January 04 , 201 3 KANSAIa NEROLAC PAINTS LTD BUY Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs Strong Buy Established way back in 1920, Kansai Nerolac Paints Ltd . (KNPL) is engaged in the Buy manufacturing of paints having products ranging across decorative paints, high performance Hold coatings, automotive coatings, general industrial coatings and specialty coatings. The Reduce company meets nearly 90% of OEM paint demand and is a key player in decorative paints. The Sell Strong Buy – Expected Returns > 20% p.a. company’s largest client for industrial paints demand is Maruti Suzuki. Buy – Expected Returns from 10 to 20% p.a. Hold – Expected Returns from 0 % to 10% p.a. • With the easing of interest rate cycle, demand for automobiles are expected to ramp up Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk Sell – Returns < 0 % which will lead to increase in demand for paints. We expected top-line and bottom-line to grow at a healthy CAGR of 17.6% and 19.3% respectively over FY12 and FY14. • Demand for decorative paint is expected to increase in the upcoming years mainly from re- paint segment due to awareness of advantages of lead free paint and will be catered by KNPL. Improving economic conditions and revival in industrial growth backed by tamed inflation and expected decline in interest rates to further support increase in paint demand. STOCK DATA BSE / NSE Code 500165 / KANSAINER • KNPL always work in congruence to the customer needs. It has been coming out with new Bloomberg Code KNPL IN EQUITY No. of Shares (Mn) 53.9 range of products in order to meet customer demands in the Automotive, Auto Refinish and Sensex / Nifty 19,714.2 / 5,993.3 Performance Coatings segments of the markets. This is expected to help the company to PRICE DATA maintain its leadership position and retain its customers. CMP Rs (02nd Jan' 13) 1110 Beta • 0.16 The company’s margins were under pressure in the last few quarters due to higher raw- Market Cap (Rs mn) 59,821 material prices and as it failed to pass on the higher cost to the customers. However, with 52 Week High-low 1039.9 - 840.0 Average Daily Volume 2926 the correction of major raw materials corrected significantly (~15% correction in titanium STOCK RETURN (%) dioxide prices), we expect the margin to improve from the current levels. 30D 3M 6M 1Y KNPL 2.6% 19.2% 18.5% 30.3% • The market for the paints segment is expected to grow at 12-13% for the next five years i.e. Sensex 1.9% 4.7% 13.3% 27.0% at 1.5 to 2 times the real GDP. This indicates that there is growth opportunity for KNPL and Nifty 1.9% 4.8% 13.5% 29.3% SHARE HOLDING PATTERN (%) the company is well equipped for FY13. The industry size for paints is estimated at Rs 291bn Promoter 69.3 wherein the organized sector accounts for 65% while the remaining is with the unorganized Institution 12.4 Others 18.3 sector comprising of around two thousand small scale paint units. Total 100.0 Based on FY14 P/E multiple of 22.0x, the fair value for the company work out to 1 Year Price Performance (Rel. to Sensex) 138 Rs 1242.7 Sensex KNPL Financial Snapshot 126 Projections (Rs Mn) FY07A FY08A FY09A FY10A FY11A FY12A FY13E FY14E Revenue 12,875 14,041 14,705 18,220 22,555 27,312 32,326 37,754 Y-o-Y Growth % 9.1% 4.7% 23.9% 23.8% 21.1% 18.4% 16.8% 114 EBITDA 1,955 2,114 1,796 2,841 3,386 3,616 4,195 5,023 Y-o-Y Growth % 8.1% -15.0% 58.1% 19.2% 6.8% 16.0% 19.7% 102 Adj. PAT 1,036 1,102 961 1,626 1,865 2,086 2,425 2,966 Y-o-Y Growth % 6.3% -12.8% 69.2% 14.7% 11.8% 16.2% 22.4% EPS Rs 39.9 44.4 36.6 61.4 38.2 40.1 46.3 56.4 90 BVPS Rs 189.9 220.3 242.8 286.8 170.0 197.3 229.5 268.9 EBIDTA % 15.2% 15.1% 12.2% 15.6% 15.0% 13.2% 13.0% 13.3% NPM % 8.0% 7.8% 6.5% 8.9% 8.3% 7.6% 7.5% 7.9% ROE % 21.0% 20.2% 15.1% 21.4% 22.5% 20.3% 20.2% 21.0% PER x 23.9 19.7 P/B Ratio 4.8 4.1 www.fullertonsecurities.co.in Page | 1 January 04, 201 3 BUSINESS PROFILE KNPL is the second largest paint company in India and market leader in industrial coatings. Its industrial coatings have a wide range of products in the Automotive, Powder, General Industrial and High performance Coatings space. The company is also an established brand in decorative paints. KNPL is the second largest paint company in India KNPL is a subsidiary of Japan based Kansai Paint Company Limited, which is one of the top ten coating companies in the world. The technological edge of Kansai helps the company to constantly innovate and come up with products that meet consumer need gaps. The company started its operation in the year 1920, as Gahagan Paints and Varnish Co. Ltd. in Mumbai. 1957: Goodlass Wall Pvt. Ltd grew popular as Goodlass Nerolac Paints (Pvt) Ltd. Also, it went public in the same year and established itself as Goodlass Nerolac Paints Ltd. 1976: Goodlass Nerolac Paints Ltd. became a part of the Tata Forbes Group on acquisition of a part of the foreign shareholdings by Forbes Gokak. 1983: Goodlass Nerolac Paints Ltd. strengthened itself by entering in technical collaboration agreements with Kansai Paint Co. Ltd, Japan and Nihon Tokushu Toryo Co. Ltd, Japan. 1999: Kansai Paint Co. Ltd, Japan took over the entire stake of Tata Forbes group and thus GNP became wholly owned subsidiary of Kansai Paint Company Ltd. 2006: On the 11th of July, Goodlass Paints Ltd. name has been changed to Kansai Nerolac Paints Ltd. The company is a The company has its manufacturing facilities at Lote in Maharashtra, Bawal at Haryana, Jainpur in UP, Chennai subsidiary of Japan based Kansai Paint Company and the latest state of the art plant at Hosur in Tamil Nadu. The geographical set up of the plants has been Limited advantageous in providing high service levels and supply chain efficiency, thus leading to customer satisfaction. The company has pioneered the launch of eco friendly, zero VOC, low VOC, lead free (no lead added) range of products for the decorative business. It has continued the focus on core brands with introduction of products like Lotus Touch and Little Master series of emulsions. The market for the paints segment is expected to grow at 12-13% for the next five years i.e. at 1.5 to 2 times the real GDP. This indicates that there is growth opportunity for KNPL and the company is well equipped for FY13. The industry size for paints is estimated at Rs 291bn, wherein the organized sector accounts for 65% while the remaining is with the unorganized sector comprising of around two thousand small scale paint units. The decorative paints segment accounts for Rs 225bn while industrial accounts for Rs 66bn of the total paint market. Recognizing the long term growth potential of the industry due to a series of long term favorable economic and demographic criteria, the company has continued to make strategic investments, which will help to preserve its leadership as well as ensure that its customers are served with the highest of standard. Manufacturing capacity expansions, reduction in carbon emissions, energy and water conservation, manage sustainability through The market for the paints segment is expected to environment friendly products, efficient supply chain, strong people processes and best in class IT systems are some of grow at 12-13% for the the long term strategic investments. However there remain few challenges that have to be met such as regulation of next five years environmental laws, market volatility, inflation, rising crude oil and other raw material prices, interest rates, political interruptions etc. However, KNPL is prepared to meet the challenges and sustain the leadership in the industrial segment and work towards creating leadership in the decorative business. www.fullertonsecurities.co.in Page | 2 January 04, 201 3 INVESTMENT RATIONALE • KNPL has made huge investments in Research & Development and always aimed at being one of the first in introducing new environment friendly products. Breakthrough technology and high quality across product KNPL has made huge segments have been the forte of the function and will enable the company to keep ahead of the competition. investments in Research & Development and always • The economic pressures are likely to remain and the markets may be volatile. One of the most important risk factors aimed at being one of the is sustainability of the business and changing customer choices. The company is prepared to handle it through first in introducing new environment friendly environment friendly products, world class technological innovations, speed of response and operational products excellence which are important attributes for risk handling. • Efficient manufacturing, strong supply chain, high quality raw materials, timely reach to the customers, working capital management, productivity enhancement, right inventory levels, talent retention, adherence to standard operating procedures are the cutting edge to overcome the risks and face the competitive environment, which we believe that the company is well equipped with to sustain its growth story.