Kansai Nerolac

07 September 2020 Initiating Coverage

Kansai Nerolac

Joined at the hip with Auto ADD Kansai Nerolac (KNPL; #1/#3 in Industrial/Decorative Paints) remains joined CMP (as on 04 Sep 2020) Rs 485 at the hip with Auto OEMs, which are likely to see their 2nd straight year of Target Price Rs 500 16-18% volume declines (given Auto slowdown/COVID-19). Meanwhile, it has been beefing up its relatively less cyclical non-auto industrial portfolio. In NIFTY 11,334 Decorative, KNPL has outpaced bigger rivals over FY15-19, given its KEY aggressive marketing & distribution push. This trend, however, is unlikely to OLD NEW continue over FY20-23 as KNPL’s predisposition would likely be to safeguard CHANGES margins/restrict A&P spend amidst the demand destruction & until Auto Rating - ADD recovery is in sight. We build in Rev/EBITDA/PAT CAGR of 6/9/8% over Price Target - Rs 500 FY20-23E and initiate coverage on the stock with an ADD recommendation & FY21E FY22E DCF-based TP of Rs. 500/sh (implying 44x Sep-22 P/E, 12% discount to APNT). EPS % - - . Alpha hinges on Auto recovery pace, thrust on reducing cyclicality:

KNPL’s high exposure (HSIE:25-28% of sales) to Auto OEMs, which are KEY STOCK DATA likely to see their 2nd straight year of 16-18% volume declines will translate into deeper topline cuts (vs APNT/BRGR) in FY21. Meanwhile, KNPL has Bloomberg code KNPL IN been subtly pivoting towards relatively less cyclical industrial portfolio such No. of Shares (mn) 539

as Auto-refinish, powder, coil, and protective coating). We build in a modest MCap (Rs bn) / ($ mn) 262/3,580 3.6% CAGR for its industrial business over FY20-23E. 6m avg traded value (Rs mn) 137 . Decorative salience increasing, albeit volumes to marginally lag Top 2: 52 Week high / low Rs 573/294 KNPL outpaced APNT/BRGR in decorative segment over FY15-19, given its aggression in both marketing (A&P spends clocked a 23% CAGR vs APNT/BRGR’s -2/-5% CAGR over FY15-18) and distribution (5-year active STOCK PERFORMANCE (%) dealers CAGR estimated at 13%+ CAGR). This outperformance is unlikely to 3M 6M 12M

repeat itself over FY20-23 as KNPL’s predisposition would likely be to Absolute (%) 24.0 (1.1) 4.5 safeguard margins from the Auto onslaught by restricting A&P spends. Ergo, we expect KNPL’s decorative volumes to marginally lag Top 2 and Relative (%) 11.1 (1.0) 0.1 build in decorative revenue CAGR of 7% over FY20-23E. SHAREHOLDING PATTERN (%) . Well-covered to play the volume game, margins to improve over FY20-23: Even if overall volumes clock 9% CAGR over FY20-24, we estimate KNPL to Mar-20 June-20 hit a capacity utilisation of ~80% by FY24. Hence, KNPL seems well-covered Promoters 74.99 74.99 to play the volume game. While demand shock-led benign raw material FIs & Local MFs 7.82 7.77 costs/high GMs are likely to mean-revert, the reversion for KNPL is likely to be less steep vs peers, given the increasing decorative salience. Thus, we FPIs 3.93 4.37 build in a 120bp EBITDAM improvement to 16.4% over FY20-23E on the Public & Others 13.26 12.87 back of higher GMs and higher utilisation-led marginal cost savings. Pledged Shares 0 0

. Ranks low on fundamental anchors, ergo discount to peers: Higher Source : BSE industrial salience (lower GMs, higher capital intensity) warrants a

valuation discount to Top 2. That said, increasing decorative salience will

help RoICs improve from 10.8% to 14.5% over FY21-23. Swifter Auto

recovery could offer higher upside. We initiate coverage on KNPL with an

ADD Reco & DCF-based TP of Rs. 500/sh (implying 44x Sep-22 P/E). Jay Gandhi Financial Summary [email protected] (Rs. mn) FY19 FY20 FY21E FY22E FY23E +91-22-6171-7320 Net Revenue 54,243 52,800 46,762 56,194 62,759

EBITDA 7,525 8,045 7,122 9,082 10,284 APAT 4,477 5,158 4,264 5,691 6,415 EPS (Rs) 8.3 9.6 7.9 10.6 11.9 Varun Lohchab P/E (x) 57.3 49.7 60.2 45.1 40.0 [email protected] EV/EBITDA (x) 34.1 31.9 35.5 27.7 24.6 +91-22-6171-7334 Core RoCE (%) 12.8 13.6 10.7 13.8 14.0 Source: Company, HSIE Research

HSIE Research is also available on Bloomberg ERH HDF & Thomson Reuters

Kansai Nerolac: Initiating Coverage

Focus Charts Industry paint volume forecasts Industry and Organised Paints revenue forecasts

Total paints revenue Total Paint volume (mn Ltrs) Rs bn Organized paints revenue Organized players volumes (mn Ltrs) Org. Paints revenue growth (%) - RHS Org. Volume growth YoY (%) 1,500 25 10,000 25 20 20 20 8,000 19 15 15 1,000 12 12 12 11 10 6,000 10 9 9 9 9 9 8 5 4,000 5 500 - - 0 0 2,000 -4 -5 -5 -7

- -10 0 -10

FY19E FY21E FY22E FY23E FY24E FY25E FY30E FY20E

FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY30E

Source: HSIE Research Source: HSIE Research

Market share loss can primarily be attributed to higher Revenue mix (%): Decorative business’ skew inching industrial segment which has been under stress (%) up for KNPL

Asian Paints Berger Paints -Decorative -Industrial Kansai Nerolac Azko Nobel 100%

Others 90%

33 33

35 35 36 36

100% 80% 41

42 42

44 44 45 45 70% 80% 18 17 16 16 16 16 16 16 16 15 60% 60% 50%

40%

67 67

67 67 65 65 40% 64

30% 59

58 58

56 56 55 55 20% 20% 10%

0% 0%

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research Source: HSIE Research

KNPL’s aggressive A&P spends (% of sales) over FY16- ...ensured it outpaced APNT/BRGR in decorative 18… volumes (% growth)

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 KNPL APNT BRGR

8.0 As % of sales 40 6.8

7.0 6.8

6.1 6.0

5.8 30

6.0 5.6

5.1

5.0

4.7

4.9

4.8

4.7

4.6

4.7

4.6 4.8

5.0 4.2

4.2 4.1

4.1 20

4.0

3.9

3.9 3.6

4.0 3.3

3.3

3.1 3.1 3.0 10 2.0 - 1.0 - (10)

Asian Paints Berger Paints Kansai Akzo Nobel

FY17 FY18 FY19 FY20

Nerolac FY16

FY21E FY22E FY23E

Source: Companies, HSIE Research Source: HSIE Research

Page | 2 Kansai Nerolac: Initiating Coverage

Joined at the hip with Auto

. Joined at the hip with Auto: KNPL remains joined at the hip with the fate of the Auto OEM industry (~25-28% of revenue – FY20) with a market share of nearly 60% (dominant category leader). This segment accounts for ~70% of KNPL’s industrial business. KNPL is likely to have its second straight year (FY20/FY21) of mid-teen growth declines in revenue of its Auto industrials business due to the double whammy of an already ongoing Auto slowdown and the demand destruction caused by the COVID-19 pandemic (HSIE). However, given its dominant business share in key auto accounts/market leaders, we believe the recovery could be swifter-than-industry as Auto market leaders typically lead the recovery given their strong distribution and after-sale touchpoints. Note: Key KNPL Auto accounts are Maruti Suzuki, Hero Motors, Honda Motors, Volvo, to name a few. We build in an 18% decline/14% revenue CAGR in FY21/FY21-23 respectively for the business).

Auto OEMs account for nearly a fourth of the Rs. 150bn KNPL’s market share in Auto OEMs/Total industrials Industrial Coatings business in India

Others, 8 70 Marine Protective 58 coatings , 4 Coatings, 60 20 50 Coil 40 coatings, 12 40 Powder 30 Coatings, 12 20 Automotive 10 Re-finish, 18 0 Automotive KNPL's Mkt share in Auto KNPL's Mkt share in Total OEM , 26 Industrials Industrials

Source: Companies, HSIE Research Source: HSIE Research

KNPL’s industrial performance has closely mimicked the fate of the Auto industry

KNPL - Industrial growth (%) Auto sales growth (%) PV volume growth (%)

20 15 10 5 - (5) (10) (15)

(20)

FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E

Source: Companies, HSIE Research, SIAM

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Kansai Nerolac: Initiating Coverage

. Subtly beefing up its non-Auto portfolio: Given the cyclicality of its Auto industrial vertical, KNPL is subtly reducing its structural exposure to its non- Auto industrial coatings business such as Powder Coatings, Auto Refinishes, General Industrial, Protective and Coil Coatings, which now account for ~30% of KNPL’s industrial revenues.

KNPL: Estimated industrial revenue mix (%)

Auto Industrial paints Non-Auto Industrial paints

100% 90% 27 30 30 80% 33 32 32 70% 60% 50% 40% 73 70 70 30% 67 68 68 20% 10% 0% FY18E FY19E FY20E FY21E FY22E FY23E

Source: HSIE Research

. Auto refinish coats (18% of the industrial coatings market): KNPL has identified Auto-refinish as a key growth driver for its industrial vertical. It has been consistently gaining market share in the Auto-refinish segment (6% market share within three years of launch) underpinned by (1) consistent new product launches, (2) enhancement of its retail and Body Shop network. Key product launches include: 1. Retan (in Premium Polyurethane (PU) Paints) in 2017 and has been received well by the market and approved by major automakers. The product has superior performance in terms of finish, drying time, cost and coverage and is also environment friendly being a High Solids Paint. 2. Cardea–recently launched in popular PU category–to bolster its presence in the retail market. 3. “Perfect Match” brand of PU paints to improve the shade matching and offer the users the factory Original Equipment Manufacturers (OEM) shade in the two-wheeler segment. The same has been approved by Honda Motorcycles and Scooters for its entire service network and is also available through KNPLs retail network.

Note: Demand in Auto-Refinish segment is more predictable/stable than the Auto OEM business, which could help reduce the cyclicality in the overall industrial business of KNPL.

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Kansai Nerolac: Initiating Coverage

. Performance Coatings: Under this segment, the company caters to customers by supplying Liquid Paints and Powder coatings. KNPL continues to be a dominant leader in Powder Coating market (40% market share) and continues to gain ground in the Liquid Coating market by entering niche areas such as Bridges and Pipe Coating (Metro and Railway projects bagged). The company also acquired Marpol for INR 341mn in FY19 (0.5x sales), which would help it consolidate its market leadership position in powder coatings. Marpol clocked revenue/PAT of INR 590/29mn in FY20. Profitability has improved since its acquisition. EBITDA margin expanded 410bp to 9.7% in FY20. We expect KNPL’s powder vertical to be tied in with the secular growth story in consumer durables in India.

. General industrial, coil and protective coatings (45% of Industrial Coatings market): These segments remain fragmented courtesy the high unorganised share. However, with consistent network, customer base and capacity augmentation, we expect KNPL to gain significant strength in this vertical over the medium-to-long term. New technology products developed recently include Low Bake Coil coatings, Uni-coats and Super Durable Coil Coatings.

KNPL’s key Auto OEM client profile

Source: Companies, HSIE Research Source: HSIE Research

KNPL’s non-auto industrial client profile

Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

Decorative salience increasing, albeit volumes to lag top-2

. KNPL managed to outgrow its bigger rivals (in decorative coats) APNT and BRGR over FY16-19, primarily led by: 1. Aggressive marketing push over FY16-18 2. Consistent push on dealer adds 3. Consistent new product additions across price points to fill white spaces

1. Aggressive marketing push: KNPL stepped up its A&P spends in FY16- 18 (6-7% of sales in ad spends vs 3.5-4% historically and vs APNT/ BRGR’s 4%/5% respectively), translating into an 11/23% CAGR over FY15-20/FY15-18 resp. This ad-spend lever available to KNPL was partly due to the up-cycle in Auto industrials business during FY16-18 (HSIE: 10% CAGR over FY16-18). It has reversed since, with the fortunes of the auto industry. A&P spends were cut to 6/5/5% of sales respectively over FY18-20 as management focused on safeguarding margins during the aforementioned period. 2. Consistent push on dealer adds: KNPL is estimated to have added dealers at a decadal ~9% CAGR and installed tinting machines at a CAGR of 11%. (HSIE: KNPL’s tinting machine penetration is estimated at ~78%). The dealership gap between KNPL and BRGR (#2 in Decorative) continues to reduce. It would be interesting to see if KNPL catches up on throughput per dealer too as room to improve remains the most within the Top-3. Note: Management intends to grow the dealer network by 8- 10% per annum. 3. Sprucing up the economy emulsion portfolio and filling other product white spaces in the portfolio.

We believe that KNPL’s decorative outperformance within the Top-3 over FY16- 18 is a function of the above three variables firing together. That said, the predisposition to safeguard margins is likely to continue in FY21, courtesy the COVID-led demand destruction (higher in case of KNPL, given its higher Industrial salience). We do not build any material step-up in A&P spends even post the pandemic (FY21-23) as we believe the management would prefer a clear endorsement of Auto recovery before stepping on the gas in terms of A&P spends. This reluctance to increase A&P spend, in turn, is likely to feed into marginally lower performance in decorative business vs APNT/BRGR over FY21- 23.

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Kansai Nerolac: Initiating Coverage

KNPL’s aggressive A&P spends over FY16-18… ...and active dealer additions...

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Asian Paints Berger Paints Kansai Nerolac

8.0 6.8 6.8 60,000

7.0 43-86% 6.1

6.0 APNT/BRGR 5.8

6.0 5.6 50,000

5.1

5.0

4.7 4.9

4.8 45-82% of

4.7

4.6

4.7

4.6 4.8

5.0 4.2

4.2 APNT/BRGR 4.1

4.1 40,000

4.0

3.9 3.9

3.9 55-85% of 3.6

4.0 3.3

3.3 3.1 3.1 30,000 APNT/BRGR 3.0 2.0 20,000 1.0 10,000 - - Asian Paints Berger Paints Kansai Akzo Nobel

Nerolac

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research Source: HSIE Research, Note: Indexed to APNT/BRGR. How to Read: In FY20, KNPL’s active dealer network stood at 43%/86% of APNT/BRGR respectively

...ensured it outpaced APNT/BRGR in decorative ...there is room to catch up on revenue/per active volumes (% growth)… dealer though (Rs. mn)

KNPL APNT BRGR Asian Paints Berger Paints Kansai Nerolac

40 3.5 3.0 2.9 2.9 2.9 2.9 30 3.0 2.5 20 2.0 1.8 1.8 1.9 2.0 1.7 1.5 1.5 1.5 1.5 10 1.5 1.3

1.0 - 0.5 (10)

FY16 FY17 FY18 FY19 FY20

FY21E FY22E FY23E

FY16 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research Source: HSIE Research, NOTE: Revenue adjusted to account for only decorative revenue. 90% of deco rev assigned to active dealer

KNPL has been sprucing up its emulsions portfolio, especially in the economy segment with Product Launches Paint Solutions Segment Type Application Launch year Nerolac Excel Top Guard Premium Emulsion Exterior FY20 Suraksha Acrylic Exterior Emulsion Economy Emulsion Exterior FY20 Nerolac Waterproof Putty Premium Putty Waterproofing FY20 Soldier Metallics Economy Emulsion Interior & Exterior FY20 Suraksha Range Economy Emulsion Exterior FY19 Beauty Little Master Economy Emulsion Interior FY19 Impression Ultra HD, Ultra Fresh Premium Emulsion Interior FY19 Gloria Band (Fast drying polyurethane) Premium Wood emulsion Wood coating FY18 Excel Rainguard waterproof primer Premium Primer Interior and exterior FY18 Ready Mix (Primer +Putty) Economy Primer/Putty Interior FY17 Excel Alkali Primer and impression Glitter Economy Primer/Putty Exterior FY17 Excel Mica Marble Premium Emulsion Exterior FY17 Soldier Paints Economy Emulsion Interior and exterior FY16 Impression with HD colour technology Premium Emulsion Interior FY15 Excel Rain Guard Premium Emulsion Exterior FY15

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Kansai Nerolac: Initiating Coverage

Well-covered to play the volume game until FY24

. Well-covered in terms of capacity until FY24: As per our estimates, KPNT seems covered in terms of in-house capacity to deliver 9-10%/7-8% volume/revenue CAGR respectively until FY24 (518k KL/pa currently, intends to take it to 525k KL/pa in FY21). The company’s Vizag plant (earmarked for Decorative Paints) was expected to be commissioned in FY21 but could get pushed to FY22 (per management), courtesy the pandemic. Any spurt in the aforementioned volume run-rate could advance the need for capacity addition. Note: market leader APNT does not have this compulsion post its mega capex cycle in FY19. During FY20, KNPL augmented its manufacturing capability with (1) commissioning of its new digital factory in Goindwal (50k MT for decorative paints) and (2) approvals in place for supply to major automobile OEMs from its Sayakha, Gujarat, plant (commissioned in FY19). Capex earmarked for these capacity boosters was Rs. 11bn, of which Rs. 8.5bn has been utilised.

. Of Note: the last big Capex cycle happened in FY13, and the industry absorbed the excess within five years. We believe that this windfall capacity addition would further consolidate volumes in the hands of the Top-3 players.

Company-wise capacity (KL/pa) Estimated capacity utilisation (%)

APNT BRGR KNPL FY17 FY18 FY19 FY20 FY21E FY22E FY23E 2,000,000 90 82 1,800,000 80 80 1,600,000 67 70 70 65 63 1,400,000 60 1,200,000 50 1,000,000 40 800,000 30 600,000 400,000 20 200,000 10 0 - FY17 FY18 FY19 FY20 FY21E FY22E FY23E APNT BRGR KNPL

Source: Companies, HSIE Research Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

1QFY21 result review: APNT > KNPL’s performance > BRGR

. Contextually a reasonable print in decorative business: Given the heavy Auto/Industrial skew (40% in FY20) in revenue mix, the pandemic impact on Kansai’s overall volume/value was bound to be higher vs peers. However, we estimate that decorative revenue (comparable vertical) has declined by ~49%/45% in value/volume – weaker than APNT’s 44/38% (HSIE), but on par with BRGR (48% decline in value). Management highlighted that May and Jun-20 recorded double-digit volume growth and Jul-20 got a good start. However, we remain circumspect of the real progression in volume recovery as the May/June recovery is mostly a function of (1) pent-up demand and (2) incentivised channel up- stocking. Capacity utilisation is estimated to be north of 50% for June.

. The industrial segment gets massacred courtesy high Auto exposure: Industrial segment is estimated to have declined by ~78% YoY, mainly mimicking Auto sales. Management remains cautiously optimistic on the Auto recovery. However, it remains committal on reducing its Auto exposure in the industrial mix by channelling its efforts to grow the Powder, Coil, Rebar and high- performance Coating business.

. Profitability improvement underpinned by abnormally high decorative skew: GM’s improvement of 340/320bp YoY/QoQ to 41.6% was primarily a function the (1) revenue mix significantly getting skewed towards the high-margin decorative business in 1Q. HSIE (80:20 Decorative: Industrial mix in 1QFY21 vs typically 60:40). The impact on EBITDAM, as a consequence of the GM swing, was the least within the Top-4 paint companies at -360bp/+50bp YoY/QoQ). APNT/BRGR EBITDAM contractions were -580/-430bp YoY in 1Q. While employee expenses remained sticky, other expenses declined 57% YoY, closely tracking sales decline, indicating significant work done on fixed costs reduction. Net profit declined 71% YoY to Rs427mn (Note: part of these cost savings are not sustainable and are likely to mean revert once demand picks up).

. Tier 2/3/4 cities outperformed Metros and Tier-1 cities: Management highlighted that Tier 2/3/4 cities witnessed better recovery than Metros/Tier 1 cities due to lower severity and paranoia of the pandemic and better crop harvest. In order of severity in demand destruction, West remained the most impacted followed by South and then North and East.

. International business – April was a washout; progressively improving: Nepal remained the most affected during the pandemic, while Sri Lanka and Bangladesh’s revenue recoup was relatively better.

. Construction chemicals pegged at Rs. 50bn, but not targeting the entire market: Management pegged the construction chemicals market at Rs. 50bn, which includes Admixtures, waterproofing, Tile Adhesives, etc. While Apr-20 was a washout, business demand is progressively improving, especially in waterproofing. Management indicated that profitability of waterproofing segment is comparable to decorative paints on the retail side, whereas margins are far lower in the institutional segment. It also highlighted that while the market is big enough to bite, it intends to restrict its presence in the medium term to waterproofing and Tile Adhesives and is not likely to be present in Admixtures. Construction chemicals and Putty are estimated to contribute 5-10% of KNPL’s sales.

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Kansai Nerolac: Initiating Coverage

Quarterly snapshot - consolidated Rs. Mn 1QFY20 4QFY20 1QFY21 YoY (%) QoQ (%) FY20 FY21 Net Revenue 15,424 10,801 6,389 (58.6) (40.8) 52,800 46,762 Total COGS 9,526 6,593 3,741 (60.7) (43.3) 32,586 28,099 Gross Profit 5,898 4,208 2,649 (55.1) (37.1) 20,214 18,663 Gross Profit Margin (%) 38.2 39.0 41.5 321 bps 249 bps 38.3 39.9 Total Operating expenses 3,361 2,866 1,880 (44.1) (34.4) 12,169 11,548 Reported EBITDA 2,537 1,342 768 (69.7) (42.8) 8,045 7,116 EBITDA Margin (%) 16.4 12.4 12.0 (442 bps) (40 bps) 15.2 15.2 Depreciation 330 384 379 14.8 (1.1) 1,421 1,549 EBIT 2,207 959 389 (82.4) (59.4) 6,623 5,567 EBIT Margin (%) 14.3 8.9 6.1 (822 bps) (279 bps) 12.5 11.9 Finance cost 46 62 55 19.0 (11.0) 209 250 Other income 68 38 82 20.5 112.5 255 429 PBT 2,228 935 416 (81.4) (55.6) 6,670 5,746 Exceptional Item

Tax Expenses 781 281 119 (84.8) (57.7) 1,512 1,446 Effective Tax Rate (%) 35.1 30.1 28.7 (640 bps) (143 bps) 22.7 25.2 Share of associate earnings ------Minority Interest 13 19 38 - -

EO items - - - - -

PAT 1,434 635 258 (82.0) (59.3) 5,158 4,300 APAT 1,434 635 258 258

APAT margin (%) 9.3 5.9 4.0 (525 bps) (183 bps) 9.8 9.2 Operating Expenses (Rs mn) 3361 2866 1880 (44.1) (34.4) 12169 11548 Employee expenses 773 748 748 (3.3) (0.0) 3104 3133 Other expenses 2588 2117 1132 (56.2) (46.5) 9065 8415 Source: Companies, HSIE Research

Quarterly snapshot - consolidated Rs. Mn 1QFY20 4QFY20 1QFY21 YoY (%) QoQ (%) FY20 Net Revenue 14,635 9,880 5,981 (59.1) (39.5) 49,432 Total COGS 9,036 6,078 3,490 (61.4) (42.6) 30,576 Gross Profit 5,598 3,802 2,491 (55.5) (34.5) 18,856 Gross Profit Margin (%) 38.3 38.5 41.6 339 bps 317 bps 38.1 Total Operating expenses 3,108 2,524 1,686 (45.8) (33.2) 11,039 Reported EBITDA 2,490 1,278 805 (67.7) (37.0) 7,816 EBITDA Margin (%) 17.0 12.9 13.5 (355 bps) 53 bps 15.8 Depreciation 278 320 318 14.6 (0.7) 1,199 EBIT 2,212 957 487 (78.0) (49.2) 6,617 EBIT Margin (%) 15.1 9.7 8.1 (698 bps) (155 bps) 13.4 Finance cost 13 13 13 4.8 2.3 50 Other income 65 40 79 21.8 98.7 269 PBT 2,265 984 553 (75.6) (43.8) 6,836 Exceptional Item

Tax Expenses 786 270 126 (84.0) (53.4) 1,482 Effective Tax Rate (%) 34.7 27.4 22.8 (1195 bps) (466 bps) 21.7 Share of associate earnings - - - -

Minority Interest - - - -

EO items - - - -

PAT 1,479 715 427 (71.1) (40.2) 5,354 APAT margin (%) 10.1 7.2 7.1 (296 bps) (9 bps) 10.8 Operating Expenses (Rs mn) 3108 2524 1686 (45.8) (33.2) 11,039 Employee expenses 676 649 645 (4.5) (0.6) 2,694 Other expenses 2433 1875 1041 (57.2) (44.5) 8346 Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

1QFY21: Volume declines by an estimated 45% YoY Decorative volume growth (YoY)

30 14 15 20 10 9 12 10 - (10) (20) (30) (45) (40)

(50)

1QFY16 2QFY16 3QFY17 4QFY17 1QFY19 2QFY19 3QFY19 4QFY20 1QFY21 3QFY16 4QFY16 1QFY17 2QFY17 1QFY18 2QFY18 3QFY18 4QFY18 4QFY19 1QFY20 2QFY20 3QFY20

Source: Companies, HSIE Research

Baking in 6% revenue CAGR over FY20-23 EBITDA margin contraction was the least for KNPL among peers in 1QFY21

Gross Profit (Rs. mn) Gross Margin (%) - RHS EBITDA (Rs. mn) EBITDA Margin (%) - RHS

43 43

42 42

41 41

40 40

40 40 40 40

6,000 40 45 3,000 25

38 38

36 36

20 20

36 36 35 35

40 19

18 18

18 18 18 18

5,000 2,500 17

17 17 17 17 17 17 20

35 16

15 15

15 15 15 15

4,000 30 2,000 13

13 13 13 13 13 13 15 25 3,000 1,500 20 10 2,000 15 1,000 10 1,000 500 5 5

- - - -

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21

Source: Companies, HSIE Research Source: Companies, HSIE Research

Key assumptions Key assumptions FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Decorative volume growth (%) 16.0 12.5 14.7 12.0 5.0 (6.5) 29.0 12.5 Decorative realisation growth (%) (6.0) (2.6) 2.7 2.7 (1.0) (4.0) (3.6) (1.8) Decorative revenue growth (%) 9.0 9.6 17.8 15.0 4.0 (10.2) 24.4 10.5 Standalone revenue growth (%) 5.0 7.6 14.9 16.4 (2.7) (11.4) 20.2 11.7 Industrial revenue growth (%) (16.6) (13.9) 14.0 12.5

Gross margin (%) 37.1 41.5 39.6 36.2 38.3 39.9 39.1 39.0 EBITDA margin (%) 15.5 18.2 17.0 13.9 15.2 15.2 16.2 16.4 Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

Financial analysis

. Baking in 6% revenue CAGR over FY20-23: Given KNPL’s higher exposure to the Auto/Industrial segment, impact on overall volumes is likely to be higher vs APNT/BRGR in FY21. Predisposition to safeguard profitability may also feed into lower-than-usual ad spends, hence higher-than- APNT/BRGR volume declines in the decorative vertical too. We build in 6.5/10% volume/revenue decline in the decorative biz and ~14% decline in industrial revenue for KNPL in FY21. Over FY20-23, we build in a moderate 6% revenue CAGR for KNPL.

Baking in 6% revenue CAGR over FY20-23 KNPL’s Decorative mix has been inching up

Revenue (Rs. mn) YoY (%) -Decorative -Industrial 100%

70,000 20.2 25.0

33 33

16.4 35

36 36 14.9

80% 41

42 42 44 44 60,000 20.0 45 11.7 15.0

50,000 7.6

5.0 10.0 60% 40,000 5.0

30,000 (2.7)

- 40%

67 67

67 67 65 65

20,000 64

59 59

58 58 56 56

(5.0) 55 (11.4) 10,000 (10.0) 20% - (15.0)

FY16 FY17 FY18 FY19 FY20

FY21E FY22E FY23E

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Companies, HSIE Research Source: Companies, HSIE Research

. Margins: While RM prices have significantly corrected (TiO2 and Crude-linked derivatives account for 80% of RM costs for Paint companies are down 18-22% YoY). We believe the flow through in material costs may remain relatively low in FY21 vs street expectations (modest 160bp savings factored in GMs for KNPL in FY21) as a better part of 1H is likely expected to be about clearing high-cost inventory and as demand gradually recovers 2H onwards, RM costs are likely to firm up. Also, part of GM savings may find its way to incentivise the dealer network for up-stocking.

. GM increase due to increasing decorative salience + marginal operational savings led by normalising capacity utilisation (~70/80% by FY23/FY24) to help EBITDA margins improve by 115bp over FY20-23E

Modest material cost savings built in FY21 (160bp) EBITDA margins to improve by 115bp over FY20-23E

Gross Margin (%) EBITDA Margin (%) 50.0 41.5 20.0 18.2 39.6 38.3 39.9 39.1 39.0 17.0 40.0 37.1 36.2 16.2 16.4 33.5 15.5 15.2 15.2 32.7 13.9 15.0 12.6 30.0 11.5 10.0 20.0

10.0 5.0

- -

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Companies, HSIE Research Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

. While A&P spends remain over-indexed to decorative scale vs Top 2...A&P growth has tapered off to safeguard margins from KNPL’s Auto woes. We believe, KNPL’s predisposition to protect margins is likely to continue in FY21/22.

A&P spends (As % of estimated decorative revenue) Growth in A&P spends (%)

Asian Paints Berger Paints Kansai Nerolac Akzo Nobel FY14 FY15 FY16 FY17 FY18 FY19 FY20 12.5 70 11.5 60 56

10.5 50 33 33

9.5 40

25 25 21 21

30 19

18 18

17 17

15 15 18 18

8.5 13 11 11

20 14

8 8 5 5

7.5 2 3 3

10 3 6.5 - (10)

5.5 (3)

(5) (6)

(20) (9) (10)

4.5 (30) (10)

(19) (16)

3.5 (22)

(40)

Asian Paints Berger(28) Paints Kansai Akzo Nobel

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY13 Nerolac

Source: Companies, HSIE Research Source: Companies, HSIE Research

. Cash Discounts/Rebates have been inching up and are likely to remain elevated vs history given the focus on new launches and to gain share in low-end emulsions. Note: In FY20, KNPL launched 16 new offerings across price points.

Cash Discounts/Rebates have been inching up We build in a PAT CAGR of 7.5% over FY20-23

Cash Discounts/Rebates (As % of sales) APAT (Rs. mn) YoY (%)

11 7,000 50

39 39 33 33 6,000 34 40 10 30

5,000 13 13 9 15 20 4,000

8 1 10 3,000

- (13) 7 (17) 2,000 (10) 6 1,000 (20)

5 - (30)

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Companies, HSIE Research Source: Companies, HSIE Research

. Structurally, given the higher industrial salience, KNPL’s cash conversion cycle is longer vs APNT/BRGR. Note: Receivables from industrials clients are typically longer vs that of dealers from decorative biz. Both inventory /payable days have inched up/down resp. over FY16-20. (more pronounced over FY18-20). We suspect this may be due to the Auto slowdown and new products filling in the channel. A similar trend was observed over FY13-14 (Prev. Auto slowdown). Capital intensity in industrials is also nearly double that of decorative plants.

. Ergo, lower GMs/EBITDAM, longer CC cycle and higher capital intensity (reflected in lower-than-APNT/BRGR fixed asset turns) for Industrials does weigh in on structural return ratios for KNPL. This is likely to improve at the margin as KNPL’s decorative salience increases over the medium-to-long term.

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Kansai Nerolac: Initiating Coverage

Company-wise Core Cash conversion cycle FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Asian Paints Inventory 60 58 56 50 63 56 58 60 Receivables 26 25 23 23 29 29 28 24 Trade payables 49 53 41 41 48 48 46 37 Core CC Cycle 37 31 38 32 44 38 39 46

Berger Paints Inventory days 70 67 62 65 77 73 76 75 Receivables 39 41 42 44 44 46 38 36 Trade payables 42 53 49 60 65 72 64 65 Core CC Cycle 67 55 55 49 56 47 50 46

Kansai Nerolac Inventory (days) 68 74 56 56 63 64 74 69 Debtors (days) 54 52 51 51 52 54 48 50 Payables (days) 50 51 33 53 50 54 45 38 Core CC Cycle 72 76 74 54 65 63 77 80 Source: Companies, HSIE Research

Lower margins/Higher WC needs (given higher ...Fixed asset turnover also remains lower vs industrial salience) keep underlying CFO/EBITDA APNT/BRGR given the higher industrial salience conversion low vs APNT/BRGR

KNPL APNT BRGR FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 x 6.0 90 % 83 80 75 5.0 69 63 66 64 64 65 63 70 63 62 60 62 62 58 57 59 4.0 60 55 52 47 50 50 46 45 3.0 40 35 2.9 30 2.9 2.8 2.0 2.4 20 1.8 2.0 1.7 1.7 10 1.0

FY17 FY18 FY19 FY20 FY21 FY22 FY23 Asian Paints Berger Paints Kansai Nerolac FY16

Source: Companies, HSIE Research, 3-year rolling avg Source: Companies, HSIE Research, CFO/EBITDA considered for standalone operations KNPL’s capital requirements are more volatile too than its decorative-heavy peers FY15 FY16 FY17 FY18 FY19 FY20

Cash from Operations (excl WC change) 3,340 3,417 5,332 5,333 4,602 6,521 Other Income 67 168 82 213 176 26 Total 3,407 3,585 5,414 5,546 4,777 6,547

Application of funds (Rs bn)

Working Capital 292 (500) 1,820 1,740 3,603 570 Capex 902 (4,506) 2,169 3,431 6,013 2,799 Investments 1,552 3,232 (826) (458) (3,482) 900 Dividend 703 912 1,988 1,955 1,789 1,855 Borrowings 167 6 174 (65) 440 (448) Others - - 4,311 (1,134) (3,240) 89 Net change in cash (209) 4,440 (4,223) 76 (345) 782 Total 3,407 3,585 5,414 5,546 4,777 6,547 3-yr rolling cumm. WC + Capex as % of sources of funds 72.9 (17.1) 1.4 28.6 119.3 107.6 Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

Return profile to decline in the pandemic-stricken Lags APNT/BRGR in return profile courtesy the FY21…expect a V-shaped recovery over FY20-23E higher industrial salience

RoE (%) RoCE (%) RoIC (%) - RHS KNPL APNT BRGR % 45 25 18 19 20 39 16 17 40 35 18 33 14 32 20 14 14 14 14 16 35 13 27 28 14 30 25 11 24 15 12 23 25 20 21 19 19 18 21 10 20 17 10 8 15 18 19 6 17 10 14 5 4 13 14 14 11 2 5

- - -

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Companies, HSIE Research Source: Companies, HSIE Research

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Kansai Nerolac: Initiating Coverage

Ranks low on key fundamental anchors…ergo, the valuation discount

. Our DCF-based TP of Rs. 500/sh (implying 44x Sep-21 P/E) assumes: 1. 10-yr revenue CAGR: 10.7%, 2. EBITDA margin expansion of ~290bp over FY20-30E given increasing decorative skew, 3. FY20-41 FCFF CAGR: 15.5% (FY20-30E FCFF CAGR: 18.3%, FY30-41E CAGR: 13%), 4. WACC: 10.5%, 5. Terminal growth: 6%, FCFF/EBITDA conversion of ~40% over FY20-30E (implied P/E of 44x). The 12% discount to APNT seems justified given the inherently lower fundamental anchors (Lower GMs/EBITDAM and Higher capital intensity – both WC/Capex) vs decorative heavy-weights like APNT and BRGR. DCF Valuation FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30E FY31E FY35E FY41E EBIT*(1-t) 5,555 6,279 7,076 8,253 9,656 11,272 13,188 15,459 17,355

Less: Capex (2,684) (6,210) (2,004) (3,634) (3,637) (5,745) (4,058) (4,750) (5,327)

Add: Depreciation 1,659 1,893 2,105 2,241 2,418 2,650 2,887 3,094 3,329

Change in NWC (2,197) (1,339) (1,824) (2,233) (2,557) (2,947) (3,188) (3,365) (3,005)

FCF 2,333 624 5,353 4,627 5,880 5,229 8,829 10,438 12,352 14,493 25,199 47,344 FCF growth yoy (%) (53.6) (73.3) 758.4 (13.6) 27.1 (11.1) 68.8 18.2 18.3 17.3 13.3 9.8

Year-ending 31-Mar-22 31-Mar-23 31-Mar-24 31-Mar-25 31-Mar-26 31-Mar-27 31-Mar-28 31-Mar-29 31-Mar-30 31-Mar-31 31-Mar-35 31-Mar-41 Discounting period 0.50 1.50 2.50 3.50 4.50 5.50 6.50 7.50 8.50 9.50 13.51 19.51 Discounting factor 0.95 0.86 0.78 0.70 0.64 0.58 0.52 0.47 0.43 0.39 0.26 0.14 Discounted FCF 2,220 537 4,170 3,262 3,751 3,019 4,612 4,934 5,284 5,611 6,542 6,748 FCF/EBITDA (%) 25.7 6.1 46.3 34.9 38.4 29.5 43.0 43.9 46.6

DCF as on (date) 30-Sep-21

WACC (%) 10.5

Terminal growth (%) 6.0

Terminal FCF multiple (X) 23.6

Implied terminal EV/EBITDA (X) 17.8

PV-Explicit Period 102,884

PV-Terminal Value 158,949

EV 261,833

Net debt/(cash) (7,649)

Equity value 269,482

# of shares (mn) 539

Equity value (Rs/share) 500

CMP (Rs/share) 484

Upside/(Downside) 3.3

Implied Sep-22 P/E 44.5

Source: Companies, HSIE Research

Sensitivity Analysis WACC (%)

9.5 10.0 10.5 11.0 11.5 5.0 576 503 444 396 356 5.5 621 536 469 415 371 Terminal growth rate (%) 6.0 680 578 500 438 388 6.5 758 632 538 467 410 7.0 867 704 588 502 436

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Kansai Nerolac: Initiating Coverage

Company Profile Kansai Nerolac Paints (KNPL) is a 74.99% subsidiary of Kansai Paints Co. Ltd., Japan. The parent company is one of the world’s top ten paint companies with a presence in over 43 companies. KNPL is the second largest coating company in India and a market leader in Industrial Coatings. Their manufacturing footprint spans six plants, all of which are strategically located near key Original Equipment Manufacturers (OEMs), thus lending the company a strong competitive edge. Through technology, product innovation and a well established distribution network, KNPL has strengthened its core to be established as a strong consumer brand and is one of India’s Top 40 brands.

The company has been expanding its horizons by foraying into new market segments and new geographies. In order to scale up leadership in the Powder Coating segment, the company acquired 100% share in Marpol in April 2018. In the following year, the company acquired a small construction chemicals company, Perma Construction Aids in April 2019. In August 2019, KNPL formed a 60:40 joint venture with Polygel, a manufacturer of adhesives and sealants. Through acquisitions and joint ventures the company also operates internationally in Sri Lanka, Nepal and Bangladesh.

Key Personnel Name Designation Description Mr. Shah is a qualified Cost Accountant and Chartered Accountant. He also holds an MBA from Harvard Business School. He was the founder Managing Director of CRISIL. Mr. Shah also Mr. Pradip Panalal Shah Chairman (Independent Director) served as a consultant to USAID, the World Bank and the Asian Development Bank. Mr. Shah started IndAsia, a corporate finance and private equity advisory business. He is currently Chairman at KPNL. Mr. Bharuka has a bachelor’s degree in Commerce from Mumbai Mr. Harishchandra Bharuka Vice Chairman and Managing Director University. He is also a qualified AICWA from the Institute of Cost and Works Accountants of India. Mr. Jain has a bachelor’s in Science and a masters degree in Marketing from University of Mumbai. He has 27 years of experience under his belt. He joined the company in 1990 and was Mr. Anuj Jain Executive Director Director – Decorative and Industrial Sales & Marketing of the Company. prior to his appointment as a Whole-time Director. He is now Executive Director at the company.

Mr. Pai served as CFO & Senior VP – Finance prior to his current Mr. Prashant Pai Director – Finance role of Director – Finance. He has been with the company since 1989. Source: Company, HSIE Research

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Kansai Nerolac: Initiating Coverage

Key Risks Name Description While the three top paint companies have shown resilience in terms Correlation of sales with the of volume growth over the past few quarters even during the extant economy economic slowdown, the sustenance of the slowdown could pose a downside risk to our estimates. There are several raw materials which are directly driven by crude oil. Approximately 70% of the input costs can be accounted for by Sharp rise in input costs crude derivations. The remaining ~30% of the input costs arise from non-crude (TiO2) forms. Therefore, any sharp increase in input costs could adversely impact the business The USD-INR exchange is an important component of the input Finance risks originating out of costs. Hence, a depreciation of INR vis-à-vis the USD, could affect currency fluctuations the company’s bottom line directly by the way of gross margins. In a year of high uncertainty in the macro environment and geopolitical scenarios, disruptions in the supply chain are an Disruption in the supply chain important risk to monitor. The unavailability of raw materials could impact the estimates negatively. Source: Company, HSIE Research

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Kansai Nerolac: Initiating Coverage

Financials Income Statement Year End (March) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Net Revenues 37,669 40,526 46,581 54,243 52,800 46,762 56,194 62,759 Growth (%) 5.0 7.6 14.9 16.4 (2.7) (11.4) 20.2 11.7 COGS 23,682 23,691 28,136 34,618 32,586 28,092 34,204 38,310 Employee Expense 1,733 2,026 2,351 2,834 3,104 3,133 3,259 3,546 A&P Expense 2,361 2,810 2,857 2,783 2,733 2,198 2,909 3,217 Freight and handling charges 1,698 1,950 2,273 2,752 2,768 2,806 2,922 3,232 Power and fuel 697 713 758 868 736 652 784 844 Other Expenses 1,652 1,961 2,276 2,863 2,828 2,759 3,035 3,326 EBITDA 5,847 7,374 7,931 7,525 8,045 7,122 9,082 10,284 EBITDA Growth (%) 29.6 26.1 7.6 (5.1) 6.9 (11.5) 27.5 13.2 EBITDA Margin (%) 15.5 18.2 17.0 13.9 15.2 15.2 16.2 16.4 Depreciation 683 701 771 1,063 1,421 1,549 1,659 1,893 EBIT 5,164 6,673 7,161 6,462 6,623 5,574 7,423 8,390 Other Income (Including EO Items) 5,629 980 709 605 255 374 432 432 Interest - - - 100 209 250 250 250 PBT 10,792 7,653 7,870 6,968 6,670 5,698 7,605 8,572 Total Tax 1,772 2,552 2,732 2,491 1,512 1,434 1,914 2,158 RPAT before associate earnings 9,020 5,101 5,138 4,477 5,158 4,264 5,691 6,415 Share of Associate earnings ------Minority Interest ------RPAT 9,020 5,101 5,138 4,477 5,158 4,264 5,691 6,415 Exceptional Gain/(loss) 5,353 ------Adjusted PAT 3,667 5,101 5,138 4,477 5,158 4,264 5,691 6,415 APAT Growth (%) 33.8 39.1 0.7 (12.9) 15.2 (17.3) 33.5 12.7 Adjusted EPS (Rs) 7 9 10 8 10 8 11 12 EPS Growth (%) 33.8 39.1 0.7 (12.9) 15.2 (17.3) 33.5 12.7 Source: Company, HSIE Research Balance Sheet Year End (March) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E SOURCES OF FUNDS

Share Capital - Equity 539 539 539 539 539 539 539 539 Reserves 24,557 27,606 30,784 33,624 37,064 39,638 44,029 48,169 Total Shareholders Funds 25,096 28,145 31,323 34,163 37,603 40,177 44,568 48,708 Minority Interest 60 153 164 201 217 217 217 217 Long Term Debt 294 182 97 44 234 234 234 234 Short Term Debt 167 105 255 1,036 1,548 1,548 1,548 1,548 Total Debt 461 287 352 1,080 1,782 1,782 1,782 1,782 Net Deferred Taxes 129 795 814 1,267 1,081 1,081 1,081 1,081 Other Non-current Liabilities & Provns - - - - 638 638 638 638 TOTAL SOURCES OF FUNDS 25,746 29,379 32,652 36,710 41,321 43,894 48,286 52,426 APPLICATION OF FUNDS

Net Block 9,353 9,552 10,333 14,455 17,541 17,703 18,728 23,045 CWIP 420 1,544 3,460 3,164 1,691 1,691 1,691 1,691 Goodwill 23 23 23 196 198 198 198 198 Other Non-current Assets - - - - 1,325 1,325 1,325 1,325 Total Non-current Assets 9,795 11,118 13,815 17,814 20,755 20,917 21,942 26,259 Investments 5,388 5,314 5,207 1,965 3,060 3,060 3,060 3,060 Inventories 5,827 7,032 8,292 11,111 10,084 9,865 11,085 12,208 Debtors 5,455 5,904 7,026 7,556 7,870 7,431 8,468 9,285 Other Current Assets 1,153 4,379 3,323 5,771 5,148 4,559 5,325 5,603 Cash & Equivalents 4,785 2,614 3,636 962 1,920 5,211 6,380 4,865 Total Current Assets 22,609 25,244 27,484 27,365 28,081 30,125 34,318 35,021 Creditors 5,513 5,607 6,999 6,934 5,954 5,765 6,312 6,998 Other Current Liabilities & Provns 1,146 1,377 1,648 1,535 1,562 1,383 1,662 1,856 Total Current Liabilities 6,659 6,984 8,647 8,469 7,516 7,148 7,974 8,854 Net Current Assets 15,950 18,260 18,837 18,896 20,566 22,977 26,343 26,167 TOTAL APPLICATION OF FUNDS 25,746 29,379 32,652 36,710 41,321 43,894 48,286 52,426 Source: Company, HSIE Research

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Kansai Nerolac: Initiating Coverage

Cash Flow Statement Year ending March FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Reported PBT 10,792 7,653 7,870 6,968 6,670 5,698 7,605 8,572 Non-operating & EO Items (5,560) (761) (543) (421) (124) (374) (432) (432) Interest Expenses - - - 100 209 250 250 250 Depreciation 683 701 771 1,063 1,421 1,549 1,659 1,893 Working Capital Change 500 (1,820) (1,740) (3,603) (570) 879 (2,197) (1,339) Tax Paid (2,498) (2,261) (2,764) (3,107) (1,655) (1,434) (1,914) (2,158) OPERATING CASH FLOW ( a ) 3,917 3,512 3,593 999 5,951 6,567 4,971 6,788 Capex 4,506 (2,169) (3,431) (6,013) (2,799) (1,711) (2,684) (6,210) Free Cash Flow (FCF) 8,423 1,343 162 (5,014) 3,152 4,856 2,287 578 Investments (3,232) 826 458 3,482 (900) - - - Non-operating Income 168 (4,229) 1,347 3,416 (63) 374 432 432 INVESTING CASH FLOW ( b ) 1,441 (5,573) (1,627) 885 (3,762) (1,337) (2,253) (5,778) Debt Issuance/(Repaid) (6) (174) 65 (440) 448 - - - Interest Expenses - - - (100) (157) (250) (250) (250) FCFE 8,417 1,169 227 (5,553) 3,444 4,607 2,038 328 Share Capital Issuance ------Dividend (912) (1,988) (1,955) (1,689) (1,699) (1,690) (1,300) (2,275) Others ------FINANCING CASH FLOW ( c ) (918) (2,162) (1,890) (2,229) (1,407) (1,939) (1,549) (2,524) NET CASH FLOW (a+b+c) 4,440 (4,223) 76 (345) 782 3,291 1,169 (1,515) EO Items, Others 7 2,058 3,004 694 871 - - - Closing Cash & Equivalents 4,785 2,614 3,636 962 1,920 5,211 6,380 4,865 Source: Company, HSIE Research

Key Ratios FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E PROFITABILITY (%)

GPM 37.1 41.5 39.6 36.2 38.3 39.9 39.1 39.0 EBITDA Margin 15.5 18.2 17.0 13.9 15.2 15.2 16.2 16.4 EBIT Margin 13.7 16.5 15.4 11.9 12.5 11.9 13.2 13.4 APAT Margin 9.7 12.6 11.0 8.3 9.8 9.1 10.1 10.2 RoE 17.8 19.2 17.3 13.7 14.4 11.0 13.4 13.8 RoIC (or Core RoCE) 18.3 18.6 16.8 12.8 13.6 10.7 13.8 14.0 RoCE 17.0 18.5 16.6 13.1 13.6 10.4 12.8 13.1 EFFICIENCY

Tax Rate (%) 32.59 33.35 34.72 35.75 22.67 25.17 25.17 25.17 Fixed Asset Turnover (x) 2.5 2.6 2.7 2.4 2.0 1.7 1.8 1.7 Inventory (days) 56 63 65 75 70 77 72 71 Debtors (days) 53 53 55 51 54 58 55 54 Other Current Assets (days) 11 39 26 39 36 36 35 33 Payables (days) 53 50 55 47 41 45 41 41 Other Current Liab & Provns (days) 11 12 13 10 11 11 11 11 Cash Conversion Cycle (days) 56 93 78 107 108 115 110 106 Net Debt/Equity (x) (0.17) (0.08) (0.10) 0.00 (0.00) (0.09) (0.10) (0.06) Interest Coverage (x) 64.8 31.7 22.3 29.8 33.6

PER SHARE DATA (Rs)

EPS 6.8 9.5 9.5 8.3 9.6 7.9 10.6 11.9 CEPS 8.1 10.8 11.0 10.3 12.2 10.8 13.6 15.4 Dividend 3.1 3.0 2.6 2.6 2.6 2.0 3.5 4.0 Book Value 46.6 52.2 58.1 63.4 69.8 74.6 82.7 90.4 VALUATION

P/E (x) 71.3 51.2 50.9 58.4 50.7 61.3 45.9 40.7 P/BV (x) 10.4 9.3 8.3 7.7 7.0 6.5 5.9 5.4 EV/EBITDA (x) 44.0 35.1 32.5 34.7 32.5 36.2 28.3 25.1 EV/Revenues (x) 6.8 6.4 5.5 4.8 4.9 5.5 4.6 4.1 OCF/EV (%) 1.5 1.4 1.4 0.4 2.3 2.5 1.9 2.6 FCF/EV (%) 3.3 0.5 0.1 (1.9) 1.2 1.9 0.9 0.2 FCFE/Mkt Cap (%) 3.2 0.4 0.1 (2.1) 1.3 1.8 0.8 0.1 Dividend Yield (%) 0.6 0.6 0.5 0.5 0.5 0.4 0.7 0.8 Source: Company, HSIE Research

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Kansai Nerolac: Initiating Coverage

RECOMMENDATION HISTORY

Date CMP Reco Target Kansai Nerolac TP 650 07-Sep-20 485 ADD 500 600 550 500 450 400 350 300 250

200

…

19 20 20 20

- -

May

Jul

Jan

Jun

Feb

Oct

Sep Sep

Dec

Apr

Mar Aug Nov

Rating Criteria BUY: >+15% return potential ADD: +5% to +15% return potential REDUCE: -10% to +5% return potential SELL: >10% Downside return potential

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Kansai Nerolac: Initiating Coverage

Disclosure: We, Jay Gandhi, MBA & Varun Lohchab, PGDM, 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. HSL has no material adverse disciplinary history as on the date of publication of this report. 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. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 11092018; IRDA Corporate Agent License No.: CA0062; SEBI Research Analyst Reg. No.: INH000002475; SEBI Investment Adviser Reg. 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