India Equity Research | Building Products © December 24, 2015 Channel Checks Emkay
Building Products Your success is our success
Paints & LED lights on strong footing;
others still lagging
Asian Paints BUY Building Products Channel Checks: Key Takeaways CMP Target Price . We interacted with about 90 dealers in the building products space to assess current 879 885 demand trends, competitive landscape and promotional activities. Paints category depicted healthy growth trends owing to festive demand, but sanitaryware, tiles and
consumer electrical saw weak trails owing to continued slowdown in real estate activity Berger Paints ACCUMULATE
. Aggressive push by organized players for Wall putty, given huge unorganized market; CMP Target Price despite weak income trends, up-trading continues as premium paints remained in flavor. 254 236 In sanitaryware/tiles, volumes are flat and companies resorting to new product lines to
drive growth. In consumer electrical, industrial cables & wires and LED is driving growth Pidilite Industries ACCUMULATE . Structurally positive on building products space, but pace of growth has decelerated. CMP Target Price Unless economic activity improves or real estate market picks up, growth will be tepid. We have positive bias on Asian Paints, Berger Paints, Havells and Pidilite 550 600
Paints – Has been the most resilient in the pack Havells BUY Decorative paint demand was resilient in festive period with healthy double digit growth and CMP Target Price momentum has continued post the festive season as well. Growth is driven by economy and 303 355 premium segment, while mid-segment is lagging in growth. Up-trading and mix improvement is visible within segments (from enamels to emulsions) and products (Tractor Emulsion to
Royale; Ace Emulsion to Apex Ultima). Dealers are aggressively pushing for Wall Putty, given HSIL BUY companies endeavor to gain share in a largely unorganized controlled Putty segment. CMP Target Price Sanitaryware – Expect weak demand offtake to continue 302 400 Interactions with dealers in sanitaryware and faucets segment suggested that sharp fall in real
estate activities in the last few quarters, has severely dented volumes for organized players. In this scenario, growth in sanitaryware is primarily driven by price growth and better mix, while shift from unorganized to organized products is driving growth in faucets. In order to beat
slowdown and sustain growth, companies are resorting to new revenue streams.
Consumer Electrical – Industrial seeing green shoots; LED lights going strong Some uptick in industrial activity and rapid shift from CFL to LED lighting are driving growth in the consumer electrical segment. Volumes in cables & wires are growing in double digits, but lower copper prices are offsetting volume growth. LED is growing at 40-50% but is offset by sharp fall in CFL (30-40%). Here again, pick -up in economic and real estate activity is essential
for uptick in demand.
Outlook & Top Picks We are structurally positive on the building products space, but short term hiccups in the form of muted demand could weigh on stock performance. We expect healthy volume performance from Paints segment and some improvement in growth for Havells, led by LED & industrial cables. We have positive bias on Asian Paints (BUY, TP – Rs 885) and Berger Paints (ACCUMULATE, TP – Rs 236). We like Havells (BUY, TP - Rs 355) given strong growth levers in domestic business and positive development post Sylvania stake sale. We like Pidilite (ACCUMULATE, TP – Rs 600), given the uptick in urban demand, innovation pipeline and strong margin performance.
Financial Snapshot (Consolidated) EPS EV/EBITDA P/E (Rs mn) FY16E FY17E FY16E FY17E FY16E FY17E Prashant Kutty Asian Paints 19.1 25.2 29.1 22.3 46.0 34.7 [email protected] Berger Paints 5.5 7.4 25.0 19.1 46.5 34.7 +91 22 66121341 Pidilite Industries 14.2 17.8 24.3 19.3 38.6 30.9 Dhaval Mehta Havells 7.7 10.7 20.4 16.8 39.9 28.6 [email protected]
HSIL 20.2 28.3 6.9 5.7 15.0 10.7 +91 22 66121284
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Paints – Demand resilient in festive season; Pick-up in economic activity is key trigger
We did a pan India check with dealers in the paint industry (28 dealers) to gauge the current demand trends, competitive landscape, pricing & promotional strategies and other key parameters. Decorative paints have witnessed step-up in demand during the festive season and the momentum has continued in most regions, post the festive season as well. Trends are healthy in low-end and premium-end, while mid-end continues to struggle. There is aggressive push from organized players towards economy-products like Wall Putty and they expect this segment to report strong growth, driven by rising shift from unorganized to organized players. . Demand for decorative paints picked up in October and November and has sustained post festive season as well. But some pockets like Bangalore and Chennai have been affected by unseasonal rainfall. . Demand for industrial paints has also been performing well, both in automotive as well as industrial space. In automotive, growth is driven by 4-wheelers, while rise in industrial activity in few segments is aiding growth in industrial segment. . In decorative paints, emulsions continue to outperform enamels, where growth rate in enamels has slowed down to low single digits. Better terms of trade and huge un-organized market in low-end segment (Wall putty and distemper) is driving market share and growth for organized players. Up-trading is visible across product segments, as consumers are aspiring for high-end products. Asian Paints and Berger have been very aggressive on project sales in the last one year. . Among zones, East is among the best growing markets led by West Bengal, Odisha, Assam and Bihar. North has seen mixed trends with healthy growth in UP, while growth is slow in Delhi, Punjab, etc. In the West, the festive season has fueled demand in select markets like Mumbai, Pune, Gujarat, while South demand has been impacted by unseasonal rains in Tamil Nadu and Karnataka. But, growth rate is resilient in Kerala and AP. . In the decorative space, Asian Paints has outpaced competition by a huge mile driven by its superior brand equity, aggressive marketing strategies and superior reach. Berger is giving tough competition to Asian paints in the East, while Kansai is gaining presence in markets like UP, Bihar, Madhya Pradesh and stabilizing operations in the West. . In industrial paints, Nippon and Jotun are slowly gaining traction in the projects space, but Kansai remains the leader in this space, followed by Asian Paints. . Dealer margin of Asian Paints are the lowest at 1.5-3%, but turns are higher, while other’s margins are in the same range of 3-6%. Brands like Jotun and Nippon are giving margins of 8-10% in order to expand their revenue base. . After initial round of price cut in Feb’15, Kansai Nerolac has effected another price cut of 1.5- 2% in the enamels portfolio in Nov’15 and Akzo Nobel also, cut its prices by 1.75% in Dec’15 in its oil based portfolio. While price cuts are minimal, all brands are resorting to promotional activities to improve demand, with Asian paints being the most aggressive. . Unorganized market in the paint industry in retail sales is not more than 10-15%, but there is high prominence of unorganized players in project sales. Un-organized is more prevalent in the low/economy-end segment like putty and primer. However, builders prefer to go with branded players at the time of final coat. . On credit terms, Asian Paints works on cash against delivery, while other players give credit for 5-15 days, depending upon the size of the dealer. If the size of the dealer is small then even other players do not give any credit.
Key comments – Interaction with Kansai Nerolac “Demand sentiments in decorative paints have improved in the last few months and expect trends to remain healthy in the near term. Industrial paint demand has been resilient led by 2-wheelers, while gradual uptick in 4-wheelers will sustain growth momentum in automotive paints” “Believes paint industry can continue to grow in double digits, driven by multiple triggers – penetration, improving visibility, shorter re-painting cycle (now at 5-6 years) and premiumisation.” “Emulsions will continue to grow at a faster pace than Enamels, as there is faster shift to water based paints.” In the low/economy segment, Wall Putty is a big opportunity and will continue to grow at a healthy pace, given high un-organized presence” “Was ahead of the pack in price cuts (effected 1.5-2% price cut in decorative enamels in Nov’15). Believe, there is limited scope for price cuts from hereon, given the currency depreciation. Here on, mix improvement and operating leverage is important for EBITDA margin improvement”
Emkay Research | December 24, 2015 2
Building Products India Equity Research | Channel Checks
Exhibit 1: Regional Trends on Decorative Paint segment suggest East is among the fastest growing, followed by North Paints West North South East
Sample Size 8 9 6 5
Demand . Demand was upbeat . Demand trends mixed; . Unseasonal rains and . Remains fastest growing through festive season. Growth may be in mid- weak sentiment impacted market, led by West . Double digit growth in single digits. festive sales in Bangalore Bengal, Odisha and markets like Mumbai, . Strong growth in UP, but and Chennai. Bihar. Ahmedabad, Baroda, Delhi and Punjab saw . State divide continues to . Demand healthy since Jaipur, etc. weak trends. impact Hyderabad. Durga Puja; Growth is in . Strong growth in wall . Healthy demand visible . Kerala & AP grew in double digits. putty segment for premium products double digits . Real estate catching up well in pockets.
Competitive Intensity . Asian Paints is driving . Kansai is aggressive in . Competitive intensity . All brands have been market through strong promotions, but unable to rising among dealers, as focusing on this market, marketing initiatives. impact Asian Paints due there has been large given high growth . Kansai & Berger are to strong brand pull. number of dealer potential weak in Mumbai, but . Wall paper is gaining additions in the region. . Berger is giving tough steady in Rest of prominence. . Brands like Jotun and competition in economy Maharashtra. . Asian Paints turning Nippon are getting and premium to Asian . Asian Paints & Berger aggressive in project aggressive and giving Paints are strong in Gujarat & sales. higher dealer margins . Kansai is challenging Rajasthan (8-10%) to push sales. competition with innovation in premium segment
Discounting/Promotions . Promotional activity has . Kansai is aggressive in . No aggressive . Promotion activity has come down vs last 2 discounting. discounting/ promotional been same by all players. years. Many new . Asian Paints also started activity seen by any . Akzo Nobel has products were launched a scheme Bullet Raja, players. adopted distributor in last 2 years. which saw some traction. model in few markets, in . Asian Paints is order to drive demand aggressively marketing its Smart care range
Dealer Margins . Asian Paints Margin: 1.5-3%; Other prominent branded players: 3-6%
Premiumisation . Consumers up-trading to . Consumers up-trading to . Distemper sales have . Market is less penetrated premium brands to do premium brands to do slowed down. for paints. Thus, huge away with hassle in away with hassle in Consumers are scope for growth, both in painting jobs, as premium painting jobs, as premium receptive to premium economy and premium segment are of higher segment are of higher brands like Jotun, segment. quality & entail similar quality & entail similar Nippon and Akzo Nobel. . Dealers pushing shift labour cost labour cost These brands are from enamels to . Sales of brands like . Asian Paints Royale and growing well in South emulsions. Royale (Asian Paints), Kansai Nerolac Velvet region. Impressions (Kansai) Touch are the preferred . Dealers pushing shift have doubled in last 3-4 premium brands. from enamels to years emulsions.
Pricing . Kansai Nerolac effected further price cut of 1.5-2% in Nov’ 2015 (enamel portfolio), Akzo Nobel reduced prices by 1.75% in oil based portfolio. . No price cuts by Asian Paints and Berger Paints, post March 2015.
Preferred Brands . Asian Paints is preferred . Kansai is aggressively . Competitive intensity is . Berger is giving tough choice of consumers competing with Asian high among organized competition to Asian . Berger and Kansai is Paints, but AP is still the players…Asian Paints is Paints. slowing picking up, but leader by a large margin the leader, but strong . Good presence of difficult to challenge Asian . competition from Berger, unorganized players as Paints Akzo, Nippon, etc. well Source: Company, Emkay Research
Emkay Research | December 24, 2015 3
Building Products India Equity Research | Channel Checks
Sanitaryware/Faucets – Recovery still in slow mode
We interacted with about 27 dealers in the sanitaryware/faucets space across regions in India to assess the demand trends regarding the current demand trends, competitive landscape, pricing & promotional strategies and other key parameters. Overall, trends suggest, weakness in demand persists across all categories owing to weak real estate activities and slow income growth. Price increases and up-trading is driving 8-10% growth in the sanitaryware market, while volume are either flat or growing in low single digits. Given the weak demand conditions, most players are adding new product lines to their portfolio in order to improve growth profile. Hindware is facing tough competition from Cera and Jaguar (new entrant in the sanitaryware space). The faucets market is growing at a healthy pace of 15-20%, driven by increased penetration of newer players like HSIL and Cera and rising share of replacement market. . Real estate activity across the country remains benign, thereby impacting growth of building product categories like sanitaryware, tiles and faucets. However, real estate activity is resilient in pockets of East and South (Andhra Pradesh and Kerala). . Brand preference of tiles/sanitaryware/faucets depends upon the inventory position of the builder. For completed projects, brand preference by the builder is less, while for projects with high unsold inventory, builders attract customers with premium brands. . Growth in Sanitaryware segment is supported by price increases and mix improvement, but volumes are flat to low single digits. HSIL remains the market leader followed by Cera, but the gap between the two is narrowing down. . Geography wise, growth in sanitaryware segment is in mid-teens in Kerala, West Bengal, Odisha, Bihar & Jharkhand. Growth is flat to negative in markets like Maharashtra, Delhi, Punjab, etc. . Architects in the West and North market prefer Hindware brand, while in projects/institutional segment, there is strong image of Cera and Jaguar. . Jaguar has turned aggressive in sanitaryware and dealers are pushing their products in the trade for 2 reasons: 1) higher margins in Jaguar (8-10%) vs HSIL (3-5%) and 2) Better quality (whiteness better as compared to HSIL). . There is strong wave of up-trading in the sanitaryware space, owing to rising lifestyle of the consumers. In the premium range, consumers prefer Hindware Art & Italian collection, whereas, Jaguar and Cera are preferred brands in mid and economy segment. . Replacement market has huge growth potential, but as of now, growth is restricted to metros & urban centres. However, replacement demand is slowly picking up in markets like Gujarat, and pockets of South, owing to the improving lifestyle effect and rising income levels. . Across India, about 40-50% of the market is unorganized and there is rising prominence of regional brands, who are expanding their retail network. Many new/regional players like Varmora and Kerovit (Kajaria) are getting aggressive in the trade. . Faucets is an under-penetrated market for organized players, except Jaguar. Companies like HSIL and Cera are aggressively tapping this segment for growth. HSIL and Cera are growing at 15-20% in this segment, aided by a low base and increased penetration. Moreover, rising replacement demand in faucets is also driving growth. . Dealers are earning thin margins in case of tiles compared to almost double the margins for Sanitaryware and Faucets. However, when it comes to retail segment, margins are healthy for tiles, compared to Sanitaryware and Faucets.
Key comments – Interaction with Cera Sanitaryware “Sustained moderate growth trends in realty market have impacted growth of building product companies, especially those, who have high presence in metros. Tier 2/3 cities have projects lined up, but moving at a slow pace. However, demand in Tier 2/3 is still resilient, which is aiding growth for companies focused on value segment.” “Real estate activity in pockets of South has been resilient, driving demand for sanitaryware, faucets, tiles, etc. East remains the most virgin markets with healthy demand from markets like Odisha, West Bengal and North eastern states.”
“Believe building products demand could be in consolidation phase until H1FY17. Till then, companies would focus on expanding distribution and entry in new product segments/categories.”
“Growth potential in faucets is immense owing to high presence of un-organized players. Thus, organized players have been expanding their footprints in these categories, in order to offset the slowdown in the sanitaryware and tiles segment.”
Emkay Research | December 24, 2015 4
Building Products India Equity Research | Channel Checks
Exhibit 2: Regional trends in Sanitaryware/faucets segment suggest that slowing real estate activity has hampered growth in the segment Sanitaryware West North South East Sample Size 9 7 5 6 Demand . Slow real estate activity . Volumes are flat in . Post festive season, . Market should have impacting sanitaryware. sanitaryware, HSIL faces demand has seen grown by 12-15%, both Jaguar is aggressively tough competition from traction. Markets like in sanitaryware and competing with HSIL. Cera, Jaguar and new Kerala growing strong. faucets. Increasing reach . Players pushing faucets players. . Faucets have seen steady is aiding growth in the to maintain overall . Faucets are growing at a growth. segment. growth. Faucets growth healthy 10-15%, led by at 15-20%. replacement demand.
Competitive Intensity . Architects prefer Hindware . Architects prefer Hindware . E-com is fast gaining in . Parryware/Roca is in premium segment; in premium segment; this category, which has aggressive in pricing and Prefer Cera and Jaguar in Prefer Cera and Jaguar in impacted growth of promotional activity in projects projects dealers. retail trade. . New/regional players like . In Retail, Jaguar is gaining . Cera is growing strong in . All players are growing Varmora and Kerovit preference in mid and Kerala and Andhra well in this region, led by (Kajaria) are getting premium segment as Pradesh. Jaguar is also penetration and new aggressive in trade. compared to HSIL. aggressive in the trade. products.
Discounting / . 5-6% discount for selected . No aggressive . No aggressive . Jaguar aggressive on Promotions moving products. discounting/ promotional discounting/ promotional promotions in terms of activity seen by any activity seen by any hoardings, meets etc. player. player. . Hindware has now started some promotional activity in high end products like free coin etc.
Distributor Margins . Sanitaryware: 3-5% for HSIL & Cera and 8-10% for Jaguar . Faucets: 5-6%
Premiumisation . Premium (Italian) range of . Premium end of products . Premium end of products . Up-trading of product products is seeing healthy doing well, Italian doing well, Italian seen as people aspire to growth. collection of Hindware and collection of Hindware and use high end products. Jaguar are strong Jaguar are strong Consumer prefer Jaguar competitors in that competitors in that in premium range due to segment. segment. better whiteness.
Pricing . Price hike of 5-7% taken by HSIL in July15. No pricing action by Cera for last 12 months
Preferred Brands . Sanitaryware: Hindware, . Sanitaryware: Hindware . Sanitaryware: Cera, . Sanitaryware: Parryware Cera, Jaguar . Faucets: Jaguar Hindware & HSIL . Faucets: Jaguar . Faucets: Jaguar . Faucets: Jaguar Source: Company, Emkay Research
Emkay Research | December 24, 2015 5
Building Products India Equity Research | Channel Checks
Consumer Electricals – Industrial picking up, LED strong
We interacted with 34 dealers across India in the consumer electrical space to assess the current demand trends, competitive landscape, pricing & promotional strategies and other key parameters. Demand signals are mixed, with upbeat commentary on industrial activity and muted trends in retail segment. Dealerships have reported growth of 7-8%, on the back of LED lighting and industrial cables. Cables & wires have seen pent up demand owing to rise in industrial activity in few pockets, but significant price correction in copper prices have impacted value growth. In the retail segment, LED is the only growth segment, largely driven by rapid shift from CFL to LED lighting. Consumer Appliances and fans have seen steady growth. However, other appliances sales have been impacted due to rising significance of e-commerce.
Cables and Wires . This segment has reported healthy double digit volume growth on the back of rise in industrial activity, but significant fall in copper prices (30-40%) has impacted overall revenue growth. . Among brands, Polycab remains one of the strongest players in the West & North, followed by KEI, RR Cables, Havells and Finolex Cables. Polycab is among the cheapest followed by KEI, while Havells and Finolex Cables are priced at a premium to the other brands. . Polycab is getting aggressive on project sales through steep price cuts. However, Havells has maintained its pricing premium in the market. . Inventory levels across dealers have shrunk from 1 month to about 2-3 weeks, owing to volatile copper prices. Price revision happens normally every 15 days vs a month earlier.
Lighting & Fixtures . Growth has been marginally positive, as sharp growth in LED (+50%) has been offset by equivalent fall in CFL sales (30-40%). However, for most dealers, share of LED is now close to 50-60% of their business vs 20-30% 2 years back. . Dealers believe CFL sales may continue to decline atleast for another year before the segment bottoms out. There is rapid growth, both in organized as well as unorganized segment in LED lighting. While prices in LED have declined by over 50%, the price differential between unorganized and organized is still 70-100%. . While margins are more lucrative in LED as compared to CFL, discounting is also high in LED. Post discounting, margin difference between CFL and LED is 300-500 bps. . The new BIS norms were passed in November. This is beneficial for organised players as the cost advantage of Chinese manufacturers/suppliers to India may diminish, as will their ability to undercut vs Indian players. The new norms will help weed out inferior quality LED products from the market and bring some sanity in pricing mechanism of LED market. . Unorganized market is still very high at about 50-60% in lightning and fixtures segment. Fastest growing segments of LED and decorative lights have a large unorganized market. Margins in decorative lighting is very high compared to traditional lighting.
Fans & Consumer Appliances . Overall growth in appliances has been muted barring fans, as the emergence of e-commerce and overall weak sentiments have impacted growth rates of dealers. . Fans have posted steady 10-15% growth rate driven by pricing and mix, while volume growth has been in low single digits. Crompton Greaves and Orient are dominant players in economy segment and have been growing at a healthy pace. Havells and Crompton Greaves compete in the premium segment, with Havells reporting stronger growth. . In fans, economy segment (Price range Rs 700-1200) is dominated by Crompton Greaves, Orient, Bajaj and Khaitan, while in mid premium (Price range Rs 1400-2500) and premium (Price range Rs 2500+), Havells is among the top players in this space. . On an average, companies resort to price increases of 5-7% in fans segment, which is one of the key drivers for growth. . Companies have been adding new products in their appliances portfolio, in order to offset the slow growth in the segment. Products like water heaters, mixer, grinders and irons have been growing well, whereas preferred brands are Philips, Bajaj and Havells in the branded space.
Emkay Research | December 24, 2015 6
Building Products India Equity Research | Channel Checks
Key comments – Interaction with Havells India “Demand trends have improved in industrial cables (gradual uptick in industrial & infrastructure activity) and LED lighting (rapid shift from CFL to LED), while most other consumer segments continue to remain benign.” “Slow and steady uptick in demand and cash flows improving in the trade channel is giving confidence of better growth trends in H2FY16.” “In LED segment, both- organized as well as unorganized players, are growing at steadfast pace, while there are also many new players entering LED space. While LED prices have come down sharply over the years, the price differential between organized & unorganized players is still 1.5-2x. LED is now 45-50% lighting segment and endeavor is to move to 60-70% of lighting revenues.” “Havells continues to beat industry growth on the back of deeper penetration, enhancing brand equity and focus on premiumisation via technological innovation (Euro 2 range in Switchgears, home automation switches, inverter loaded premium fans, mobile-operated switches, etc).”
Key comments – Interaction with V-Guard Industries “Against expectations of pick-up in demand post Sep’15, sentiments still continue to remain tepid owing to slow infrastructure activity and sustained weakness in real estate demand” “Demand in festive season was steady, but lower than expected, but should still close with 10% revenue growth in FY16. Categories like white goods have done well, resulting in steady growth for stabilizers. Company is strengthening base in appliances by introducing new models and focusing on premium products.” “For V-guard, growth has slowed down in South India with markets like Telangana and Tamilnadu being impacted by state divide and ongoing flood situation. Regions in Non-South markets like UP, West Bengal, Odisha, Assam, NCR, etc have been growing at a healthy pace.” “At a time when the overall economic activity is slow, Innovation remains the key driver to growth. Company is looking at expanding into categories like modular switches, home appliances, house wiring cables, domestic switchgears, etc.”
Emkay Research | December 24, 2015 7
Building Products India Equity Research | Channel Checks
Exhibit 3: Regional trends in Consumer electrical suggest that improving activity in industrials and strong growth in LED are positive triggers West North South East Sample Size 11 8 7 8 Cables and Wires Demand . Volume growth has been healthy. . Market has grown by 10-15% in . Market demand has been slow, . Sales have been muted due to Sales growth impacted by price cables and wires. both in Industrial as well as liquidity crunch in market. reductions. . Industrial cable doing much better commercial. . Post festive season, there have than commercial. been some visible green shoots. Competitive . Polycab remains one of the . Havells is a strong force, despite . Finolex and V-Guard are strong . Finolex and Havells are major Intensity strongest players in commercial as 10% premium to market. competitors in the region. players in this region with similar well as Industrial cables. . Polycab is aggressive in project . Polycab with its aggressive pricing growth structure. . Havells and Finolex are at the sales and gaining market share. strategy has made strong inroads in premium end in wires, ~15% the market. costlier than Polycab. Discounting / . Polycab is very aggressive in . Promotional activity of Havells is . Polycab and Finolex are aggressive . No major change in discounting Promotions discounting (even 60%). the best. in project specific discounts. seen both in retail as well as project . For retail, discounting offered by . Polycab aggressive in discounting Discount offered by these players sales. Havells is ~45% while for Polycab, but unable to compete against for projects is ~60%. . Promotional activity normal, barring it is ~50%. Havells due to strong brand pull. some schemes by few players. Distributor . 1.5-2% additional discounting . 2-3% additional discounting . 2% additional discounting . 2% additional discounting Margins depending on payment terms depending on payment terms depending on payment terms depending on payment terms Pricing . Price reduction by ~40% in last one year, as copper prices have fallen sharply. Preferred Brands . Polycab is the clear leader . Havells, KEI, Polycab are preferred . Finolex, V-guard, Polycab, Havells, . Finolex, Havells, Polycab are brands in that sequence. RR Cables are preferred brands. preferred brands in that sequence. . Nakoda, a regional player also has strong presence. Lighting & Fixtures Demand . Overall demand has been stable. . Growth is healthy at ~10%, led by . LED growth is healthy. However, . Overall demand has been stable. LED segment has seen healthy LED. after Diwali, market has slowed LED segment has seen healthy growth, while CFL has de-grown. down. growth, while CFL has de-grown. Competitive . Unorganized market very high . Compaq giving strong competition . Havells is the market leader, with . Unorganized market very high Intensity (60%). Major players are Chinese to Havells in LED, especially retail strong competition from Phillips in (60%). Major players are Chinese imports at a cheaper price. sales. retail segment. imports at a cheaper price. . Wipro, Bajaj and Phillips are . Havells is a preferred brand in . Wipro, Bajaj and Phillips are . Havells is the market leader in LED aggressive in project sales and Industrials. aggressive in project sales and segment. offer high level of discounting. offer high level of discounting. Discounting / . No aggressive discounting/ . Promotional activity of Havells is . No aggressive discounting/ . No aggressive discounting/ Promotions promotional activity seen by any superior to any other competitor. promotional activity seen by any promotional activity seen by any players. player. player. Distributor . 12-15% margin in LED, while in . 10-12% margin in LED, while in . 10-12% margin in LED, while in . 12-15% margin in LED, while in Margins CFL, margins are ~8-10% CFL, margins are ~7-8% CFL, margins are ~7-8% CFL, margins are ~7-8% Premiumisation . Premiumisation depends upon the design of lighting. Consumer pay premium for good designs. Strong shift from traditional lighting to decorative lighting Pricing . In LED, prices have corrected by 50% in last one year, but price differential between unorganized and organized is still 1.5-2x. . Huge price variations in decorative lighting, thus huge margins in this segment. High presence of unorganized (almost 70-80%) Preferred . Phillips, Havells are preferred . Crompton, Havells, Phillips are . Havells and Phillips are the . Havells and Philips are preferred Brands brands in retail space, while Wipro preferred brands in that sequence. preferred brands in LED. brand in LED and Phillips are leaders in projects. Fans/Consumer Appliances Demand . Fans have seen steady growth in . Marginal de-growth vs previous . Fans have seen steady growth in . Overall demand is slow vs mid-teens, led by premiumisation year. mid-teens, led by premiumisation previous year. and price increase. . New demand impacted by sluggish and price increase. . New demand impacted by sluggish . Other consumer durables’ sales real estate activity and replacement . Other consumer durables’ sales real estate activity and replacement impacted by e-Com channel. demand muted due to overall impacted by e-Com channel. demand muted due to overall challenging environment. challenging environment. Competitive . Unorganized market quite high . High unorganized market resulting . Market is open to try new brands; . High unorganized market resulting Intensity ~50% resulting in high competition. in intense competitive intensity. Havells, Crompton & V-guard are in intense competitive intensity. . Online is a big threat, given price fierce competitors differential vs traditional dealers. . Online is a big threat, given price differential vs traditional dealers. Distributor . Low for economy fans 2-5%; Margins are about 5-7% for premium fans Margins Premiumisation . In Fans, rapid shift from economy to premium segment. Brands like Havells and Crompton driving premium segment . In appliances, consumers more driven by utility value, but gradual shift to quality products & brands is aiding premiumisation Pricing/ . Havells present only in premium . In Fans, Bajaj and Khaitan are . Crompton Greaves and Havells are . Crompton Greaves and Havells are Competition fans (priced 5-7% higher than performing well in economy. In mid- leaders in fans. leaders in fan. peers). Crompton and Orient are premium and premium segment, . Havells is strong in premium range. . Havells is strong in mid-premium to strong in economy segment Havells and Orient are strong premium range. Preferred . In fans, Crompton Greaves, Orient, . In Fans, Crompton Greaves, . In Fans, Havells & Orient are . Havells & Crompton Greaves are Brands (Fans) Havells are preferred brands. Havells & Orient preferred brands preferred brands. preferred brands. Source: Company, Emkay Research
Emkay Research | December 24, 2015 8
Building Products India Equity Research | Channel Checks
Companies Section
Asian Paints Dealer checks indicated volume trends have been healthy (in double digits) in festive season and momentum has continued post festive season as well. We expect growth momentum to sustain in ensuing quarters, led by improving urban demand sentiments and likely rise in income bands (post 7th pay commission); however, slowing rural demand and low real estate activity are few concerns. Benign input costs will ensure margin sustenance, but pick up in volumes and better mix are key levers for margin improvement. We maintain our positive bias on Asian Paints and believe it is among the best placed in paints category to ride the uptick in economic activity. We have BUY with target price of Rs 885 (35x FY17E).
Exhibit 4: Financial Snapshot (Consolidated) (Rs mn) FY16 FY17 FY15 FY16E FY17E Net Sales 1,09,386 1,27,148 1,41,828 1,56,420 1,87,884 EBITDA 17,379 20,071 22,354 28,309 36,589 EBITDA Margin (%) 15.9 15.8 15.8 18.1 19.5 APAT 11,139 12,288 14,227 18,341 24,196 EPS (Rs) 11.6 12.8 14.8 19.1 25.2 EPS (% chg) 12.7 10.3 15.8 28.9 31.9 ROE (%) 36.3 33.1 32.4 35.0 37.9 P/E (x) 75.9 68.8 59.4 46.1 34.9 EV/EBITDA (x) 48.3 41.7 37.4 29.2 22.3 P/BV (x) 25.0 20.9 17.8 14.8 12.0 Source: Company, Emkay Research
Berger Paints Dealer checks indicated volume trends have been healthy (in double digits) in festive season and momentum has continued post festive season as well. Company efforts to increase share of decorative segment in the mix and increase emulsions within decorative segment is clearly visible. Improving sentiments in urban demand coupled with rise in income bands post release of 7th Pay commission are positive triggers. Our core arguments are (1) gains from scale & size (2) shift in product portfolio and (3) retaining market share. We have an Accumulate rating with price target of Rs 236/share (32x FY17E).
Exhibit 5: Financial Snapshot (Consolidated) (Rs mn) FY16 FY17 FY15 FY16E FY17E Net Sales 33,464 38,697 43,221 47,905 57,301 EBITDA 3,711 4,378 5,221 6,680 8,589 EBITDA Margin (%) 11.1 11.3 12.1 13.9 15.0 APAT 2,184 2,494 2,647 3,816 5,115 EPS (Rs) 3.2 3.6 3.8 5.5 7.4 EPS (% chg) 21.1 14.1 6.1 44.2 34.0 ROE (%) 25.1 24.1 22.3 27.7 30.7 P/E (x) 79.9 70.0 66.0 45.8 34.1 EV/EBITDA (x) 47.8 40.4 34.0 26.2 20.0 P/BV (x) 18.3 15.6 13.9 11.6 9.5
Source: Company, Emkay Research
Havells India Channel checks depicted positivity in industrial activity, thereby improving volume growth trends in cables & wires. Further, rapid shift from CFL to LED will be another growth driver in lighting segment in ensuing quarters. Retail is still lukewarm, owing to weak real estate activity and pick- up in economic activity is imperative for revenue growth. Havells is well-placed to benefit from likely uptick in economic sentiments, given its concerted focus on distribution expansion and aggressive branding/marketing initiatives. Further, divestment of Sylvania is a positive development for Havells, as Sylvania operations was a drag on consolidated financials. Healthy cash flows, return ratios and higher dividend payouts gives valuation comfort. We value Havells on standalone business (27x FY18 EPS) and assign Rs 17 cash value to proceeds from divestment of Havells Malta. We have a BUY rating with target price of Rs 355.
Emkay Research | December 24, 2015 9
Building Products India Equity Research | Channel Checks
Exhibit 6: Financial Snapshot (Consolidated) (Rs mn) FY16 FY17 FY15 FY16E FY17E Net Sales 72,479 81,858 85,694 87,162 96,263 EBITDA 6,916 7,790 7,653 9,122 11,116 EBITDA Margin (%) 9.5 9.5 8.9 10.5 11.5 APAT 3,870 4,463 3,854 5,463 7,288 EPS (Rs) 6.2 7.2 6.2 8.8 11.7 EPS (% chg) 4.6 15.3 (13.6) 41.8 33.4 ROE (%) 32.3 28.7 22.1 28.0 30.1 P/E (x) 49.0 42.5 49.2 34.7 26.0 EV/EBITDA (x) 27.9 24.3 24.2 20.0 15.0 P/BV (x) 13.2 11.4 10.4 9.1 6.9
Source: Company, Emkay Research
Pidilite Industries Volume trends have been lukewarm owing to weakness in demand sentiments, but strong gross and EBITDA margins has more than compensated for volume growth. Hereon, base is favourable, but uptick in adhesives still remain muted, while pace of growth in construction chemicals has also moderated. Strong brand franchisee, clear pricing power along with healthy innovation pipeline and improving trends in urban demand are key drivers. Benign crude prices will ensure margin sustenance, but healthy volumes can further improve margins. Improvement in volume trends should leg up multiples in line with paint companies. We maintain positive bias on Pidilite and have Accumulate rating with target price of Rs 600/share (33.5x FY17E).
Exhibit 7: Financial Snapshot (Consolidated) (Rs mn) FY16 FY17 FY15 FY16E FY17E Net Sales 36,579 42,559 48,204 52,905 61,600 EBITDA 6,005 6,723 7,766 11,330 14,065 EBITDA Margin (%) 16.3 15.7 16.0 21.3 22.7 APAT 4,221 4,516 5,175 7,300 9,122 EPS (Rs) 8.2 8.8 10.1 14.2 17.8 EPS (% chg) 28.9 7.0 14.6 41.1 25.0 ROE (%) 28.4 25.1 24.5 28.8 29.4 P/E (x) 65.8 61.5 53.7 38.0 30.4 EV/EBITDA (x) 46.2 41.1 35.7 24.4 19.3 P/BV (x) 16.8 14.2 12.2 9.9 8.1
Source: Company, Emkay Research
HSIL Dealer checks depicted that growth trends in sanitaryware are muted owing to slowing real estate activities. Price hikes, mix and healthy growth in faucets (on low base) is aiding revenue growth. Moreover, competitive intensity could weigh on revenue growth. Weka real estate business could continue to weigh on demand sentiments, despite favourable base. Capex in new segments (pipes & closures) will start from H2FY16, which could also impact financials. Given relatively cheaper valuation and strong brand franchise of Hindware, we have a BUY rating with SOTP target price of Rs 400/share.
Exhibit 8: Financial Snapshot (Consolidated) (Rs mn) FY16 FY17 FY15 FY16E FY17E Net Sales 17,367 18,279 19,421 20,711 23,611 EBITDA 2,607 2,581 3,390 3,647 4,346 EBITDA Margin (%) 14.8 13.9 17.1 17.6 18.4 APAT 348 340 854 1,193 1,538 EPS (Rs) 5.3 5.1 11.8 16.5 21.3 EPS (% chg) (64.1) (2.4) 129.7 39.6 29.0 ROE (%) 7.4 7.0 14.0 15.0 17.1 P/E (x) 56.6 58.0 25.2 18.1 14.0 EV/EBITDA (x) 10.9 11.1 8.0 7.2 6.0 P/BV (x) 4.0 4.1 2.9 2.6 2.3
Source: Company, Emkay Research
Emkay Research | December 24, 2015 10
Building Products India Equity Research | Channel Checks
Valuation Band
Exhibit 9: Asian Paints P/E Band Exhibit 10: Berger Paints P/E Band
1000 350 24x 300 800 32x 250 18x 600 24x 200 400 16x 150 12x 100 200 6x 8x 50
0 0
Jun-14 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-15
Jun-08 Jun-15 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Dec-06 Dec-02 Dec-03 Dec-04 Dec-05 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
Dec-12 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-13 Dec-14 Dec-15
Source: Company, Emkay Research Source: Company, Emkay Research
Exhibit 11: Havells P/E Band Exhibit 12: Pidilite Industries P/E band 400 32x 700 600 300 24x 500 32x 400 24x 200 16x 300 16x 200 8x 100 8x 100 0
0
Jun-06 Jun-03 Jun-04 Jun-05 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
Jun-13 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-14 Jun-15
Dec-08 Dec-12 Dec-07 Dec-09 Dec-10 Dec-11 Dec-13 Dec-14 Dec-15 Dec-06 Source: Company, Emkay Research Source: Company, Emkay Research
Exhibit 13: HSIL P/E Band
700 600 16x 500 12x 400 300 8x 200 4x 100
0
Jun-06 Jun-08 Jun-03 Jun-04 Jun-05 Jun-07 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-03 Source: Company, Emkay Research
Emkay Research | December 24, 2015 11
Building Products India Equity Research | Channel Checks
Building Products – Sector Valuations
Exhibit 14: Valuation Matrix Sales EBITDA PAT EV/EBI RoE RoCE FCF Yield Market Sales CAGR EBITDA CAGR PAT CAGR EPS P/E TDA (FY17) (FY17) (FY17) In Rs mn Cap Reco (FY17E) FY15-17E (FY17E) FY15-17E (FY17E) FY15-17E (FY17) (FY17E) (FY17E) % % % Paints/Adhesives Asian Paints 840257 Buy 187884 15.1% 36589 27.9% 24196 31.7% 25.2 34.0 22.6 37.9 49.6 2.1 Berger Paints 177634 Accumulate 57301 15.1% 8589 28.3% 5115 39.0% 7.4 29.8 18.2 30.7 34.4 3.1 Kansai Nerolac 138556 Not Rated 45131 12.4% 6881 23.5% 4404 26.8% 8.1 31.6 19.8 20.6 NR NR Akzo Noble 65706 Not Rated 29823 9.1% 3374 13.4% 2176 8.1% 47.8 28.7 18.3 22.0 NR NR Pidilite Industries 282074 Accumulate 61919 13.1% 14065 34.6% 9122 33.4% 17.8 29.6 19.2 29.4 40.6 3.0 Consumer Electrical Havells 191124 Buy 64233 10.7% 9515 16.5% 6411 17.4% 10.3 29.7 17.7 21.3 39.4 2.8 V-Guard 27924 Not Rated 22658 13.9% 1982 21.8% 1230 31.9% 41.1 22.7 14.3 24.0 NR NR Bajaj Electricals 21563 Not Rated 55804 14.8% 3556 99.9% 1630 NA 16.4 13.0 7.0 18.9 NR NR Sanitaryware/Faucets/Tiles HSIL 21906 Buy 25798 14.1% 4811 20.3% 2044 54.7% 28.3 10.7 5.7 19.2 21.0 2.7 Cera Sanitaryware 25687 Not Rated 11882 20.3% 1747 20.6% 1027 23.2% 79.2 25.0 14.4 22.0 NR NR Kajaria Ceramics 75019 Accumulate 28754 14.9% 5285 22.5% 2771 23.6% 34.9 27.2 14.1 25.9 32.1 2.5 Somany Ceramics 14567 Not Rated 21278 17.4% 1621 21.8% 808 32.0% 21.1 17.8 10.0 23.4 NR NR Ply Century Ply Industries 389200 Accumulate 19891 13.0% 3693 22.0% 2121 19.0% 20.5 18.4 12.1 37.8 28.6 1.4 Green Ply Industries 226592 Not Rated 19326 11.0% 2859 18.0% 1517 12.0% 63.2 14.9 8.7 22.2 NR NR Greenlam Industries 146991 Not Rated 11768 21.0% 1431 24.0% 529 41.0% 21.9 28.0 12.1 18.6 NR NR Source: Company, Emkay Research
Emkay Research | December 24, 2015 12
Building Products India Equity Research | Channel Checks
Emkay Rating Distribution BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months. ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months. HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months. SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
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Emkay Research | December 24, 2015 www.emkayglobal.com 13