITDA margins in the ures across various
long run. fronts to improve
profitability.
Technological collaborations with international players has helped it constantly innovate and launch technologi-
cally advanced products in the marketplace. This remains the prime reason as to why Nerolac dominates the
industrial paints segment ,as it requires specialized knowledge and techniques. Capacity additions have helped
KNPL to progressively ramp up production and keep pace with the growing industry demand without loosing out
on any opportunities.
KNPL’s Industrial’s Revenue Mix

Marine &
Protective Others
Coatings
7%
6%
Performance
Automotive
Coatings 46%
18% Coatings
23%
Powder Coatings

BP W E A LT H
Kansai Nerolac Paints
Key Clients of Kansai Nerolac in the Auto Motive Industry
Maruti Suzuki General Motors Bajaj Auto Suzuki Motorcycle
Tata Motors Renault Nissan Hero Motors Toyota Kirloskar
Mahindra & Mahindra Hindustan Motors Honda Eicher Motors
Ashok Leyland Fiat TVS Motors TAFE
Honda Siel Volvo India Yamaha TACO

Shifting the focus towards the decorative segment

KNPL is currently the third largest player in the decorative paints segment with a 16% market share and contrib-
uting almost 55% to the total revenues. KNPL is the leader in industrial paints and is hoping to recreate the In the coming years
same foothold in the decorative paints segment by steadily increasing its market share. The firm hope to achieve the decorative
this through a aeries of steps which include: paints segment will
provide a much
⇒ Catering to a broader market segment more unified and
balanced presence
KNPL has been offering a wide product range and will further widen it in the coming years to ensure that it ap-
across various sec-
peals to consumers at varying price points. This will include creating affordable products as well as high value
tors.
niche products to appeal to the urban and rural customers likewise.
⇒ Revenue mix to improve profitability
Since the firm is keen to improve its position in the decorative paints segment ,as this segment currently com-
mands a formidable position in the Indian paint industry. In the coming years the revenue mix contributed by the
industrial and decorative segments will help improve the firm’s performance in various parameters such as profit-
ability, margin performance ,cost absorption and cash flow position.
Decorative Paint Market Share
Kansai
Nerolac
16%
Asian Paints
48% 18% Berger Paints
11%
7%
Akzo Noble
Shalimar
Paints

BP W E A LT H

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

Source : Company research

BP W E A LT H

⇒ Nationwide dispersion
Shifting towards
KNPL has a presence across the whole nation with 5 factories and a dealer network comprising of 13000.The water based alterna-
company currently dominates the northern region but has a relatively weaker hold in the south. However adding tives will help ease
capacity in the region with the opening of new plants is about to change that. Tier I and Tier ii cities have been margin pressures
contributing strongly to the sales growth and will continue to do so in the future.
and the much
needed crude oil
KNPL’s Nation wide presence
independence.
South
East
18% 25%
30% 27%
North
West
Managing raw material mix to improve margins

The paint industry is the most susceptible to volatility in crude oil prices as it is the core raw material. KNPL’s
Marketing and brand
raw material cost has remained at around 65-67% of total sales. This is because demand has been fueled by
transformation ini-
solvent or oil based paints that rely solely on crude oil derivatives. However going ahead the company hopes to
tiatives to transcend
reduce its dependency and relatively shield itself from the volatility by focusing on water based Emulsion paints
KNPL’s current stat-
for the industrial and decorative segments as it requires only 35-40% of crude oil derivatives. Thus margins will
ure and heightened
improve by the reduction in the raw materials cost. Titanium dioxide is the single largest pigment required in the
brand awareness.
manufacturing process but a domestic shortage means that it has to imported and a shortage worldwide has put
an upward pressure on prices Hence currency price fluctuations can have an adverse impact on the overall prof-
itability. Composition of raw materials
Packing
Others 10%
9%
45% Pigments &
Organic Acids Resins
& Chemicals 12%
24%
Solvents & Oil

BP W E A LT H

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

BP W E A LT H
Balance sheet
Liabilities
Reserve & Surplus 6,361 7,459 8,623 10,093
Net Worth 6,630 7,728 9,162 10,632
Total Loans 936 1,100 825 746
Assets
Gross Block 5,420 6,377 6,753 8,486
Less: Depreciation 3,034 3,474 3,962 4,516
Net Block 2,374 2,893 2,782 3,963
Capital WIP 356 164 1,036 1,615
Investments 3,030 4,015 3,718 1,839
Other Assets 0 0 0 437
Current Assets 4,981 5,620 7,043 9,029
Cash 762 411 397 592
Loans & Advances 417 411 502 311
Inventories 1,706 2,474 3,541 4,537
Debtors 2,096 2,324 2,603 3,588
Provisions 838 937 1,091 732
Net Current Assets 1,700 1,640 2,316 3,857
Deferred Tax Liability 0 0 0 25
Net Deferred Tax 106 115 134 98
Capital Applied 7,566 8,828 9,986 11,809
Cash Flow Statement

Cash and Cash Equivalents at the Start of the year 334 762 411 392
Cash from Operating Activities 2046 1505 1306 1023
Cash Used in Investing Activities (1178) (1629) (565) (121)
Cash Used in Financing Activities 428 (227) (755) (706)
Net Inc/(Dec) in Cash 428 (351) (14) 195
Cash at End of the year 762 411 397 586


BP W E A LT H
Income statement
Total Income 13,967 17,268 21,876 28,168
Total Expenditure 12,171 14,427 18,482 24,552
% change (YoY) - 58.1% 19.5% 6.6%
Less: Depreciation & Amortization 376 443 494 564
EBIT 1,420 2,398 2,900 3,052
% change (YoY) 68.9% 20.9% 5.3%
PBT 1,402 2,386 2,891 3,051
% change (YoY) 0 70.2% 21.2% 5.5%
Less: Tax 416 731 831 892
% PBT 29.7% 30.6% 28.8% 29.2%
Reported PAT 986 1,655 2,060 2,159
% change (YoY) 0 67.9% 24.5% 4.8%
Adjusted PAT 986 1,655 2,060 2,159
% change (YoY) 0 67.9% 24.5% 4.8%
Adjusted EPS 37 61 38 40
Key Ratios

P/E (x) 12.4 22.2 25.8 22.5
P/BV (x) 0.9 4.6 5.3 4.6
EV/EBITDA (X) 6.7 12.6 15.3 13.7

Berger Paints India Ltd. Hold BP WEALTH
Stock Rating
Company Overview BUY HOLD SELL
Berger Paints India Ltd (BPIL) is the third largest paint manufacturer and the second largest decora-
tive paint player in India. They are offering their customers a variety of innovative painting solutions, > 15% -5% to 15% < -5%
decorative or industrial. The company is headquartered in Calcutta and services the market through
a distribution network comprising of 75 stock points and above 12,000 paint retailers. Their manu- Sector Outlook Bullish
facturing facilities are located in West Bengal, Uttar Pradesh, Pondicherry, Goa, and Jammu & Stock
Kashmir. Berger Auto & Industrial Coatings Ltd, a wholly owned subsidiary was amalgamated with CMP (Rs) 207
the company. The firm entered into a Joint Venture Agreement with Nippon Bee Chemical Co Ltd,
Target Price (Rs) 234
Japan for the purpose of formation of a company for manufacture and sale of coatings for plastic
BSE code 509480
substrates used in automobiles and parts thereof in India.
NSE Symbol BERGEPAINT
Investment Rational Bloomberg BRGR IN
Aspirations to become a prominent industry player Reuters BRGR.BO
Key Data
BPIL is the second largest firm in the decorative paint segment with a market share of 21%.The firm
Nifty 5.,957
ranks 33rd globally and has plans to reach the top 25 position by 2016.The management intends to
increase the market share to 23% in the next four years through a plethora of measures such as: 52WeekH/L(Rs) 201 / 101
O/s Shares (mn) 346
⇒ Ramping production
Market Cap (Rs bn) 60
BPIL’s current production capacity stands at 43% of Asian Paints. The company hopes to narrow Face Value (Rs) 2
this gap by building capacity through expansions in both Greenfield as well as Brownfield projects.
Average volume
Expansion for future activities are to be funded through internal accruals. All in all these activities will
3 months 324,265
help BPIL to reach closer to Asian Paint’s capacity, the current market leader in the decorative
6 months 284,748
paints arena.
1 year 264,930
⇒ Effective supply chain infrastructure
Share Holding Pattern (%)
A strong and efficient distribution network is imperative to ensure high levels of customer satisfac-
tion. BPIL’s measures to improve the dealer network and supply side support by adding 400-500
11.6%
dealers along with 1,600-1,700 tinting machines every year will help them garner a strong foothold 3.4%
9.5%
in this area.CRM implementation will help the firm transform its operations on an efficient scale and
better manage inventories and demand forecasting activities. 75.5%
⇒ Moving higher up the value chain
The firm is reorganizing it’s product portfolio to include a greater proportion of premium products.
Premium products command higher prices, hence will result in better margins for the firm. Selling
exotic products will also help improve the brand’s perception leading to a higher sales realization,
even for its low range and mid positioned products. Relative Price Chart
⇒ Brand reconciliation efforts

175
As discussed earlier BPIL is on the rise to improve its brand recognition efforts. The decorative paint
market does require constant marketing activities as the products are being pushed to the end con- 125
sumers in a highly competitive environment. Aggressive marketing initiatives by the management

have ensured that these vital opportunities are not lost and constant brand awareness ,as repainting
75
constitutes to an important contributor to the firm’s overall revenues.
Outlook & Valuation Berger Paints Relative Nifty
We have assigned a target PE multiple of 25x to our FY15 EPS of Rs 9.71 to arrived at a target
price of Rs 234 with a Buy rating on the stock.

25
BP W E A LT H
Berger Paints India
Opportunities for improving fundamentals
Asian Paints the industry leader in decorative trails ahead by a substantial margin in terms of market share. Scope for improve-
Even though BPIL is the second largest in the decorative paints segment its margins are much lower compared ment in margins and
to that of Asian Paints. There are number of reasons responsible for this. Firstly APIL has a greater presence in a commendable
the decorative paints segment ,that has traditionally commanded higher margins than the industrial segment. position in the deco-
Secondly APIL has been adding a greater proportion of water based alternatives to its product lineup arsenal, rative paints division
will help in better
that offer much better margins to conventional crude oil based derivatives.
future performance.
Total Output Capacity
700000
600000
500000
INR 400000
mn
300000
200000
100000
0
FY07 FY08 FY09 FY10 FY11
Asian Paints Berger Paints
However BPIL had realized and decided to implement a slew of measures intended to improve its performance
specially its margins. Adding water based products to the product portfolio has increased the contribution to the
overall revenues from this segment and improved margins at the same time. The company is also expanding its
presence in the decorative paints segment by continuously adding capacity and increasing its marketing initia-
tives as already mentioned earlier.
Decorative Paints firm wise out put capacity
3,500 3,200
3,000
2,500
2,000
1,500 1,350
1,100
1,000 850
500
-
INR Akzo Nobel Berger Paints Asian Paints Kansai Nerolac
MN

BP W E A LT H
Berger Paints India
⇒ Easing in global commodity prices
Correction of titanium dioxide prices in beginning of the FY12,due to the global slowdown has caused a slump in
the demand lowering the prices. This will be a major contributor to the overall margin performance and also a
revision in prices of key raw materials will help in this regard. Since quite a few raw materials are imported the
appreciation in the rupee will help in easing margins.
Total Cost Breakout for FY12
6.4%
1.3%
20.2%
1.1%
2.4% 62.8%
4.1%
1.8%
Material Cost Dividend Retained Earnings Taxation
Finance Cost Depreciation Other Expenses Employed Cost
⇒ Price Increases
Recent price increases bundled with lower costs of raw materials have significantly helped in improving the over-
all profitability. This approach if sustained in the future will continuously yield positive results for the company.
Keeping up with the

Diversifying into other sectors dynamic changes in
the marketplace will
BPIL’s recent venture into the construction chemicals sector will help the firm to fully integrate its operations and help the firm’s future
further leverage its existing efficiencies and scale. This area is currently dominated by around 8-10 players and growth.
Pidilite remains one of their main competitors. The company expects this segment to grow in the future and con-
tribute to its frontline growth.
Keeping pace with the marketplace
The paint industry remains a highly dynamic and competitive environment. Hence innovation and constant prod-
uct development is the only way for firms to survive in this industry. BPIL has remained promising on this front by
continuously offering competitive products through investments in technology and frequent up gradations. Even
in the industrial paints space BPIL has not failed to disappoint as it has found a way to offer niche products with
alternative applications.

BP W E A LT H
Berger Paints India
Global footprint
BPIL has a strong presence worldwide through its subsidiaries and strategic collaborations with international play-
ers. This has helped in strengthening its domestic hold as the synergies have trickled down and percolated not
only into its product offerings but also in the manner the firm operates .
Subsidiaries & Collaborations
Subsidiaries Status Ownership
BeePee Coatings Pvt. Ltd Wholly Owned 100%

Berger Jenson & Nicholson
Wholly Owned 100%
(Nepal) Pvt Ltd
Berger Paints (Cyprus) Ltd Wholly Owned 100%
Berger Paints Overseas Ltd,

Subsidiary of Berger Cyprus 100%
Russia
Lusako Trading Ltd Cyprus Wholly Owned 100%
BoilX SA Subsidiary of Lusako 100%
Buold - Trade SP Z.o.o Subsidiary of Bolix SA 100%

Bolix Ukraine Limited Liability
Subsidiary of Bolix SA 100%
company
Berger Becker Coatings Pvt.
JV 49%
Ltd
BNB Coatings India Pvt. Ltd JV 49%


BP W E A LT H
Berger Paints India
Balance sheet
Liabilities
Equity Share Capital 637.7 692.1 692.0 692.0
Reserve & Surplus 3,262.8 5,272.5 6,203.0 7,223.0
Net Worth 3,900.5 5,964.6 6,895.0 7,915.0
Total Loans 3,502.2 2,673.8 3,297.0 4,180.0
Other Liabilities 0.0 0.0 80.0 102.0
Minority Interest 0.0 0.0 0.0 0.0
Capital Employed 7,402.7 8,638.4 10,272.0 12,197.0
Assets
Gross Block 6,196.5 6,756.5 7,157.0 8,317.0
Less: Depreciation 2,129.7 2,461.9 2,816.0 3,228.0
Less: Impairment of Assets 0.0 0.0 0.0 0.0
Net Block 4,066.8 4,294.6 4,341.0 5,089.0
Capital WIP 275.3 326.0 818.0 730.0
Investments 44.6 1,281.6 526.0 40.0
Other Assets 0.0 0.0 145.0 456.0
Current Assets 6,027.9 6,566.7 8,871.0 11,553.0
Cash 363.8 412.6 1,253.0 1,824.0
Loans & Advances 523.2 432.3 452.0 599.0
Inventories 2,944.5 3,298.6 4,438.0 5,544.0
Debtors 2,196.4 2,423.2 2,728.0 3,586.0
Total Current Liabilities 2,777.8 3,566.3 4,166.0 5,359.0
Current Liabilities 2,496.3 3,031.3 3,684.0 4,666.0
Provisions 281.5 535.0 482.0 693.0
Net Current Assets 3,250.1 3,000.4 4,705.0 6,194.0
Deferred Tax Assets 123.7 105.5 90.0 82.0
Deferred Tax Liability 357.8 369.7 353.0 394.0
Net Deferred Tax (234.1) (264.2) (263.0) (312.0)
Capital Applied 7,402.7 8,638.4 10,272.0 12,197.0
Cash Flow
Cash and Cash Equivalents 399.0 318.7 376.0 1,228.0
Cash from Operating Activities 990.8 1,650.2 1,146.0 1,199.0
Cash Used in Investing Activities (429.4) (2,072.3) (292.0) (670.0)
Cash Used in Financing Activities (641.7) 479.0 (2.0) 6.0
Net Inc/(Dec) in Cash (80.3) 56.9 852.0 535.0
Cash at End of the year 318.7 375.6 1,228.0 1,763.0

29
BP W E A LT H
Berger Paints India
Income statement
Total Income 16,652 19,316 24,321 30,535
total Expenditure 15,059 17,065 21,516 27,195
% change (YoY) 41.3% 24.7% 19.1%
Less: Depreciation & Amortization 251 358 401 472
EBIT 1,342 1,892 2,404 2,868
% change (YoY) 41.02% 27.05% 19.30%
PBT 1,125 1,720 2,161 2,545
% change (YoY) 52.9% 25.6% 17.8%
Less: Tax 260 486 653 700
% change (PBT) 23.1% 28.3% 30.2% 27.5%
Less: Deferred Tax 36 30 7 44
Reported PAT 828 1,204 1,501 1,801
% change (YoY) 45.3% 24.7% 20.0%
Less: Extra Ordinary Items 35.1 1.8 29.2 1.5
Adjusted PAT 793.3 1,202.1 1,471.8 1,799.5
% change (YoY) 51.5% 22.4% 22.3%
Adjusted EPS 38.5 82.6 82.7 96.6

Key Financials
P/E (x) 13.9 17.8 21.3 21.4
P/BV (x) 2.9 3.4 4.4 4.7
EV/EBITDA (X) 8.9 10.0 11.6 11.7

30

Akzo Nobel India Ltd. Buy
BP WEALTH
Stock Rating
Company Overview
BUY HOLD SELL
Akzo Nobel India (ANI) is the subsidiary of Akzo Nobel, the Dutch based international coating giant.
Most recently there was a consolidation in the Indian operations leading to a merger of the three
group subsidiaries into one main powerhouse giving ANI the much needed scale to compete. Strong > 15% -5% to 15% < -5%
technological support from the parent company has helped the firm become a prominent player in
the industrial paints segment, with the automobile industry being one of its main consumers along Sector Outlook Bullish
with other industrial clients.
Stock
Opportunities & Constrains CMP (Rs) 991
Target Price (Rs) 1,152
ANI has been showing some promising prospects over the last few years. The sales growth in FY
BSE code 500710
12 was contributed mainly by tier 2 and tier 3 cities. Creation of different brands has helped the firm
compete in various segments of the market. Over time the costs will optimize because the strategic NSE Symbol AKZOINDIA
partnerships with vendors will result in protection from price fluctuations and foreign exchange trans- Bloomberg AKZO IN
lations. The ongoing assistance and collaboration by the parent has created new products and Reuters AKZO.BO
streamlined operations. Despite the promising future a few hurdles continue to remain. Uncertainty
regarding the outcome of the business to be generated by the merged entity. Also the composition Key Data
of the revenue to be generated from the consumer and the industrial businesses remain to be seen Nifty 5,957
in the coming periods. 52WeekH/L(Rs) 1040 / 790

O/s Shares (mn) 47
Investment Rationale
Market Cap (Rs bn) 45
Reorganizing the product offerings specially the value oriented offerings Face Value (Rs) 10
ANI has been on a rapid quest to constantly introduce new products and stay ahead of the general
Average volume
marketplace. This has led to several additions to their product portfolio and resulted in a wide array 3 months 20,391
of offerings covering the lower as well as the mid ranges and also includes premium categories. The
6 months 22,089
offerings cater to various segments of the market at multiple price points, ensuring that the company
does not only generate enough volumes but also offers decent margins to ensure profitability and 1 year 22,121
stability of earnings.ANI has been particularly focusing on the mid range value products as these Share Holding Pattern (%)
offer the highest potential for growth and have been selling well in tier I and tier ii cities, that are ex-
pected to provide a reasonable contribution to the firms overall growth in the years to come.
14.3%
Gearing up marketing initiatives to take on rivals 11.2%
1.5%
ANI has been beefing up its marketing activities and indulging in aggressive advertisement cam- 73.0%
paigns to promote the Dulux brand. As discussed earlier the advertisement spending in the decora-
tive paint segment is generally higher as firms scamper in a bid to grab market share by building a
strong brand and high levels of awareness. This will ensure that the playing field is leveled and the
management expects the performance in the decorative segment to be better than the industrial
segment.
Merger and amalgamation of subsidiaries to add value Relative Price Chart

1,050
ANI has merged three of its entities comprising of industrial coatings, chemicals and A&A along with 1,000
its decorative paints division to transform the entity into a large powerhouse making it a fully verti-
950
cally integrated chemicals provider. The amalgamation will provide benefits on various fronts such
900
as scale, cost optimization and better financing abilities. Also branding and marketing activities
850
through a single entity will be much more effective and easily recognizable. The revenue from the
800
merged entities is expected to be 1billion Euros by 2015.
750
Outlook & Valuation

Akzo Nobel India Relative Nifty
We have assigned a target PE multiple of 20x to our FY15 EPS of Rs 57.6 to arrive at a target price
of Rs 1,152 with a Buy rating on the stock.

BP W E A LT H
Akzo Nobel India
ANI’s operation Breakup
Decorative
Paints
Industrial
A&A ANI Coatings
Chemicals
ANI is one of the

Systematic increase in production worlds largest coat-
ings conglomerate
ANI has grown at a rapid pace ever since it commenced operations in the country. The company has production and it hopes to im-
bases strategically distributed throughout the nation. Management intends to grow the firm even further through part the similar foot-
organic as well as inorganic routes. Many green field projects are underway and will also mark the new begin- hold in India. Man-
ning of the firm’s diversion into the wood coatings segment. Expansion and capacity additions will be in tandem agement expects the
with higher penetration levels and increase in market share. Currently the firm has 6 manufacturing facilities Indian subsidiary to
spread across the nation to cater to the domestic requirements. contribute around
1billion Euros by
2015
Nationwide Plant Locations
Plant Location Processes
Mohali Decorative, A&A coatings
Hyderabad Decorative, A&A coatings
Hoskote MPC, Powder, Packaging, A&A Coatiings
Mahad Polymer Chemicals
Thane Decorative Paints
Mumbai Functional Chemicals, Surface Chemistry


BP W E A LT H
Akzo Nobel India
Strengthening the supply side infrastructure
To increase the penetration levels and grab a larger pie of the market share,ANI has remained adamant to keep
the dealer and distribution network infrastructure initiatives on track. The company has setup warehousing facili-
ties and delivery points to make sure that the supply side remains uninterrupted and functions in an efficient man-
ner. Customer service has also been prioritized though these measures as it will ultimately lead in creating high
levels of brand loyalty.
Revenue by business area
Others
3%
Speciality Chemicals
23%
39% Decorative Paints
35%
Performace Coatings
Research and development to provide future sustainability

Constant innova-
ANI is the worlds largest paint manufacturer that has been driven by innovation and technological advancement tions will drive ANI’s
for decades. This same philosophy is reflected in the manner that the firm conducts its business in India. The superior technologi-
cal prowess.
firm’s product offering has been backed by years of research and reliability to enhance the technical edge it has
over its peers. Innovative products will be the main driver for the company and along with mainstream products,
the firm will also focus on specialty chemicals. In spite of being a relatively niche segment in the country it en-
cases an opportunity for ANI to demonstrate its technological prowess. Given below is the Akzo Nobel worldwide
fragmented performance.
Employee by business area
Decorative Paint
33%
34%
33%
Perf ormance Coating

BP W E A LT H
Akzo Nobel India
Post Merger FY 12 Revenue Mix
5%
Industrial
34%
Decorative
61%
Raw material breakup
Others Pigments, tinters, Extenders
16%
16%
17% Latex, Monomers

Titanium Dioxide 19%
16% 16%
Resins
Solvents

BP W E A LT H
Akzo Nobel India
Balance sheet
YE March-Consolidated (Rs
FY09 FY10 FY11 FY12
mn)
Liabilities
Reserve & Surplus 9,330 9,553 10,548 13,931
Net Worth 9,711 9,921 10,916 14,410
Total Loans 0 0 0 191
Assets
Gross Block 3,255 3,495 3,749 3,563
Less: Depreciation 1,924 2,114 2,330 0
Net Block 1,331 1,381 1,419 3,563
Capital WIP 16 23 145 148
Investments 9,152 9,602 9,850 1,390
Other Assets 0 0 0 4
Current Assets 2,826 2,724 3,985 16,975
Cash 147 143 303 739
Loans & Advances 914 801 1,449 10,642
Inventories 1,008 972 1,532 3,334
Debtors 757 808 701 2,260
Provisions 1,537 1,552 1,697 1,757
Net Current Assets (730) (1,064) (457) 10,151
Deferred Tax Liability 198 21 41 26
Net Deferred Tax (59) (21) (41) (26)
Capital Applied 9,711 9,921 10,916 15,230
Cash Flow
Cash and Cash Equivalents 6,989 9,297 9,743 654
Cash from Operating Activities 20 1,108 585 1,413
Cash Used in Investing Activities 2,827 755 273 (607)
Cash Used in Financing Activities (539) (1,417) (698) (721)
Net Inc/(Dec) in Cash 2,308 446 160 85
Cash at End of the year 9,297 9,743 303 739

BP W E A LT H
Akzo Nobel India
Income statement
Total Income 12,033.2 10,433.0 12,068.0 21,001.0
total Expenditure 7,999.2 8,210.0 9,637.0 18,132.0
EBITDA (Operating Profit) 4,034.0 2,223.0 2,431.0 2,869.0
% change (YoY) -45% 9% 18%
Less: Depreciation & Amortization 213.3 212.0 217.0 366.0
EBIT 3,820.7 2,011.0 2,214.0 2,503.0
% change (YoY) -47% 10% 13%
Less: Interest 29.3 11.0 15.0 39.0
PBT 3,791.4 2,000.0 2,199.0 2,464.0
% change (YoY) -47% 10% 12%
Less: Tax 877.3 444.0 413.0 433.0
% change (PBT) 23% 22% 19% 18%
Less: Deferred Tax (36.1) (37.0) 20.0 13.0
Reported PAT 2,950.2 1,593.0 1,766.0 2,018.0
% change (YoY) -46% 11% 14%
Less: Extra Ordinary Items 2,094.3 0 0 0
Adjusted PAT 855.9 1,593.0 1,766.0 2,018.0
% change (YoY) 86% 11% 14%
Adjusted EPS 74.7 42.6 47.9 42.1
Key Ratios
P/E (x) 5.9x 14.8x 18.3x 16.1x
P/BV (x) 1.7x 2.2x 2.8x 2.1x
EV/EBITDA (X) 4.1x 9.9x 12.4x 10.2x

Market Cap./Sales (x) 1.5x 2.0x 2.5x 1.4x

BP W E A LT H
Research Desk Tel: +91 22 61596406
Institutional Sales Desk Tel: +91 22 61596403/04/05
Disclaimer Appendix
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Paint Sector Overview

Paint Sector Overview

Market Structure …………..……………………..……………………………………………………………………………………….3

Industry Overview …………..……………………..…………………………………………….……………………………………… 4

Business Model (Micro) Analysis…………..……………………..…………………………………………………………………. 8

⇒ Asian Paints Ltd..…………….…………………………………….………………………………………………………………10

⇒ Kansai Nerolac Paints Ltd.……………………………………………………………………………………………………….17

⇒ Berger Paints (India) Ltd…...………………………………………..……………………………………………………………25

⇒ Akzo Nobel India Ltd.……………..……………………………………………………………………………………………….31

BP Equities Private Limited (w ww .bpw ealth.com)

Sector Analysis 12th March, 2013

Peer comparison Snapshot

YE March (Rs in Mn)

BP Equities Private Limited (w ww .bpw ealth.com) 1

Growth of the Paint Industry

Market Size (Rs. Bn)

Source: Industry, BP Equities Research

BP Equities Private Limited (w ww .bpw ealth.com) 2

Fragmentation of the Paint Industry

Source: Industry, BP Equities Research

Segmentation of the Paint Industry

Source: Industry, BP Equities Research

BP Equities Private Limited (w ww .bpw ealth.com) 3

Overall market share of Competing firms

52% Asian Paints

Source: Industry, BP Equities Research

Decorative Paints segment product break-up

Source: Industry, BP Equities Research

BP Equities Pvt. Limited (www .bpw ealth.com) 4

There are several factors that can be attributed to this phenomenon:

⇒ Greater proportion of the population migrating to cities, due to better opportunities.

⇒ Easy availability of financing for housing loans.

⇒ Wider acceptance of nuclear families.

⇒ All in all higher demand for residential housing.

Increase in purchasing power across various income groups.

Urban Rural Mix of the Paint Industries

Source: Industry, BP Equities Research

BP Equities Pvt. Limited (www .bpw ealth.com)

Fragmentation of the Industrial Paints sector

Auto Ref inish Powder Coatings

21% Auto OEM

Demand Drivers for this segment

⇒ Increase in domestic production of automobiles further aided by easy financing options.

⇒ Government policy on infrastructure to boost spending.

⇒ Economic development spurting creation of new industries.

There are several differences however:

BP Equities Pvt. Limited (www .bpw ealth.com)

Raw Material Mix

Source: Industry, BP Equities Research

Business Model (micro) Analysis:

Revenue Contribution for Industrial & Decorative Paints

Decorative Paints Industrial Paints

Source: Industry, BP Equities Research

BP Equities Pvt. Limited (www .bpw ealth.com)

Source: Industry, BP Equities Research

Advertising & Brand Creation

Advertisement & Sales Promotion of the Competing Firms

Advertisement & sales promotion (Rs.mn) Ad Spend as % of Sales

Source: Industry, BP Equities Research

BP Equities Pvt. Limited (www .bpw ealth.com)

Retail Network & Distribution

Company wise Dealer Distribution Network