Sie sind auf Seite 1von 93

Indulge in this finish

20 April 2016
BSE Sensex: 25844
Sector: Paints
Asian Paints
CMP (Rs)
Mkt Cap (Rsbn/USDm)

886
850/ 12,832

Target Price (Rs)

1,015

Change in TP (%)

NA

Potential from CMP (%)

14.6

Berger Paints India


CMP (Rs)
Mkt Cap (Rsbn/USDm)

251
174/2,627

Target Price (Rs)

299

Change in TP (%)

NA

Potential from CMP (%)

19.2

Kansai Nerolac Paints


CMP (Rs)
Mkt Cap (Rsbn/USDm)

304
174/2,476

Target Price (Rs)

313

Change in TP (%)

NA

Potential from CMP (%)

2.9

Akzo Nobel India


CMP (Rs)
Mkt Cap (Rsbn/USDm)

1,345
65/974

Target Price (Rs)

1,442

Change in TP (%)

NA

Potential from CMP (%)

7.2

We believe the Indian Paints industry is the best structural proxy to


play the themes of a sharp rise in urbanisation, improved disposable
incomes, low per capita consumption and meagre penetration in India.
Moreover, recent macro tailwinds such as the Seventh Pay
Commission, One Rank One Pension (OROP) scheme and likely good
monsoons are set to propel industry volume growth FY17 onwards.
Additionally, benign commodity prices and continued mix
improvement will drive gross margin improvement of 30-60bp for the
top-four players over FY16-18E. An oligopolistic structure and a stable
competitive landscape make the industry more attractive, thereby
increasing earnings visibility versus other consumer segments. We
factor in average 20% earnings CAGR over FY16-18E for the top-four
paint companies in India. We initiate coverage on Asian Paints
(APNT)/Berger Paints with Outperformer, and on Kansai Nerolac
Paints (KNPL)/Akzo Nobel India with Neutral rating.
Volume recovery underway: After a modest FY12-15, the top-three
paint companies in India have posted double-digit volume growth in
FY16. We expect the volume growth trajectory to accelerate as
structural factors such as increasing disposable incomes and low per
capita consumption combine with external triggers such as the Seventh
Pay Commission, OROP and likely good monsoons. We expect the topfour domestic paint companies to post an average volume CAGR of 13%
over FY16-18E.
Earnings/margin visibility high: The paints industry enjoys pricing
power and a stable competitive landscape, resulting in higher earnings
visibility. Consequently, paint companies posted healthy earnings
growth during periods of inflation/deflation, unlike other FMCG
businesses. Moreover, given that ~35-45% of the paint industrys raw
materials are crude linked, with benign crude oil prices, the companies
gross margin should expand for another two quarters. Overall, we
estimate 13-30% earnings CAGR for the top-four players over FY16-18E.
Premium justified; initiating with positive bias: We believe the industry
deserves premium multiples not only over international peers, but also
against domestic consumer staples companies. Further, given the
structural opportunity and strong growth visibility, we value the topfour paint companies on DCF. We prefer the top two companies with
improved high-margin decorative mix and superior financial metrics in
terms of volume growth, profitability and return ratios. We initiate
coverage on APNT/Berger Paints with Outperformer and on
KNPL/Akzo Nobel India with Neutral rating.

Comparative valuations-FY18E
Price

Mkt Cap

EPS

(Rs)

(Rs bn)

(Rs)

EPS CAGR
FY16-18E (%)

Outperformer

886

849.7

28.3

Outperformer

251

174.0

8.5

Neutral

304

164.0

Neutral

1,345

64.5

Companies

Reco

Asian Paints
Berger Paints India
Kansai Nerolac Paints
Akzo Nobel India

P/E EV/EBITDA

RoE

RoCE

(%)

(%)

20.4

35.8

44.1

17.6

30.4

37.1

31.5

19.7

19.5

23.7

23.4

14.0

23.1

28.0

(x)

(x)

20.2

31.3

29.7

29.7

9.7

19.1

56.7

13.1

Source: IDFC Securities Research

Harit Kapoor

Mehul Desai

harit.kapoor@idfc.com
91-22-662 22649

mehul.desai@idfc.com
91-22-662 22640

For Private Circulation only.

Important disclosures appear at the back of this report

INITIATING COVERAGE

Paints

Paints

INDULGE IN THIS FINISH


xx
INDIAN PAINTS INDUSTRY LEVERAGING INDIAS ECONOMIC GROWTH
Indian pants industry Strong correlation with nominal
GDP growth
Paints

Domestic paint industry has grown at a CAGR of 17% over


FY05-15

GDP

Overall paint (Rs bn)

35.0%

450

28.0%

360

21.0%

270

14.0%

180

406

10 yr CAGR of 17%

187

7.0%

90

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY05

FY06

FY15

FY14

FY13

FY12

FY11

FY10

0.0%

82

DECORATIVE PAINTS THE LIONS SHARE; ADRESSING A STRUCTURAL OPPORTUNITY!


Our analysis on the likely growth CAGR for the Organized Decorative Industry
Number of households in India in 2011 based on Census (m)

247

Estimated number of households in India in 2021 assuming 2.5% growth (m)

316

Carpet area assuming 100sqft per person (sqft)

500

Total area to be painted per household (3.5x the carpet area) (sqft)

1,750

Estimated base case cost per sqft (Rs)

10

Total cost per house (Rs)

17,500

Total addressable Deco Paint size in 2021 (Rs m)

5,533,165

% of Painted households by 2021 (%)

50

Total Deco Paint size in 2021 (Rs m)

276,6583

Total Deco Paint size assuming a 5 year repainting cycle (Rs m)

55,3317

Current estimated Decorative Paint industry size in 2016 (Rs m)

301,252

Consequent growth CAGR likely in the next 5 years (%)

12.9

Estimated organized industry share in 2016 (assuming 65% share)

195,814

Estimated organized industry share in 2021 (assuming 70% stake)

387,322

5 year decorative organized industry CAGR

15%

+
(%)

Decorative paints

Industrial paints

100.0
75.0
The two leading companies
have historically had a
greater focus and share of
the decorative segment

50.0
25.0
0.0
Overall

Asian Paints

Berger

Kansai
Nerolac

Akzo Nobel

+
2| IDFC SECURITIES

20 April 2016

Paints
Revenue CAGR - FY05-15 reflects this adequately

19%

As does the earnings CAGR - FY05-15

23%

18%

16%
Asian
Paints

Berger
Paints

Asian
Paints

15%

13%

Kansai
Nerolac

Akzo Nobel
India

Berger
Paints

12%

12%

Akzo Nobel
India

Kansai
Nerolac

+
Crude oil prices continue to remain benign

Titanium Dioxide prices have remained stable


(Rs/kg)
140

Brent Crude oil

(USD/barrel)
80
60

TiO2

130

40
120

20

Mar-16

Jan-16

Feb-16

Dec-15

Oct-15

Nov-15

Sep-15

Jul-15

Aug-15

Jun-15

Apr-15

May-15

Mar-15

Jan-15

Feb-15

Mar-16

Jan-16

Feb-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Jan-15

110
Feb-15

Getting set for a higher growth trajectory than the recent past!
Expect a pickup in the revenue growth across players
FY12-15

And a similar beat on EBITDA growth as well

FY16-18E

18.0%

30%

13.5%

24%

9.0%

18%

FY12-15

FY16-18E

Berger
Paints

Kansai
Nerolac

12%

4.5%

6%
0.0%
Asian Paints

Berger
Paints

Kansai
Nerolac

0%

Akzo Nobel
India

Asian Paints

Akzo Nobel
India

+
Premium valuations for premium growth
Paints

Asian Paints

Mcap

(Rs)

(Rs bn)

(Rs)

(%)

FY17E

FY18E

FY17E

FY18E

FY17E

FY18E

886

849.7

OP

1015

20.2

38.3

31.3

24.9

20.4

33.7

35.8

251

174.0

OP

299

29.7

39.3

29.7

22.5

17.6

27.8

30.4

304

163.9

313

19.1

36.8

31.5

23.0

19.7

18.9

19.5

1,345

64.5

1442

13.1

27.2

23.4

16.8

14.0

21.7

23.1

Berger Paints
Kansai Nerolac Paints
Akzo Nobel

Reco

TP

EPS
CAGR

CMP

PE (x)

EV/EBITDA (x)

RoE (%)

INITIATE COVERAGE WITH


OUTPERFORMER ASIAN PAINTS, BERGER PAINTS
NEUTRAL KANSAI NEROLAC PAINTS, AKZO NOBEL INDIA

3| IDFC SECURITIES

20 April 2016

Paints

Contents
INVESTMENT ARGUMENT ......................................................................... 5
Paints Direct beneficiary of economic growth ........................................... 5
Macro tailwinds to boost growth......................................................................... 7
A stable competitive order aids incumbents ................................................. 9
Softness in commodity prices to prop margins ........................................... 11
Organised players versus unorganised companies ................................... 12
Decorative paints Play on urban consumption ........................................ 14
Industrial paints Leveraging technology & relationship ....................... 15
FMCG versus Paints Key differentiators and disrupters ...................... 17
Financial analysis ...................................................................................................... 19
Valuations and view Premium justified....................................................... 20
Key Risks ..................................................................................................................... 22

Companies ..................................................................................................... 23
Asian Paints ................................................................................................................ 24
Berger Paints ............................................................................................................. 44
Kansai Nerolac Paints ............................................................................................. 61
Akzo Nobel India ..................................................................................................... 78

4| IDFC SECURITIES

20 April 2016

Paints

INVESTMENT ARGUMENT
The ~US$6bn Indian paints industry is the best proxy to play the
themes of increasing urbanisation and disposable incomes, given its
strong correlation with GDP growth, lower penetration and higher
volume/profit growth visibility.
Propped by external growth triggers such as Pay Commission, OROP,
rise in rural welfare schemes and expectations of good monsoons, we
believe discretionary consumption is set to grow the Paints industry
is likely to be the biggest beneficiary of this opportunity.
Industry
leaders
enjoy
competitive
advantage
over
smaller/unorganised players, backed by scale, distribution and
innovation. These together with stable competitive order should
boost growth. We estimate FY16-18E earnings CAGR of 13-30% for
four leading paint companies.
We believe paint companies that are currently valued in line with
staple companies deserve a valuation premium given their superior
growth visibility and strong operational metrics.
We initiate coverage on APNT/Berger Paints with Outperformer, and
on KNPL/Akzo Nobel India with Neutral rating.

Paints Direct beneficiary of economic growth


We believe the India paints industry is the best structural proxy to play the
themes of a sharp spike in urbanisation and disposable incomes. The
sector offers greater growth stability (versus other discretionary
consumption categories), and higher volume visibility and profit growth
given its strong correlation with GDP growth.
Over the past 10 years, Indias nominal GDP CAGR stood at an impressive
14.5%, led by a consumption boom. The key drivers were an increase in
disposable incomes and reduced savings-to-GDP rate (implying an
increased propensity to consume). The Indian paints industry directly
benefited from this trend the industry size increased from ~Rs82bn to
~Rs406bn, at a CAGR of ~17% over FY05-15. In contrast, the FMCG industry
grew only ~13% during the period.
Exhibit 1: Indian paints industry Strong correlation with economic growth
Paints industry growth

Nominal GDP growth

FMCG growth

35.0%
28.0%
21.0%
14.0%
7.0%
0.0%
FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

5| IDFC SECURITIES

20 April 2016

Paints
Exhibit 2: Domestic paints industry has grown at a CAGR of 17% over FY05-15
Overall paint industry size (Rs bn)

406

450
350

360

305

270
158

180
90

82

95

115

187

224.4

260.4

134

0
FY05 FY06 FY07 FY08 FY09 FY10

FY11

FY12

FY13

FY14

FY15

Source: Industry, IDFC Securities Research

Further, over the next decade, continued macro tailwinds, strong


incumbents with global partnerships and a stable competitive order add
visibility to the profitable growth outlook.
Exhibit 3: Domestic paint industry Segmental mix

Industrial
paints
30%
Decorative
paints
70%

Source :Industry, IDFC Securities Research

Growth more broad based given lower cyclicality


Generally, it is believed that the Indian Paints industry is more cyclical in
nature and not as consumer centric. However, cyclicality is mostly driven
by the industrial business, which forms only 30% of the Indian paints
industry. Further, the largest sub-segment in the industrial category is
dependent on four-wheeler and two-wheeler demand, making the industry
consumer centric.
The Indian paints industry
enjoys lower cyclicality,
resulting in better growth
visibility

The remaining 70% is formed of decorative/architectural paints, more than


the global average of ~58%. Of this, only 15% demand comes from new
projects (builder-led); the rest is repainting demand, which is stickier in
nature.
Further, over the years, the consumers involvement in the painting
decision has increased with rising advertising/consumer involvement
strategies. Consequently, cyclicality has reduced, making the business
more consumer-centric.

6| IDFC SECURITIES

20 April 2016

Paints
Exhibit 4: Lower cyclicality provides better growth visibility
(%)

Asian paints

Berger - Std

Kansai Nerolac

30
25
20
15
10
5
0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

Macro tailwinds to boost growth


We believe a modest recovery in urban growth, external tailwinds such as
the Seventh Pay Commission and OROP, and a modest growth in pockets
of industrial segment will drive volumes for the paints industry over FY1618. Further, the implementation of GST is likely to reduce the overall
central and state tax incidence from 24-25% to ~18%, aiding volume
growth/profitability.

Long-term structural opportunity compelling

We expect the organised


paints industry to post
15% revenue CAGR over
FY16-21, indicating scope
for longer-term growth

The structural growth opportunity for the paints industry is compelling.


India has 247m residential houses, as per 2011 census data. This has
increased by 30% between 2001 and 2011, which implies a 3% CAGR.
Assuming a 2.5% CAGR over the next decade, the total households in India
will be 316m. Further, assuming a 500sqft carpet area for a family of five in
each household, Rs10 paint cost per sqft, five years repainting cycle and a
50% penetration of the industry by 2021, we expect the decorative paints
industry to post 13% CAGR in the next five years. Even if the share of the
organised segment (currently 65%) increases by 500bp in this period, the
organised industry will post 15% revenue CAGR over FY16-21.
Consequently, the scope for longer-term growth for the industry is
significant.
Exhibit 5: Our analysis on decorative industry growth
Number of households in India in 2011 (m)

247

CAGR over 2011-2021 assumed (%)

2.5

Number of households in India in 2021 (m)

316

Number of persons in a household


Carpet area assuming 100sqft per person (sqft)
Multiplier for painting (x)
Total area to be painted per household (sqft)
Cost per sqft (Rs)
Total cost per house (Rs)
Total addressable Deco Paint size in 2021 (Rs m)
Percentage of painted households of the total by 2021 (%)
Total Deco Paint size in 2021 (Rs m)

5
500
3.5
1,750
10
17,500
5,533,165
50
2,766,582

Total Deco Paint size assuming a 5 year cycle (Rs m)

553,317

Decorative Paint industry size in 2016 (Rs m)

301,252

Growth CAGR likely in the next 5 years (%)

12.9

Estimated organized industry share in 2016(assuming 65% share)

195,814

Estimated organized industry share in 2016(assuming 70% share)

387,322

5 year decorative organised industry CAGR (%)

15

Source; IDFC Securities Research

7| IDFC SECURITIES

20 April 2016

Paints
Seventh Pay Commission to boost urban discretionary demand
The Seventh Pay Commission recommendations, submitted in Nov-15,
imply an increase of 23.55% in overall pay/allowances/pensions
indicating an additional infusion of Rs1.02tn for central government
employees. The impact of this change on Indias expenditure-to-GDP is
expected at 0.65%. The revision will be effective from 1 January 2016 and
consequently, employees will receive arrears.
This one-off raise in incomes has benefitted discretionary demand more
than staples, that too in urban markets. Consequently, we believe the
decorative paints industry stand to benefit the most as per our analysis,
for every 1% of the additional infusion moving to decorative paints, the
industry will grow by an additional 4%.
Exhibit 6: Volume growth accelerated post Sixth Pay Commission in 2005-06
Asian Paints

Berger Paints

20.0%
15.0%
10.0%
5.0%
0.0%
FY06

FY07

FY08

Source: Company, IDFC Securities Research

OROP Another small impetus to growth


Before the Seventh Pay Commission recommendations come into force,
the central government is likely to implement OROP, which will result in
increased income for existing/retired defence force personnel. Given past
two years of pending arrears (the scheme would be effective from 1 July
2014) and overall higher pension scales, OROP will result in an additional
infusion of Rs10-11bn from FY17 in four instalments. We expect this to
provide another impetus to urban demand in India, albeit marginally.

Good monsoons to prop rural demand outlook


Through FY10-15, overall rural demand in India continued to outpace urban
demand, led by higher disposable incomes (on higher minimum support
prices and schemes such as NREGA). However, in the past few quarters,
rural demand growth has weakened to below urban growth. Urban growth,
however, has remained steady-to-improving.
The impact of two weak monsoons has clearly impacted rural growth.
However, as per the first monsoon estimate by the Indian Meteorological
Department (IMD), rainfall this year is likely to be 106% of the long period
average. We believe this could boost rural sentiment just in time for the
festive season, when home painting is at its peak.

8| IDFC SECURITIES

20 April 2016

Paints
Exhibit 7: IMD predicts monsoons to be 106% of the long period average for the year
Monsoon (% of LPA)
120
110
100
90
80
70
60
FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16E

Source: Company, IDFC Securities Research

GST Incremental profitability trigger


In Dec-15, the GST panel recommended a standard rate of 17-18%, taking
into account all central and state taxes. Currently, for the paint industry,
the excise duty stands at 12% of gross sales. Further, the top-four paint
companies operate at a duty rate of 10-12% depending on the extent of
marginal tax benefits enjoyed on certain manufacturing facilities. Also, VAT
is at 12.5-13% depending on the state. Together, these imply a 22-24%
overall tax incidence on paint companies.
If the GST is implemented at the standard rate, the industry stands to
benefit immensely. A complete pass-through of the benefits will result in
upsides to volumes and a partial retention could prop our EBITDA margin
estimates.
Exhibit 8: GST implementation to aid profitability
Excise duty

VAT

Total Tax

Asian Paints

9.4%

12.5%

21.9%

Proposed GST
rate
18.0%

Berger

9.2%

12.5%

21.7%

18.0%

3.7%

Kansai Nerolac

11.4%

12.5%

23.9%

18.0%

5.9%

Akzo Nobel

9.9%

12.5%

22.4%

18.0%

4.4%

Company

Benefit
3.9%

Source: Company, IDFC Securities Research

A stable competitive order aids incumbents


The top-four players constitute ~55% of the total paints industry in India. A
stable competitive order with low disruption (in terms of
pricing/discounts) implies profitable growth and stable market share,
especially in the decorative segment. Unlike staples, wherein competitive
intensity impacts market share/profitability of incumbents, a stable
competitive order in paints implies higher flow through of input cost
benefits and consequently, improved profitability.

9| IDFC SECURITIES

20 April 2016

Paints
Exhibit 9: Market share of top-four players in FY10

Asian
Paints,
27.4%

Others,49.4
%

Exhibit 10: Market share of top-four players in FY15

Asian
Paints,
30.3%

Berger,
9.0%

Top 4,
50.6%

Kansai
Nerolac,
9.1%

Others,
45.4%

Top 4,
54.6%

Kansai
Nerolac,
8.7%
Akzo
Nobel, 6.2%

Akzo
Nobel, 5.0%

Source: Company, IDFC Securities Research

Berger,
9.4%

Source: Company, IDFC Securities Research

Pricing power adds visibility; entry barriers the key reason


As per our analysis, industries where the leading players have adequate
pricing power grow in a sustained and profitable manner The decorative
paints industry is a prime example. The top four players pass on the cost
inflation to consumers at times of high inflation, with the leading player
acting as a benchmark. Also, recently, we have seen instances of pricing
power being maintained during deflation, which allows companies to
compensate for lower revenue growth with superior EBITDA margins.
This pricing power is due to entry barriers for new players in the industry.
New players cannot match the distribution and supply chain of the
incumbent and also have to spend disproportionately to get their product
accepted by painters, dealers, user industries and end consumers.
Moreover, matching the pricing power of the leaders involves scale
efficiencies, which are not easily achieved.
An analysis of price changes effected by APNT implies that pricing order
has been maintained in the decorative segment. Despite price changes,
volume growth has not been compromised and profitability has been
sustained. Further, lack of disruptive competition among larger players
indicates that the cost of incremental volume growth was not impacted by
irrational competition, as is the case in certain staples categories.
Exhibit 11: APNT Balanced volume and price growth
Volume growth

Exhibit 12: Pricing power ensures steady margin uptick

Price/mix growth

Aggregate Gross margins

30.0%

46%

23.0%

44%
42%

16.0%

40%
9.0%

38%

2.0%

36%
34%

-5.0%
FY10

FY11

FY12

FY13

FY14

Source: Company, IDFC Securities Research

FY15

FY11

FY12

FY13

FY14

FY15

FY16E

Source: Company, IDFC Securities Research

Higher earnings visibility from stable competitive landscape


The industry structure gives incumbents a huge advantage, both in the
decorative and industrial segments. In the decorative segment, entry
barriers exist for entrants/marginal players given the pricing power and
increased distribution network of large players. Further, even in the
industrial segment, global/historical relationships and constant innovation
are required, indicating that few players garner a large share. We believe
that this competitive advantage is likely to sustain, resulting in higher
earnings visibility.

10| IDFC SECURITIES

20 April 2016

Paints

Softness in commodity prices to prop margins


About 35-40% of the paint industrys raw materials are crude linked. With
benign crude oil prices, the companies gross margin has expanded for
four consecutive quarters. Further, we expect another two quarters of
margin benefit from a continued fall in crude oil prices. Also, as prices of
Titanium Dioxide (15-20% of the RM basket) and Mineral Turpentine oil (67% of RM basket) are not inflationary even after accounting for rupee
depreciation, no pressure points exist in the RM basket.
Consequently, we expect margin to improve further, led by strong pricing
power in the decorative segment and time lag in passing price cuts to
industrial customers. We factor in 30bp-180bp EBITDA margin expansion
over FY16-18E for top four paint companies. We believe the improvement
will continue to be more pronounced for APNT/Berger Paints given that
their mix is in favour of the high-margin decorative segment (90%/80%
respectively).

EBITDA margin expansion


more pronounced for
APNT/Berger Paints

Exhibit 13: High crude oil linkage to benefit paint companies


(USD/barrel)
80

Brent Crude oil

60
40
20

Mar-16

Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

Source: Company, IDFC Securities Research


Exhibit 14: Titanium Dioxide price stable
(Rs/kg)

Exhibit 15: Gross margin expansion to continue

TiO2

140

Asian paints

Berger - Std

Kansai Nerolac

Akzo Nobel

55.0%
130

Source: Bloomberg, IDFC Securities Research

11| IDFC SECURITIES

Q3FY16

Q2FY16

Q1FY16

Q4FY15

Q3FY15

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q1FY14

Mar-16

Jan-16

Feb-16

Dec-15

Oct-15

Nov-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Mar-15

25.0%
Apr-15

110
Feb-15

35.0%

Jan-15

120

Q2FY14

45.0%

Source: Company, IDFC Securities Research

20 April 2016

Paints

Organised players versus unorganised companies


We believe the gulf between organised and unorganised paint players is
only likely to widen going forward given increasing scale of the top
organised players, resulting in better cost efficiencies/reach. Further,
continued innovation (to augment product offerings) and sustained
distribution expansion will act as key differentiators for organised players.
Additionally, the unorganised players find it difficult to penetrate the
current dealer network. We expect these factors to drive growth for the
top paint companies, ahead of the industry, and factor in 11-17% revenue
CAGR over FY16-18E for the top four players.

Organised players cost efficient led by increased scale


We believe increased scale adds to the cost efficiency (lower overheads as
a percentage of sales) and augments the competitive advantage of larger
organised players.
Exhibit 16: Driving scale Significant capacity expansion across key markets in last 10 years

FY05

FY15

Source: Company, IDFC Securities Research

Top-four players have


significantly expanded
their capacities/presence
to meet higher volume
requirement

Consequently, the top-four players have significantly expanded their


capacities/presence to meet higher volume requirement. APNT is doubling
capacity at its Rohtak plant and will set up manufacturing capacities in
Andhra Pradesh and Karnataka. Further, in Maharashtra, the company shut
down its Bhandup plant in 2014 to start manufacturing in its Khandala
plant (commissioned in 2013; 10x capacity of Bhandup plant). APNT has
also modernised its older plants.
Berger has set up two new plants one in Hindupur for decorative paints
and the other in Jejuri for powder coatings in FY15. The company
continues to increase capacity in its existing plants. Further, Kansai has
expanded capacity in existing plants and doubled its depots in the past
five years.

12| IDFC SECURITIES

20 April 2016

Paints
Constant innovation to improve product/service offerings

Innovation is the key


differentiator between
organised and
unorganised players

Leading paint companies in India try to provide better product/service


offerings through constant innovation. For industrial customers, too, the
companies, through leveraging international tie-ups and relationships, offer
enhanced technologies. As a result, such players have increased their
competitive advantage over smaller players, posting ahead-of-industry
growth. We believe innovation is a key differentiator that has increased the
gulf between larger, more resourceful paint companies and smaller,
regional and unorganised players.
Exhibit 17: Strong focus on innovation and technology
Innovation
Asian Paints

Berger paints
Express Painting
service

Kansai Nerolac
Low VOC, lead free
paints

Colour next - trend


predictions

Prolinks division

HD impressions range

Colour idea stores

WeatherCoat
Allguard
Silicone Technology

Nerolac homestylers

Introduction of small cans

Colour consultancy

Akzo Nobel
Dulux
website
Dulux
visualizer

Nerolac colorstylers
ED technology for Ecoats

Signature stores
Source: Company, IDFC Securities Research

Established distribution Entry barrier for unorganised players


Larger organised players expand their dealership network by 5-7%
annually. This includes adding new dealers and penetrating into existing
dealerships. As typically, a mid-sized paint dealer houses only two brands,
a new player faces entry barriers from distribution perspective.
We expect APNT and Berger Paints to add 1,500-2,000 dealers and 5001,000 dealers per annum respectively, which should increase their
competitive advantage.
Exhibit 18: APNT dominates the dealer network.

Exhibit 19:

.though further scope to expand distribution

(nos)
Akzo
Nobel
13%
Kansai
Nerolac
20%

Dealer network

70,000
52,500
Asian
paints
47%

35,000
17,500

Berger
20%

Source: Company, IDFC Securities Research

13| IDFC SECURITIES

0
Asian
paints

Berger

Kansai
Nerolac

Akzo
Nobel

Total
network

Source: Company, IDFC Securities Research

20 April 2016

Paints

Decorative paints Play on urban consumption


The ~Rs290bn decorative paints industry has benefited from the
consumption boom in India over the past decade. A reduction in repainting
cycle, increased preference for branded products and uptrading to
emulsions from distempers have been the key growth triggers. Also, as
new projects-led demand is only 15% of the total demand from the
decorative paints segment, this segment has witnessed lower cyclicality in
terms of growth.
Exhibit 20: Decorative paints Segmental break-up

Others
11%

Primer/Thinner
11%

Emulsion
35%
Distemper
13%

Enamel
30%
Source: Industry, IDFC Securities Research

Top four players have grown profitably


On an aggregate, the top-four players in the paint industry have posted
revenue/PAT CAGR of 15%/16% over FY11-16E. Given that the top-two
players have a higher share of the decorative segment in their overall sales,
their PAT CAGR over FY11-16E has been even sharper at 18% on similar
revenue growth.
This growth came despite multiple challenges in the macro environment
for the decorative paints industry in the past five years consumer growth
slowdown, steep input cost inflation (over FY12-15) and recently, steep
deflation coupled with a rural growth slowdown. In the staples businesses,
these factors led to increased competition and consequently, variance in
profit growth.
Exhibit 21: Revenues CAGR at 15% over FY11-16E
(Rs bn)

Exhibit 22: PAT CAGR at 16% over FY11-16E

Top 4 players sales

(Rs bn)
30

300
250

25

200

20

150

15

100

10

50

Top 4 players PAT

0
FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

FY16E

FY11

FY12

FY13

FY14

FY15

FY16E

Source: Company, IDFC Securities Research

We believe fundamental growth drivers remain intact for the decorative


segment. Further, increasing premiumisation trend is a major positive
going forward. Additionally, the top players in the decorative segment
enjoy a major incumbent advantage, led by a stable competitive order and
rising competitive advantage (on increased scale/innovation).

14| IDFC SECURITIES

20 April 2016

Paints
Exhibit 23: Decorative paints CAGR at 16% over FY10-15
(Rs bn)

Decorative paints

350
280
210
140
70
0
FY10

FY11

FY12

FY13

FY14

FY15

Source: Industry, IDFC Securities Research

Industrial paints Leveraging technology &


relationship
India is at a nascent stage in the industrial coatings market. Globally, the
industrial coatings segment forms ~58% of the paints market as against
~30% (~Rs110bn) in India. This is primarily due a smaller share of the
protective/powder coatings segments.

We expect the industrial


paints segment to grow in
double-digits, led by
consistent growth in
consumer facing segments
(auto/white goods)

The ~Rs110bn industrial paints segment in India has grown on the back of
increasing demand from the auto segment, white goods and industrial
machinery businesses. These segments, in turn, will be boosted by greater
leverage to urban demand and triggers such as the Seventh Pay
Commission/OROP. The segment is completely B2B in nature and is prone
to business cycles, depending on industrial/economic growth. Further,
most of the sub-segments are dominated by larger players that have
access to specialised technology and can incur high capital expenditure.
Additionally, leveraging international relationships is also a key driver for
gaining share. As a result, all of the top-four paint companies in India are
either controlled by a global parent or have certain global affiliations.

Exhibit 24: Industrial coatings Key segments and respective user industries
Industrial coatings
Automotive

Powder

Protective

Two wheelers Metal furniture & fixtures Construction

Marine

Coil

Offshore vessels

Roofing

Agri equipment

Deep Sea/Coastal ships

Building

Material handling

Domestic appliances

Glass coatings

Four wheelers

Appliances

Oil & gas

CV

Auto components

Automotive

Containers

Aerospace

Leisure crafts

Auto Refinish

General Industrial

Source: Industry, IDFC Securities Research


Exhibit 25: Industrial paints Segmental break-up

Others
15%
Powder
Coatings
15%

Auto
45%

High
performance/
Protective
25%

Source: Industry, IDFC Securities Research

15| IDFC SECURITIES

20 April 2016

Paints
In the past few quarters, a recovery in auto/white goods demand had
resulted in improved growth for the segment. However, recovery in the
protective coatings segment has been modest as capex-led sectors such
as oil & gas, metals & mining and capital goods are yet to witness a
substantial recovery.
Exhibit 26: Recovery in consumer durable demand
(%)

Exhibit 27: Pick-up in passenger car sales volumes


Total Passenger Vehicles (nos - LHS)

Consumer Durables

80

Volume growth (RHS)


3.0

30%

2.3

20%

1.5

10%

0.8

0%

0.0

-10%

Source: Company, IDFC Securities Research

16| IDFC SECURITIES

YTD16

FY15

FY13

FY14

FY12

FY11

FY10

FY09

FY08

Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15

-40

FY07

-10

FY06

20

FY05

50

Source: Company, IDFC Securities Research

20 April 2016

Paints

FMCG versus Paints Key differentiators and disrupters


Key disrupters Patanjali and e-commerce
Over the past two years, Patanjali has emerged as an herbal alternative in almost every FMCG
category, thereby disrupting organised FMCG players. The company's ever-expanding product
portfolio and lower pricing will ensnare share in certain categories and limit margin expansion for
existing organised FMCG players.
Additionally, e-commerce has impacted the way consumers shop, especially in general
merchandise/fashion segments. E-retail and online ordering/home delivery applications have
particularly disrupted the market in the past two years. Physical retailers (Shoppers Stop, Future
Group, Trent, Lifestyle, etc.) and strong QSR companies (Dominos, McDonalds, KFC, etc.) have been
affected the most. Therefore, such disrupters remain key concerns for these industries.
However, the paints industry has no such disrupter. Entry barriers for new competition are high
in terms of matching the pricing, service and distribution strength. Also, given that the ultimate
purchase in decorative paints is made by the painter on most occasions, alternate modes of
distribution are unlikely to exist in this industry.
Steep discounts by e-tailers

Disruptive pricing Key brands versus Patanjali

Category

Discount to key competitor brands

Almond hair oil

13-17%

Toothpaste

15-16%

Honey

32%

Detergents

22-28%

Marie Biscuits

16%

Source: Company, IDFC Securities Research

Source: Company, IDFC Securities Research

Deflation Intense competition limits profit growth potential


In the past 18 months, FMCG companies have benefitted from significant raw material gains on
account of lower crude prices. However, a large part of this has been passed on to consumers as
companies endeavoured to stay competitive and retain market share.
An analysis of Hindustan Unilevers (HUL) soaps and detergents segment suggests that in 9MFY16,
segment EBIT growth stood at 3.4% FY16 witnessed the highest crude price decline since 2009.
Further, HUL posted adjusted PAT growth of 3.9% during this period. This was on account of price
cuts/promotions of over 10% in the segment to defend its market shares against price warriors.
In contrast, the top-four paint companies posted 22% PAT growth over 9MFY16. MRP cuts, in
two rounds, stood at only 2-3%.
Sharp deceleration in EBIT growth

Resultant profitability remained weak

Soaps & Detergents EBIT growth

30.0%

Adj PAT growth

Source: Company, IDFC Securities Research

17| IDFC SECURITIES

Q3FY16

Q2FY16

Q1FY16

Q4FY15

Q3FY15

Q2FY15

Q4FY14

Q3FY16

0.0%
Q2FY16

-10.0%
Q1FY16

5.0%

Q4FY15

0.0%

Q3FY15

10.0%

Q2FY15

10.0%

Q1FY15

15.0%

Q4FY14

20.0%

Q1FY15

20.0%

Source: Company, IDFC Securities Research

20 April 2016

Paints

Increased discounting Taking a hit on margins to post competitive LTL growth


Physical retailers had to opt for longer end-of-season sales to stimulate demand and compete with ecommerce players. Similarly, QSR companies had to run frequent discount schemes to stimulate
demand in this environment. This impacted the margins for companies such as Shoppers Stop, Titan,
Jubilant Foodworks, etc.
For paint companies, discounts to dealers remain at 12-15% of MRP.
Shoppers Stops gross margins have come off

as have EBITDA margins for Jubilant Foodworks

Shoppers Stop Gross margins

Jubilant Foods EBITDA margins


14.0%

42.0%
40.0%

13.0%

38.0%
12.0%
36.0%
11.0%

34.0%

Source: Company, IDFC Securities Research

Q3FY16

Q2FY16

Q1FY16

Q4FY15

Q3FY15

Q2FY15

Q1FY15

Q4FY14

Q3FY16

Q2FY16

Q1FY16

Q4FY15

Q3FY15

Q2FY15

Q1FY15

10.0%
Q4FY14

32.0%

Source: Company, IDFC Securities Research

Paints continue to outshine Staples


In the past five years, top-10 listed consumer staples companies by revenue (ex-ITC) have posted
revenue CAGR of 14% respectively. In contrast, top-four paint companies have posted revenue CAGR
of 17% respectively. The paint industry witnessed accelerated growth trajectory, led by lower
penetration and higher pricing power versus the more competitive staples business. Going forward,
we expect major paint companies to continue to outshine consumer staples and consequently,
command premium multiples.
Paint industry (top-four players) has outperformed domestic FMCG revenue growth
FMCG

Paints

35.0%
25.0%
15.0%
5.0%
-5.0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, IDFC Securities Research

18| IDFC SECURITIES

20 April 2016

Paints

Financial analysis
Volume growth trajectory resilient

We factor in 13.5%, 14%,


12% and ~6% volume
CAGR for APNT, Berger
Paints, KNPL and Akzo
Nobel India respectively

With demand environment remaining challenging, consumer companies


have struggled to maintain healthy volume growth in FY16. However, the
top three paint companies have been more resilient, maintaining doubledigit volume growth in the domestic business, especially in FY16. We
expect the double-digit volume growth momentum to accelerate going
forward as the macro environment gradually improves, external injections
boost growth and companies drive their own innovation/distribution
expansion led initiatives. We factor in 13.5%, 14%, 12% and ~6% volume
CAGR for APNT, Berger Paints, KNPL and Akzo Nobel India respectively.
Exhibit 28: Paints Volume growth resilient in a challenging environment
Asian paints

Berger

Kansai Nerolac

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

FY16 a standout year; expect healthy profit growth to continue


Over FY12-15E, top-four players posted a PAT CAGR of 8-14%, backed by
modest volume growth, continued premiumisation, and price increase-led
operating leverage. FY16, however, has been a standout year as companies
have benefitted from a steep fall in crude oil prices, benign titanium
dioxide prices and no major pricing cuts. As a result, over 9MFY16,
earnings growth for the top-three players has been in the range of 28%33%, while Akzo Nobel Indias earnings have grown 6%, impacted by weak
volume growth and negative operating leverage. We believe that H1FY17
will also benefit from lower RM cost-led margin expansion. However, post
that, we expect key earnings growth drivers to be volume growth and
mix/scale benefits. We factor in FY16-18E earnings CAGR of
20.1%/29.7%/19%/13.1% for APNT, Berger Paints, KNPL and Akzo Nobel
India respectively.
Exhibit 29: We expect earnings CAGR to improve over FY16-18E
FY12-15

FY16-18E

25%
19%
13%
7%
1%
-5%
Asian Paints

Berger Paints

Kansai Nerolac

Akzo Nobel India

Source: Company, IDFC Securities Research

19| IDFC SECURITIES

20 April 2016

Paints

Valuations and view Premium justified


Generally, the industry believes that paint companies deserve a significant
discount over consumer staples companies given their discretionary nature
and lower return profile. However, valuations of top staples companies and
top paint companies globally suggest that this discount is only 10% at an
average and has steadily narrowed down. Further, top eight listed paint
companies globally have delivered an 18% return CAGR as against 9% for
top-10 listed consumer staples names in the past five years.
Globally, growth is higher for coatings versus staples sector. However, the
industrial coatings segment form 58% of overall revenues, which lend
higher cyclicality to it, thus partially justifying the narrow discount over
global staples companies. In contrast, Indian paints industry is still heavily
skewed towards the decorative segment, which constitutes 70% of the
industry. Since this is a consumer facing segment, it lends greater growth
visibility to the industry versus global counterparts. Further, return ratios
of Indian paint companies are far healthier than their global counterparts.
Exhibit 30: Valuations Paint companies versus staples companies globally
CMP

Mcap

(US$)

(US$ bn)

EPS CAGR

PE (x)

EV/EBITDA (x)

CY15-17E (%) CY16E CY17E

RoE (%)

CY16E

CY17E

CY16E

CY17E

Global Paints
Ppg Industries

117

31.1

10.6

18.6

16.7

12.0

11.2

32.0

32.8

Akzo Nobel

65

18.3

3.9

15.5

14.7

8.1

7.6

15.1

15.0

Sherwin-Williams

298

27.5

12.8

24.0

21.5

14.7

14.2

113.8

108.0

Valspar Corp

107

8.5

8.8

22.0

19.7

13.7

12.9

40.5

45.0

Kansai Paint

1,980

4.9

14.9

21.2

19.9

10.9

9.4

9.2

8.7

Nippon Paint Holdings

2,864

8.5

(56.9)

26.7

24.9

9.8

8.8

6.8

7.1

Axalta Coating Systems

30

7.2

18.8

24.7

20.3

10.8

9.6

23.3

22.3

Akzo Nobel

65

18.3

3.9

15.5

14.7

8.1

7.6

15.1

15.0

H.B. Fuller

45

2.3

13.3

17.7

16.0

9.4

8.5

14.2

14.5

20.7

18.7

10.8

10.0

30.0

29.8

21.2

19.7

10.8

9.4

15.1

15.0

13.3

58.0

63.6

Mean
Median
Global Staples
Pepsico Inc

104

150.7

5.9

22.1

20.4

14.0

Colgate-Palmolive

72

63.9

4.0

25.9

23.8

15.8

14.8

624.6

376.8

Coca-Cola

47

201.7

1.8

23.9

22.6

18.5

18.0

32.0

35.5

Procter & Gamble

83

225.2

1.0

23.0

20.6

14.9

14.4

16.5

19.4

Nestle Sa

73

242.2

5.0

21.6

20.1

14.4

13.5

16.2

16.6

Danone

64

47.7

7.0

21.0

19.4

12.8

11.8

14.5

14.7

Unilever

3,298

142.0

5.

22.1

20.6

14.3

13.3

34.4

31.7

British American Tobacco

4,245

114.0

9.6

18.4

17.0

17.0

16.1

74.9

71.5

Reckitt Benckiser Group

6,895

70.0

11.5

25.0

23.0

17.9

16.5

28.0

28.3

Mean

22.5

20.8

15.5

14.6

99.9

73.1

Median

22.1

20.6

14.9

14.4

32.0

31.7

Source: Bloomberg estimates

20| IDFC SECURITIES

20 April 2016

Paints
We initiate coverage on the paints sector with a positive bias
We have an Outperformer
rating for APNT/Berger
Paints and a Neutral rating
for KNPL/Akzo Nobel
India.

Currently, average multiples of top-10 FMCG companies (ex-ITC), at 30.6x


FY18E earnings, are at marginal premium to top-four paint companies
multiples (at 29.0x FY18E earnings). Given lower penetration, stronger
growth, a consumer-centric model, pricing power and a stable competitive
order, we believe Indian paint companies are likely to command a premium
versus FMCG peers in the medium-to-long term. We initiate coverage on
the paints sector with a positive bias. We have an Outperformer rating for
APNT/Berger Paints and a Neutral rating for KNPL/Akzo Nobel India
based on our DCF valuation technique.

Exhibit 31: Valuations Domestic paint companies versus domestic staples plays
Indian Staples

CMP

Mcap

(Rs)

(Rs bn)

EPS CAGR

EV/EBITDA

PE

FY16-18E (%) FY17E FY18E

FY17E

RoE

FY18E FY17E FY18E

Indian Staples
Colgate-Palmolive

852

231.6

13.3

34.3

29.5

21.3

18.4

62.9

60.3

Dabur India

267

470.1

16.3

32.3

28.1

26.4

22.5

32.9

32.1

1,352

460.5

20.4

32.8

28.3

24.3

20.8

24.1

23.6

904

1956.4

15.8

40.5

35.1

28.5

24.4

115.9

120.5

ITC

336

2699.8

9.4

25.4

23.1

17.2

15.6

30.2

30.6

Jyothy Laboratories

308

55.8

3.2

27.2

29.0

21.7

18.7

25.1

22.9

Godrej Consumer
Hindustan Unilever

Marico Industries

253

327.0

20.4

37.6

31.8

25.4

21.4

35.0

33.7

Nestle India

6,036

582.0

16.0

43.1

38.1

26.1

23.0

45.3

44.7

Britannia Industries Ltd*

2,845

341.4

19.6

33.8

28.3

22.7

19.2

48.7

44.7

996

226.2

22.5

37.2

30.5

25.2

21.3

37.6

40.1

6,002

252.4

24.6

Emami Ltd*
GSK Consumer Healthcare*

31.5

27.4

24.2

21.0

30.2

29.5

Mean

34.2

29.9

23.9

20.6

44.4

43.9

Median

33.8

29.0

24.3

21.0

35.0

33.7

Paints
Akzo Nobel

1,345

64.5

13.1

27.2

23.4

16.8

14.0

21.7

23.1

Asian Paints

886

849.7

20.2

38.3

31.3

24.9

20.4

33.7

34.0

251

174.0

29.7

39.3

29.7

22.5

17.6

27.8

30.4

304

163.9

19.1

Berger Paints
Kansai Nerolac Paints

36.8

31.5

23.0

19.7

18.9

19.5

Mean

35.4

29.0

21.8

17.9

25.5

26.7

Median

37.5

30.5

22.8

18.7

24.7

26.8

Source *Bloomberg estimates, IDFC Securities Research

21| IDFC SECURITIES

20 April 2016

Paints

Key risks
Pick-up in volume growth not as per expectations
We are factoring a 13.5%/14%/12.5%/6% volume CAGR for APNT/Berger
Paints/KNPL/Akzo Nobel India respectively over FY16-18E. These
estimates are higher than what these companies achieved in FY16 or over
FY12-15. We estimate an improving macro to aid volume growth. A slowerthan-expected pick-up
in volume growth could impact our
revenue/earnings growth assumptions going forward.

Mix improvement elusive


Though we are factoring in a marginal increase in price/mix for players (13%), a negative mix (higher sales of distempers and putty versus enamels
and emulsions) could impact realizations, consequently affecting gross
margins and in turn industry profitability. However, even if this trend plays
out, it would only be for the short term as premiuimisation is a key longterm consumer theme across industries/categories.

Increased competitive intensity among top players


So far, leading players have maintained competitive order in terms of
pricing and promotions, hence growing profitably. In the past, there have
been short periods of disruptions in terms of pricing by the odd
competitor. These, however, were never followed through for long. We
believe heightened competitive intensity remains a risk to an industry that
has not encountered long periods of disruptive pricing competition
previously.

Sharp spike in input costs


The pricing power of leading players in the industry has been maintained
during inflation with companies passing on price increases in the
decorative segment and negotiating with customers in the industrial
segment, albeit with a lag. We believe that sharp spikes in key inputs such
as crude oil, TiO2, MTO could result in near-term margin contraction,
especially in the industrial segment, wherein margin recovery comes with a
greater lag than the decorative segment.

22| IDFC SECURITIES

20 April 2016

Paints

Companies

23| IDFC SECURITIES

20 April 2016

Leading the pack!


OUTPERFORMER
Asian Paints (APNT) is the undisputed leader in the Indian organised
paint market, with 54% market share among the top-four players, ~2.5x
the size of the number two player. Armed with the widest decorative
product portfolio, a favourable decorative skew, distribution reach of
2.3x its next competitor and unmatched scale, APNT will continue to
gain market share in the next few years, resulting in ahead-of-industry
revenue CAGR of 15% over FY16-18E. The stock currently trades at 31x
FY18E earnings and can re-rate further given APNTs superior
growth/margin, and industry-leading return profile and cash flow
generation. We initiate coverage with an Outperformer rating APNT is
our top consumer large-cap pick.

20 April 2016
BSE Sensex: 25844
Sector: Paints

Stock data
CMP (Rs)

886

Mkt Cap (Rs bn/USD m)

849.7 /12,832

Target Price (Rs)

1,015

Change in TP (%)

NA

Potential from CMP (%)

14.6

Earnings change (%)


FY16E
FY17E
FY18E

Bloomberg code

APNT IN Equity

1-yr high/low (Rs)

Volume trajectory set to improve further: APNT has an unmatched


distribution infrastructure, covering ~35,000 dealers and remains a
preferred choice with presence across segments/price points. This
coupled with capacity expansion, product launches, brand investments
and innovative marketing strategies have set the stage for improved
volume trajectory. We factor in 13.5% volume CAGR over FY16-18E
versus 7.7% over FY12-15. Moreover, long-term structural drivers
reduction in repainting cycle, increased urbanisation and rising first-time
paint consumers remain intact.
Margin/earnings visibility higher versus peers: APNT derives ~90% of its
sales from the high-margin decorative segment. Further, within the
decorative segment, the company is well placed to ride the
premiumisation trend, led by a strong premium portfolio. These together
with pricing power and stable input costs provide margin visibility to
APNT. Moreover, with expected recovery in industrial/international
businesses, we expect APNTs FY16-18E EBITDA/PAT CAGR at 19%/20%.

927/693

6-mth avg. daily volumes (m)

1.1

6-mth avg. daily traded value


(Rsm/USDm)

986.6/14.9

Shares outstanding (m)

959.2

Free float (%)

47.2

Promoter holding (%)

52.8

Price performance relative & absolute


Asian Paints

Sensex

Premium valuations to sustain: APNT enjoys strong competitive


advantage versus peers in terms of market share, product portfolio and
infrastructure. Moreover, the companys earnings visibility is higher
versus peers, not only in paints but also in the broader consumer sector.
These together with industry-leading return profile and strong cash flow
generation indicate that the stocks premium valuations will sustain. We
initiate coverage with an Outperformer rating and a DCF-based price
target of Rs1,015, translating into 36x FY18E target earnings.
Key valuation metrics
Year to 31 Mar
Net sales (Rs m)

110
105

Adj. net profit (Rs m)


100
95

3-mth

6-mth

1-yr

APNT Equity

5.4

1.2

9.5

BSE Sensex

5.6

(5.6)

(9.1)

(%)

FY15
141,828

FY16E
155,846

FY17E
177,455

FY18E
206,769
27,145

12,288

14,227

18,773

22,187

Shares in issue (m)

959

959

959

959

959

Adj. EPS (Rs)

12.8

14.8

19.6

23.1

28.3

10.3

15.8

32.0

18.2

22.3

PE (x)

69.1

59.7

45.3

38.3

31.3

Price/ Book (x)

21.0

17.9

15.0

12.4

10.2

EV/ EBITDA (x)

42.7

38.2

29.3

24.9

20.4

RoE (%)

33.1

32.4

36.1

35.5

35.8

40.4

38.1

43.4

43.4

44.1

% change

90
Apr-14

FY14
127,148

RoCE (%)

Source: Company, IDFC Securities Research

Harit Kapoor

Mehul Desai

harit.kapoor@idfc.com
91-22-662 22649

mehul.desai@idfc.com
91-22-662 22640

For Private Circulation only.

Important disclosures appear at the back of this report

INITIATING COVERAGE

Asian Paints

Asian Paints

INVESTMENT ARGUMENT
APNT, the largest paint company in India, has maintained its
dominance in the Indian market via successfully expanding its
presence across products/geographies.
In FY16, APNT scripted volume growth recovery after three
challenging years. Also, FY17 onwards, we expect stronger volume
pick-up, led by continued investments in innovation/distribution and
favourable macro environment. Consequently, we estimate
consolidated revenue CAGR at 15% in FY16-18E.
We estimate FY16-18E margin to improve 110bp, implying a PAT
CAGR of 20%, led by APNTs improved mix (favouring the highmargin decorative segment), unmatched pricing power, continued
premiumisation and scale benefits.
We expect APNTs premium valuations (31x FY18E earnings) to
sustain given its improved growth trajectory and long-term structural
tailwinds.
We initiate coverage on APNT with Outperformer and a DCF target
price of Rs1,015. The company is our top large-cap consumer pick.

Asian Paints Standing tall


Undisputed leader in organised paints market

APNT maintained
industry-leading growth,
translating into strong
earnings quality

APNT dominates the Indian paint market, with 54% share of the top-four
players, ~2.5x the number two player. Over the past 10 years, the
companys sales, EBITDA and PAT have grown at CAGR of 19%, 21% and
23% respectively. Moreover, the company maintained industry-leading
growth, translating into strong earnings quality. This was led by improved
market share (from ~42% in FY05 to ~54% in FY15) and gross
margin/EBITDA margin expansion of 200bps/270bps over FY05-15.
Improved mix/scale benefits as well as low working capital and return
ratios akin to consumer staples companies further aided growth. Over
FY16-18E, we expect APNT to outperform the industry with 15% revenue
CAGR, led by domestic volume CAGR of 13.5%. We expect FY16-18E
margins to expand 110bps, resulting in EBITDA/earnings CAGR of
19%/20%.

Promoter driven but professionally managed


APNT was founded in 1942 by four professionals, Mr Champaklal Choksey,
Mr Suryaknat Dani, Mr Chimanlal Choksi and Mr Arvind Vakil. In 1997, Mr
Champaklal Choksey sold 8%, while other three promoters still hold 53% of
the stake. Currently, the erstwhile promoters who hold almost equal stake
in the company are at non-executive positions. Moreover, the third
generation of the promoter family holds an executive role in some
divisions Mr Manish Choksi heads the international business, the home
improvement segment and IT, while Mr Jalaj Dani heads the supply chain
for Indian decorative division, chemicals business and HR. However, the
company is professionally managed MR KBS Anand (MD and CEO since
2012) joined APNT in 1978 and has since then, held various roles in sales &
marketing division.

25 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 32: APNT History and key milestones
Major
modernisation
programme
undertaken to
streamline
production
facilities

1945

1985

1974

Incorporated as
Asian Oil and
Paint Company
Pvt. Ltd

Promoted 4 JVs
in South Pacific,
Fiji, Tonga, Nepal
and S.I. Ltd

1994

1990

Set up unit at
Patancheru for
the manufacture
of 15,000 MT of
paints and
enamels.

Proposed to set
up a 5th plant at
Maharashtra.
Enters JV with
Asian PPG
Industries for
automotive paint
products

1998

1996

Capacity
expansion at
each of its plants
in Ankleshwar,
Patancheru and
Kasna.

Revamped their
international
operations.
Acquired Berger
International,
Singapore,

2002

launched `Asian
Paints Colour
World' &
exclusive
showrrom

Tie up with
Dupont USA to
co-brand the
Royale range of
Emulsions with
Teflon

2004

Launches paint
solution for kids

Entered into 2nd


JV with PPG
Industries.

2010

2009

2013

2011

Increased
capacity in Tamil
Nadu,
commercialised
phase 1 at
Rohtak

Signed a MoU to
set up a
manufacturing
facility for paints
and
intermediates in
AP

2015

Completes
acquisition of
Sleek Group &
enters into
binding
agreement with
Ess Ess

Source: Company, IDFC Securities Research


Exhibit 33: Revenue CAGR of 19% over FY05-15
Net sales (Rs bn - LHS)

Exhibit 34: EBITDA CAGR of 21% over FY05-15

YoY (% - RHS)

FY15

FY14

FY13

0.0%
FY12

0.0
FY11

0.0%

FY10

0.0

FY09

22.5%

FY07

6.0

FY08

7.5%

FY05

40.0

Source: Company, IDFC Securities Research

EBITDA (Rs bn - LHS)

FY06

45.0%

FY15

12.0

FY13

15.0%

FY14

80.0

FY12

67.5%

FY11

18.0

FY10

22.5%

FY09

120.0

FY07

YoY (% - RHS)
90.0%

FY08

24.0

FY06

30.0%

FY05

160.0

Source: Company, IDFC Securities Research

Exhibit 35: Steady improvement in profitability over the years


Gross margins (% - LHS)

EBITDA margins (% - RHS)

46.0

20.00

43.0

15.00

40.0

10.00

37.0

5.00
0.00

34.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Company, IDFC Securities Research

Revenue mix and pricing power better versus peers


APNTs revenue mix is
tilted more towards the
high-margin decorative
segment

26 | IDFC SECURITIES

The Indian paint industry can be divided into two broad segments,
Decorative paints and industrial paints. However, ~70% of the demand
emanates from the decorative segment, with the industrial segment
accounting for a meagre 30%. Further, the industrial segment is marred by
its more cyclical nature (as automotive paints segment forms ~45% of
industrial demand and is directly linked to the macro economy) and lower
pricing power (given its B2B nature).

20 April 2016

Asian Paints
Though all the four top players are present in both the segments, APNTs
revenue mix is tilted more towards the attractive decorative segment. The
segment accounts for 93% of the companys domestic revenues (industrial
paints contribute only 4-5%). In contrast, the industrial segment accounts
for 20%, 45% and 40-45% of revenues for Berger, Kansai Nerolac (KNPL)
and Akzo Nobel respectively.
Exhibit 36: APNT has higher share of decorative business versus peers
Decorative paints

(%)

Industrial paints

100.0
75.0
50.0
25.0
0.0
Aggregate

Asian Paints

Berger

Kansai Nerolac

Akzo Nobel

Source: Company, IDFC Securities Research

As a result, APNT significantly outperformed the industry/peers over


FY08-10, clocking in standalone revenue CAGR of 22% versus 12%, 14% and
1% for Berger, KNPL and Akzo Nobel respectively. APNTs peers were
largely impacted by a slowdown in industrial/automotive paints segments.
Also, APNTs standalone EBITDA margin rose by 340bps versus 40bps,
50bps and 210bps increase for Berger, KNPL and Akzo Nobel respectively.
Consequently, despite the economic slowdown impacting the overall paint
industry, APNT stood tall underpinned by a higher share of decorative
segment and wider product portfolio. These in turn led to better revenue
visibility and pricing power versus peers (with higher exposure to industrial
paints).

Aggressive capacity expansion to aid supply chain efficiencies


APNT increased its capacity by 60% in FY13 to ~1mtpa at present, 2x its
nearest competitor. The company is doubling its capacity at its Rohtak
plant from 0.2mtpa to 0.4mtpa and has guided for Rs7bn capex for FY16.
Moreover, to meet demand in South/East markets, the company is setting
up facilities in Karnataka and Andhra Pradesh. Further, APNT has signed a
Memorandum of Understanding (MoU) with the Andhra Pradesh
government and plans to invest Rs17.5bn in phases to build a
manufacturing unit with capacity of 0.4m KL annually. These investments
will enhance its supply chain efficiencies and boost future growth.
Exhibit 37: Strong focus on building scale
(mt)

Capacity

1,400,000
1,050,000
700,000
350,000
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E
Source: Company, IDFC Securities Research

27 | IDFC SECURITIES

20 April 2016

Asian Paints

Decorative segment Maintaining dominance


APNT, the second largest paint company in Asia and the eleventh largest
coatings company globally, has maintained its dominance for the past 47
years in the domestic decorative paints segment. We believe, APNT will
continue to sustain this leadership, led by the following factors:

Wide and most complete product portfolio


Within the decorative segment, APNTs product portfolio straddles across
sub-segments, and different consumer requirements/price points. The
company is present in interior paints (distempers, emulsions), exterior
paints, metal finishes (enamel) and wood finishes segments.
Exhibit 38: APNTs product portfolio/key brands
Category

Brand

Variant

Interior paints

Royale

Royale luxury

440

Royale Shyne

502

Royale Matt

520

Royale Aspira

600

Apcolite

270

Tractor
Exterior paints

Apex

Price quotes(Rs/ltr)

149
Apex Ultima

370

Apex exterior emulsion

280

Apex Duracast
Apex tile guard
Ace emulsion
Metal finishes

178

Royale

Royale Luxury

440

Apcolite

Premium gloss

280

Tractor
Source: Company, IDFC Securities Research

Strong distribution network

APNT doubled its dealer


network from 17,000
dealers to 35-37,000; the
company continues to add
1,500-2,000 dealers
annually

Usually, distribution infrastructure (expansion within existing/new dealers)


is a big entry barrier in the paints industry. Expansion within existing
dealers is difficult as limited retail space and bulky nature of paints restrict
the dealers ability to place multiple tinting machines and base colour
shades for different brands. Moreover, the dealers must have
industry/product knowledge as their role in the purchase decision is higher
versus FMCG products.
However, APNT enjoys significant competitive advantage given its
extensive distribution network. In the past 10 years, the company doubled
its dealer network from 17,000 dealers to 35-37,000 currently; it continues
to add 1,500-2,000 dealers annually. Moreover, the dealer reach of number
2/3 players at ~15,000 is less than half of APNTs reach, indicating its
brand/distribution strength.
Consequently, APNT is a preferred partner among paint dealers, aided by
strong brand equity, and presence across segments/price points. Further,
APNT has sustained its leadership in the paint industry, with ability to
penetrate further to gain market share.

28 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 39: Significant competitive edge given extensive dealer network
(nos)

Dealer network

70,000
52,500
35,000
17,500
0
Asian paints

Berger

Kansai Nerolac

Akzo Nobel

Total network

Source: Company, IDFC Securities Research

No compromise on brand investments


Over FY05-15, APNTs A&P spends have grown at a CAGR of 22%, the
highest among peers. Moreover, huge scale benefit provides it with
enough headroom to back its brands (A&P spends are 3x the number two
player). Lower presence in capex-intensive industrial segment (~5% of
consolidated revenues) also boosts its ability to aggressively back its
decorative portfolio.
Exhibit 40: No compromise on A&P spends
A&P spends (Rs m - LHS)

Exhibit 41:

Cash Discount (Rs m - LHS)

(% to sales - RHS)

7,000

6.0%

5,250

4.5%

3,500

3.0%

Lower cash discounts show pricing power


(% to sales - RHS)

6,000

4.8%

5,000

4.7%

4,000

4.7%

3,000
4.6%

2,000

Source: Company, IDFC Securities Research

FY15

FY14

FY13

FY12

FY11

FY10

4.5%
FY09

0
FY08

4.6%
FY07

FY15

FY14

FY12

FY13

FY11

FY10

FY09

FY08

FY07

FY06

0.0%
FY05

1,000
FY06

1.5%

FY05

1,750

Source: Company, IDFC Securities Research

Pioneer in launching marketing initiatives


APNT has been a pioneer in launching aggressive strategies. The company
has rapidly installed tinting machines across its dealer network and
introduced paint cans/small packs to reach remote locations (to cater to
replenishment demand). Further, APNT has identified growth opportunities
in tier 2/3 cities and introduced its premium Royale range in such markets
(to tap premiumisation).

Effective communication strategy


APNT has been an iconic brand with a strong communication strategy.
Over the past 60 years, the companys communication has evolved vastly
from its mascot Gattu targeting larger mass-end home users to Har
Ghar Kuch Kehta Hai and Beautiful Home Guide campaigns, focusing on
dream homes. APNTs evolving communication strategy (to cater to
changing consumer needs and rising premiumisation) has been the key
reason behind its strong brand recall and consumer-connect.

29 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 42: Effective brand communication strategy
Year

Campaign/communication

Positioning

1954

Branding using mascot Gattu

Focus on value for money

1991

'Mera wala' campaign for Apcolite


Khushi Ke Rang - Celebrate with Asian Paints
campaign
Farewell to 'Gattu' from logo. Launch of Har ghar
kuch kehta hai campaign

Focus on extensive range of colours


Focus on festivals with people painting houses in festive
season

1992
2002
2006
2012
2013

Focus on personality and emotions, making a dream home


With increasing importance of exterior emulsion paints, focus
on durability of paints

Wah Sunil babu campaign


Campaign on two brothers teaching tricks of
painting
Revives 'Har ghar kuch kehta hai'

Launch of 'beautiful homes guide


Keep walls same even when address changes

Source: Company, IDFC Securities Research

Increasing penetration through innovation


APNT has always strived to increase penetration and improve its overall
consumer connect through innovation. In 1998, the company introduced
tinting systems, a paint dispenser that allows customers to mix base
shades to get a particular shade. Installation of tinting machines improves
the overall inventory management for the dealer, who can then provide
over 1,000 shades to the customers even with lower number of SKUs.
Moreover, this improves dealer retention as these machines are brand
specific and require space, which limits addition of multiple machines at
the same outlet.
APNT has significantly ramped up its Colour World network (dealers with
tinting machines) ahead of its peers, from ~848 stores in FY00 to 32,500
currently, covering 90% of its dealer network.
Exhibit 43: Steady expansion in APNTs Colour World network
(nos)

Colour Worlds

35,000
28,000
21,000
14,000
7,000
FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY03

FY01

FY00

Source: Company, IDFC Securities Research

Further, APNT has improved its consumer connect through launching


innovative concepts such as signature stores, colour idea stores, home
solutions, samplers etc. With increasing consumer involvement in the paint
buying decision, APNTs strategy is to enhance overall customer
experience, provide complete home dcor solution and further strengthen
its brand equity.

30 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 44: Colour Idea Store expansion
(nos)

Colour idea stores

300
240
180
120
60
0
FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, IDFC Securities Research


Exhibit 45: Innovations in service delivery
Innovation
Colour Next
Special
effects/textured
paints
Signature stores

Service
Predicting colour trends by comprehensive trend mapping
exercise conducted across India with inputs from experts
Creative texture paints with special effects for interior and
exterior requirements

Exploring colour ideas to get colour consultancy by experts


Shop in shop format wherein customers can browse through
Colour ideas store
painted/textured panels/new colours and finishes. In-store
consultancy and visualiser also available.
End-to-end painting service, involving expert advice, on time
Home solutions
completion and superior finish
Colour consultancy@ Offers expert colour consultants to provide advice on colours and
Home
designs at home (Ezy Colour/Colour Shastra)
Source: Company, IDFC Securities Research

Volume trajectory likely to improve

Backed by long-term
structural drivers, volume
trajectory is likely to
improve

Historically, APNT has maintained industry-leading growth on robust


volume growth. Over FY04-12, the company posted mid-to-high teen
volume growth, which moderated to mid-to-high single digit over FY13-15,
impacted by weak urban/rural demand. However, with long-term
structural drivers intact, we believe, the volume trajectory is likely to
improve. Key drivers for this change will be:

Product launches to drive growth


Over the years, APNT has launched new products to adapt to the changing
market trend. Moreover, with adequate brand investments and innovative
marketing strategies, the company has established strong consumer
connect and brand recall.
APNT has increased premiumisation and added products (increased
primer/putty range; entry into waterproofing), thereby plugging gaps in its
portfolio. Further, we expect, new launches to accelerate going forward
with continued premiumisation.

31 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 46: APNT consistently expanding its product range
Year

Launches

FY06

Royale Play
Apex Ultima
Utsav

FY07

Luxury Ultra Gloss Enamel


Expansion of Royale Play range

FY08

Royale Metallics and variants

FY10

Royale Shyne
Launch of Royale & Royale Shyne with Teflon surface protector
Dholpur textured finish

FY11

Water based wood finishes


New textured finishes - Duracast Pebbletex and Crosstex

FY13

Water proofing products (smart care) launched

FY14

Apcolite advanced
Royal Aspira
Expansion of smart care range
Soft Launch of wallpapers - Nilaya

FY15

Royale WB Enamel
Royale Matt
2X Primer cum Putty
Primero Primer

Source: Company, IDFC Securities Research

Unmatched distribution infrastructure


APNT has an unmatched distribution infrastructure, covering ~35,000
dealers. Also, the company remains a preferred choice for paint dealers
with presence across segments/price points. However, there is ample
headroom to further expand network, market share and overall volumes as
the total dealer universe in India stands at ~65,000 dealers at present.
Exhibit 47: Strong focus on dealer expansion
(nos)

Dealer Network

40,000
30,000
20,000
10,000
0
FY01

FY07

FY15

FY16

Source: Company, IDFC Securities Research

Potential for improvement in paint usage levels


Improved paint usage
levels to benefit APNT, the
market leader with strong
brand equity/distribution

32 | IDFC SECURITIES

Indias per capita paint consumption remains low at 2.5kgs compared with
other developing markets (China: ~6-7kg, Asia-Pacific: 5-6kg) Though
current demand has been impacted by weak macro economy, long-term
structural drivers (reduction in repainting cycle, increased urbanisation and
rising first-time paint consumers) are intact. This should improve paint
usage levels and APNT, the market leader with strong brand
equity/distribution, will be a key beneficiary.

20 April 2016

Asian Paints

APNT to gain market share from unorganised segment


Over the past 15 years, the share of the unorganised segment in the
domestic paint industry declined from 45% to 35%. Going forward, we
expect this trend to sustain as demand for branded products continues to
improve with rise in disposable income and increased involvement of
consumer in the buying decision. APNT is well placed to tap this
opportunity given its brand leadership, increased presence in tier 2/3 cities
and scale benefits versus the unorganised segment.

Industry-leading margin profile to sustain


The domestic paint industry is oligopolistic in nature with APNT being a
clear market leader (a competitive ratio of 2.5x). This gives it an edge over
its peers in terms of scale, raw material procurement, distribution and
pricing. Historically, APNT has taken judicious pricing actions and
maintained its EBITDA margins at 16%+, the highest in the industry.
Further, the following factors are likely to result in sustained industryleading margin profile for APNT:

Strong volume growth led by price leadership

Benefits of lower RM costs


have reflected in APNTs
EBITDA margin
improvement

Through FY09-12, despite strong price hikes to pass on input cost inflation,
APNT registered double-digit volume growth, clearly reflecting its pricing
leadership and brand loyalty. Moreover, the industry has strong pricing
discipline, with peers following the pricing action of the market leader.
Even in the past 18 months, APNT reduced the MRP by 4% (2% each in two
tranches), which was followed by other players, in spite of the steep
reduction in crude oil prices. Though discounts to the trade have increased
by 2-3%, the benefits of lower RM costs have reflected in EBITDA margin
improvement, ahead of consumer staples companies.
Exhibit 48: Pricing power evident in revenue growth and profitability
Volume growth

30.0%

Price/mix growth

23.0%
16.0%
9.0%
2.0%
-5.0%
FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

Well placed to ride the premiumisation trend


APNT is well placed to ride the premiumisation trend in the paint industry,
led by a strong premium portfolio, with high-margin emulsions
contributing +50% to its decorative business. Moreover, the company is
seeing a steady shift in its image to a complete home dcor
service/solution provider from a paint product manufacturer. APNT has
achieved this shift through innovative strategies (signature stores, colour
idea stores, home solutions) and focussing on premiumising the overall
product delivery.

33 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 49: Premiumising within emulsion range

Source: Company, IDFC Securities Research

Scale benefits to boost margins going forward


With likely improvement
in volume, scale benefits
should kick in

Over FY06-12, APNTs revenues grew at 20%+ annually, gross margins


declined by 130bps, while EBITDA margin rose by 180bps, indicating its
operating leverage benefit due to its large scale. Moderation in volume
growth over FY12-15 and significant capacity addition in FY13 resulted in
muted margin expansion due to higher fixed costs. However, with likely
improvement in volume trajectory, scale benefits should kick in, thereby
boosting EBITDA margins going forward.
Exhibit 50: Reduction in fixed costs as percentage to sales
Staff cost (% to sales)

Manufacutring expenses (% to sales)

General expenses (% to sales)


10.0%
7.5%
5.0%
2.5%
0.0%
FY05 FY06 FY07 FY08 FY09 FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

International businesses Recovery on cards


APNTs international businesses the Caribbean, Middle East, Asia, South
Pacific and Africa contribute ~13% to its consolidated revenues. Growth
for the international business has moderated in the past two years due to
global slowdown, adverse currency movements and political turmoil in key
markets.

The international business


should gradually recover
led by stabilisation in
Egypt, where APNT is the
number two player

34 | IDFC SECURITIES

However, we expect the international business to gradually recover led by


stabilisation in Egypt, where APNT is the number two player, and recovery
in South Asian markets (Bangladesh and Nepal). The consolidation of
recently acquired Kadisco in Ethiopia (where margins are equivalent to the
Indian decorative business) and expansion in newer markets are additional
growth drivers. Moreover, APNT is focusing on creating business
infrastructure in international markets by expanding reach, plugging
portfolio gaps, improving service quality and building capacity. The
company has plans to set up a manufacturing facility in Indonesia with
24,550MT capacity, which should cushion growth rates in the current
challenging environment.

20 April 2016

Asian Paints
Exhibit 51:

Geography-wise revenue break-up


Africa
1%

South Pacific
7%

Asia
31%

Caribean
12%

Middle East
49%

Source: Company, IDFC Securities Research


Exhibit 52: Performance of key subsidiaries
Rs m

Sales

EBITDA

EBITDA margins

Key subsidiaries

FY14

FY15

FY14

FY15

FY14

Asian Paints Bangladesh

2197

2690

221

232

10.1%

FY15
8.6%

Asian Paints Nepal

1375.0

1570.1

261.3

246.0

19.0%

15.7%

SCIB chemicals

4686.9

4285.6

543.2

426.8

11.6%

10.0%

Berger paint Jamaica

1879.2

2220.2

38.9

54.8

2.1%

2.5%

Source: Company, IDFC Securities Research

Industrial segment Growth drivers aplenty


APNT has presence in the domestic industrial coatings business, through
two 50:50 joint ventures with PPG Inc. of the US. PPG (formerly Pittsburgh
Plate Glass) is the largest coatings company globally. One of the JVs is
primarily operated by PPG, while the other is operated by APNT.

PPG AP JV (78% of industrial segment revenues): The JV caters to


automotive OEM, marine and packaging segments and enjoys
leadership in the auto refinish business. It is second only to Kansai in the
auto OEM business.
AP PPG JV (22% of the sales): The JV caters to non-automotive
industrial coating segments such as protective coatings, powder
coatings and road marking paints.
Sales from the industrial JV have grown at a 9% CAGR over FY13-15, while
PAT has increased 4x, led by a 360bp improvement in operating margins.
APNT continues to see healthy growth in the refinish business and plans to
leverage PPGs technological expertise. Further, given its strong
relationships with European/US car makers, growth in the auto OEM
business should accelerate. Also, macro injections will drive auto OEM
growth, which will benefit the JV as well. Additionally, a pick-up in
industrial capex going forward could add drivers to the JVs growth.
Exhibit 53: PPG Colour Global leader in coatings
Global
General
PPG
Architecture
coatings
Industrial
Industry
48.0
35.0
Size($bn)
Global Position
1
1
2

Protective &
Marine

Refinish/
Collision

Auto
OEM

Packaging

Aerospace

13.0

7.0

9.0

3.0

1.0

Source: Company, IDFC Securities Research

35 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 54: Industrial JV performance Sales

Exhibit 55: Industrial JV performance EBITDA margin

Sales (Rs mn)

EBITDA (Rs m- LHS)

6600.0

EBITDA margins (RHS)

400.0

7.0

300.0

5.3

5700.0

200.0

3.5

5250.0

100.0

1.8

6150.0

4800.0

0.0
FY13

FY14

FY15

Source: Company, IDFC Securities Research

0.0
FY13

FY14

FY15

Source: Company, IDFC Securities Research

Home improvement and dcor Long road ahead


In 2012, APNT announced plans to consider opportunities in home
improvement. Consequently, the company acquired Sleek International in
2013 and ESS ESS Bathroom Products Pvt. Ltd. in 2014.

Sleek International: APNT forayed into the modular kitchen segment in


Aug-13 by acquiring a 51% stake in Sleek International for Rs1.2bn. Sleek
International has a pan-India presence with retail network of more than
30 showrooms, including shop-in-shops and 250+ dealers.
ESS ESS Bathroom Products Pvt. Ltd: APNT entered into the bathroom
fittings business in June-14 through acquiring ESSs front end sales
business (including brands, network and sales infrastructure).
Water proofing and adhesives: APNT ventured into the waterproofing
business in FY13 through launching its brand Smartcare. The company
entered the branded adhesive business in the retail segment through a
distribution arrangement with Henkel, the leading solution provider for
adhesives globally. It launched three products under the Loctite brand
Loctite Quick, Loctite Rapid and Loctite Tough. Loctite, largely present
in the industrial business, has now been extended to the retail market in
certain regions of the West markets through a cobranding initiative. The
strategy is to leverage APNTs strong dealer network to penetrate the
retail segment. Currently, the segment is dominated by Pidilite with
70%+ market share.
Exhibit 56: Sleek International Performance below expectations
PAT (Rs m)

Sales(Rs m)

0.0

1,400
1,050

-45.0

700

-90.0

350

-135.0

-180.0
FY14

FY15

FY14

FY15

Source: Company, IDFC Securities Research

36 | IDFC SECURITIES

20 April 2016

Asian Paints
Both the home dcor and bathroom fitting segments are largely
unorganised in nature. Moreover, increased focus on home aesthetics,
rising income levels and urbanisation are expected to drive growth for the
segments. As a result, significant growth opportunities for branded
products exist.
While current demand remains weak and overall contribution of the
segments to profitability is not relevant, we believe long-term growth
potential is immense. APNT can leverage its strong distribution network
and aggressive marketing initiatives to tap this opportunity, thereby
creating newer avenues for growth.

Financial analysis
Revenue trajectory to remain strong
We estimate APNTs
consolidated revenues to
grow at a CAGR of 15% on
13.5% domestic volume
CAGR over FY16-18E

APNTs consolidated revenues have grown at a CAGR of 16.5% over FY1115, led by strong growth in the domestic business (FY11-15 volume CAGR
8.4%). Also, despite weak domestic demand environment, we expect
APNTs revenue trajectory to remain strong. Robust volume-led growth in
the decorative segment and recovery in international/industrial businesses
should further aid revenues. We estimate APNTs consolidated revenues to
grow at a CAGR of 15% on 13.5% domestic volume CAGR over FY16-18E.
We do not factor in a significant price/mix increase, which will be a
function of inflation going forward.

Exhibit 57: Volume CAGR of 13.5% over FY16-18E

9.0%

120.0

15.0%

350,000

4.5%

60.0

7.5%

0.0%

0.0

0.0%

Source: Company, IDFC Securities Research

FY16E

FY15

FY14

FY13

FY12

FY11

FY18E

700,000

Net sales (Rs bn - LHS)

FY17E

22.5%

FY18E

180.0

FY17E

13.5%

FY16E

1,050,000

FY15

YoY (% - RHS)
30.0%

FY14

240.0

FY13

YoY (% - RHS)
18.0%

FY12

1,400,000

FY11

Volume (nos - LHS)

Exhibit 58: Consolidated sales CAGR 15% over FY16-18E

Source: Company, IDFC Securities Research

Operating leverage, better international profitability to prop margin


Despite gross margin expansion of 190bps, APNTs consolidated EBITDA
has grown at a CAGR of 14% over FY11-15, with EBITDA margin declining
120bps over the same period. The growth was largely impacted by
increased fixed costs due to significant capacity expansion and weakness
in industrial/international businesses.
Operational performance
set to improve

37 | IDFC SECURITIES

However, in the past five quarters, gross margin expanded significantly,


aided by steep decline in input costs. With the input costs benefit already
in the base, we expect gross margin expansion to be lower versus that in
the past five quarters. However, we expect the operational performance to
improve, led by healthy growth in high-margin decorative segment and
improved industrial/international business profitability. We estimate
consolidated EBITDA to grow at a CAGR of 19% with an EBITDA margin
expansion of 110bps over FY16-18E.

20 April 2016

Asian Paints
Exhibit 59: EBITDA CAGR of 19% over FY16-18E
EBITDA (Rs bn - LHS)

Exhibit 60: Steady margin expansion


Gross margins (LHS)

YoY (% - RHS)

44.0
33.0

EBITDA margins (RHS)

37.5%

48.0

24.0

30.0%

45.0

18.0

42.0

12.0

39.0

6.0

36.0

0.0

22.5%
22.0

Source: Company, IDFC Securities Research


Exhibit 61:

FY18E

FY17E

FY16E

FY15

FY11

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

0.0%
FY11

0.0

FY14

7.5%

FY13

11.0

FY12

15.0%

Source: Company, IDFC Securities Research


Raw material break-up

Additives
15%

Packaging
material
17%

Pigments,
Extenders,
Minerals etc.
30%

Raw material
consumed
83%

Others
5%
Monomers
13%

Solvents
12%

Oils
5%

Resins
3%

Source: IDFC Securities Research, Company

We estimate standalone margins to expand by ~100bps over FY16-18E as


benefits from operating leverage start kicking in, led by improvement in
volume growth in the decorative paint business
Exhibit 62: Standalone EBITDA to grow at CAGR of 18.5% over FY16-18E
EBITDA

EBITDA margin

0.00

0.0
FY18E

6.0

FY17E

10.00

FY16E

12.0

FY15

20.00

FY14

18.0

FY13

30.00

FY12

24.0

FY11

40.00

Source: Company, IDFC Securities Research

Moreover, likely recovery in industrial capex as well as healthy pick-up in


the automotive segment should drive growth in the industrial coatings
segment. We expect revenues from industrial coating JVs to grow at a
CAGR of 15% over FY16-18E.

38 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 63: Industrial JV performance
Sales (Rs m)
EBITDA (Rs m)

FY13

FY14

FY15

FY16E

FY17E

FY18E

5410.9

5614.1

6376.2

7332.6

8432.5

9697.4

118.3

229.4

372.3

611.8

726.1

860.6

2.2

4.1

5.8

8.3

8.6

8.9

58.3

124.4

254.1

439.4

524.8

626.0

EBITDA margins (%)


PAT

Source: Company, IDFC Securities Research

Profitability of the international business is likely to improve with pick-up


in Nepal, Bangladesh, Egypt as well as contribution from the recently
acquired high-margin Ethiopia business. We estimate APNTs earnings to
grow at a CAGR of 20% over FY16-18E, aided by strong growth in the
decorative business and improved profitability in industrial/international
businesses.
Exhibit 64: Earnings to grow at a CAGR of 20% over FY16-18E
PAT (Rs bn - LHS)

YoY (% - RHS)

30.0

35.0%

24.0

28.0%

18.0

21.0%

12.0

14.0%

6.0

7.0%

0.0

0.0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

Working capital efficiency maintained despite expansion


APNT has the largest dealer network in India. However, its
debtor/inventory days are the lowest versus peers considering its
leadership and robust supply chain in the decorative segment. This clearly
indicates APNTs working capital efficiency. Further, despite planned
network expansion (1,500-2,000 dealer addition annually), we expect
APNT to maintain its efficient working capital structure.
Exhibit 65: Net working capital days best in class
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Debtor

Days of revenue

28

30

33

32

30

30

30

30

Creditors

42

48

48

50

40

38

38

38

Inventory

62

61

61

59

58

58

58

58

Loans & advances

10

12

11

12

14

15

16

16

Other CL

20

26

29

27

26

26

25

23

Net working capital

28

30

33

32

30

30

30

30

Source: Company, IDFC Securities Research

Industry-leading return ratios to sustain


APNT has maintained a strong return profile led by consistent earnings
growth (backed by dominance in the decorative segment) and efficient
working capital management. Given that capacity expansion can be
comfortably funded through internal accruals and that profitability and
dividend pay-out ratios will only steadily improve, we expect APNTs
RoCE/RoE to improve from 38%/30.6% in FY15 to 44%/35.8% in FY18E.

39 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 66: Industry-leading return profile
(%)

ROE

Exhibit 67: Healthy dividend pay-out


(%)

ROCE

Dividend payout

46.0

60.0

42.0

45.0

38.0
30.0
34.0
15.0

Source: Company, IDFC Securities Research

FY18E

FY17E

FY16E

FY15

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

FY14

FY11

FY13

0.0

FY12

FY11

30.0

Source: Company, IDFC Securities Research

Cash flow generation strong to fund capex requirements


APNT has invested significantly in expanding capacities, both in India and
internationally. In the next few years, the company plans to expand
capacity in Haryana, Andhra Pradesh, Karnataka and Indonesia. We factor
in Rs17.3bn capex over FY15-18E, which will be invested in various capacity
expansion projects. Nevertheless, with operating cash flows of ~Rs72bn
estimated over FY16-18E, capex requirements, however aggressive, will be
comfortably funded.
Exhibit 68: Capex of ~Rs17.3bn over FY15-18E

Exhibit 69: Strong cash generation to fund capex

(Rs bn)

(Rs bn)
30.0

Capex

9.0

CFO

FCF

24.0
6.0

18.0
12.0

3.0

6.0

Source: Company, IDFC Securities Research

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

FY11

FY10

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

0.0
FY11

0.0

Source: Company, IDFC Securities Research

Valuation and view


We believe structural growth tailwinds exist for the Indian paints industry.
As a result, volume growth will likely be ahead of other broad consumer
industries such as staples and alcoholic beverages. Further, headwinds
faced by some other industries (staples: higher competitive intensity and
increased penetration; retail: e-commerce threat; cigarettes and alcoholic
beverages: regulation-led issues) are absent for the paints industry.
Consequently, we believe broader paint industry players deserve premium
multiples versus other consumer segments.
APNT enjoys superior
metrics market share,
distribution, product
portfolio, volume growth,
EBITDA margin and return
ratios

40 | IDFC SECURITIES

APNT remains at the forefront of the paint industry. We believe APNT is


the best large-cap proxy to play on rising urbanisation in India with ~90%
of its revenues coming from the decorative segment (80% India; ~10%
international, the highest among peers). Also, superior metrics (market
share, distribution, product portfolio, volume growth, EBITDA margin and
return ratios) and the relentless push to get back to mid-teen revenue
growth underpin our view.

20 April 2016

Asian Paints

Initiate with Outperformer; APNT is our top large-cap pick


Given structural growth prospects of the industry and strong predictability
of cash flows for larger players, we value paint companies using DCF. Our
DCF-based target price for APNT is Rs1,015, implying 15% upside from the
current levels. This translates into a 36x FY18E target earnings. The stock
currently trades at 31x FY18E earnings, which, we believe, is not prohibitive
given APNTs superior growth and margin profile, even versus consumer
staples businesses. Further, given APNTs higher growth visibility/stability,
we initiate coverage with an Outperformer rating the company is our top
consumer large-cap pick.
Exhibit 70: APNT FY18 DCF-based target price of Rs1,015
Rs m

FY15

FY16E

FY17E

FY18E

FY19E

FY20E

FY28E

Sales

141,828

155,846

177,455

206,769

239,852

278,228

830,485

9.9%

13.9%

16.5%

16.0%

16.0%

14%

22,354

29,097

33,934

40,953

46,052

53,976

174,402

16%

19%

19%

20%

19%

19%

21%

Depreciation

-2,659

-2,969

-3,309

-3,649

-3,929

-4,209

-6,449

EBIT

21,392

28,220

33,217

40,522

45,241

53,384

177,088

Sales growth
EBITDA
EBITDA margin

Current tax
Capex
Change in WC

6,495

8,640

102,07

12,490

13,968

16,508

54,897

-3,844

-7,290

-5,000

-5,000

-4,000

-4,000

-4,000

-5111

-1,785

-2,801

-3,437

1,175

-2,015

-2,382

13,126

18,227

23,012

32,194

34,938

122,258

FCF
discount factor
PV of FCF (@ 12% WACC)
WACC
PV of projection period

12%
338,589

Terminal growth rate


Terminal value

5%
1,880,330

PV of terminal value

614,844
Source: Company, IDFC Securities Research
Exhibit 71:

1.0

0.9

0.8

0.3

23,012
Total Enterprise value

28,789

27,939

654,821

Net debt (Mar'18)

19,895

Equity value
DCF based value per share
(Rs)
# shares outstanding (m)

973,328
1,015
959

PEG lower compared with large-cap consumer staples

(x)

PEG

3.0

2.5
2.2

2.5
2.0

953,433

1.6

1.5
1.0
0.5
0.0
Asian Paints

HUL

ITC

Source: Company, IDFC Securities Research

41 | IDFC SECURITIES

20 April 2016

Asian Paints
Exhibit 72: Premium valuations to sustain
(X)
50

PE (x)
+ 1 Std. Dev.

Avg. PE
- 1 Std. Dev.

Exhibit 73: Five-year average EV/EBITDA at 22x


(X)
35

30

21

20

14

10

Source: Company, IDFC Securities Research

42 | IDFC SECURITIES

Avg. EV/EBITDA
- 1 Std. Dev.

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

28

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

40

EV/EBITDA
+ 1 Std. Dev.

Source: Company, IDFC Securities Research

20 April 2016

Asian Paints
Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth

Key ratios
FY15

FY14
127,148

141,828

FY16E
155,846

FY17E
177,455

FY14

FY15

FY16E

FY17E

EBITDA margin (%)

15.7

15.8

18.7

19.1

19.8

206,769

EBIT margin (%)

13.8

13.9

16.8

17.3

18.0

PAT margin (%)

FY18E

Year to 31 Mar

16.2

11.5

9.9

13.9

16.5

Operating expenses

107,169

119,474

126,749

143,521

165,816

RoE (%)

EBITDA

19,979

22,354

29,097

33,934

40,953

RoCE (%)

15.4

11.9

30.2

16.6

20.7

% change
Other income

1,342

1,697

2,093

2,592

3,218

Net interest

(422)

(348)

(348)

(290)

(232)

Depreciation
Pre-tax profit
Deferred tax
Current tax

2,457

2,659

2,969

3,309

3,649

18,442

21,044

27,872

32,927

40,290

351

(92)

5,364

6,587

8,640

10,207

12,490

12,727

14,549

19,232

22,719

27,800

Minorities

(440)

(322)

(458)

(533)

(655)

Adjusted net profit

12,288

14,227

18,773

22,187

27,145

Non-recurring items

(100)

(276)

Reported net profit

12,188

13,952

18,773

22,187

27,145

9.4

14.5

34.6

18.2

22.3

Profit after tax


Preference dividend

% change

FY18E

9.7

10.0

12.0

12.5

13.1

33.1

32.4

36.1

35.5

35.8

40.4

38.1

43.4

43.4

44.1

Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)

0.0

0.0

0.0

(0.1)

(0.2)

0.0

0.1

0.0

(0.3)

(0.5)

1.3

0.8

1.5

2.1

2.7

Dividend yield (%)

0.6

0.7

0.9

1.0

1.2

Valuations
Year to 31 Mar

FY14

FY15

FY16E

FY17E

FY18E

Reported EPS (Rs)

12.7

14.5

19.6

23.1

28.3

Adj. EPS (Rs)

12.8

14.8

19.6

23.1

28.3

PE (x)

69.1

59.7

45.3

38.3

31.3

Price/ Book (x)

21.0

17.9

15.0

12.4

10.2

EV/ Net sales (x)

6.7

6.0

5.5

4.8

4.0

EV/ EBITDA (x)

42.7

38.2

29.3

24.9

20.4

EV/ CE (x)

18.0

15.2

13.2

11.0

9.0

Balance sheet
As on 31 Mar (Rs
m)

FY14

FY15

FY16E

FY17E

FY18E

959

959

959

959

959

39,433

46,464

55,655

67,517

82,317

42,852

50,060

59,709

72,104

87,559

33,532

33,053

36,036

40,338

46,241

2,492

4,210

2,900

2,900

2,900

1,878

1,799

1,799

1,799

1,799

37,902

39,062

40,735

45,037

50,940

80,754

89,123

100,444

117,141

138,499

24,918

26,102

30,423

32,114

33,465

Investments

14,236

15,878

15,878

15,878

15,878

Cash

2,290

2,044

4,225

12,127

22,795

37,642

42,274

47,042

54,145

63,485

Paid-up capital
Preference capital
Reserves & surplus
Shareholders'
equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets

Other current assets


Deferred tax assets
Other non-current
assets
Net working capital
Total assets

1,669

2,825

2,876

2,876

2,876

6,400

11,265

15,231

25,935

40,039

80,754

89,123

100,444

117,141

138,499

FY14

FY15

FY16E

FY17E

FY18E

Net sales growth trend

Shareholding pattern

Cash flow
Year to 31 Mar (Rs
m)
Pre-tax profit
Depreciation
Chg in Working
capital
Total tax paid
Interest Received
Ext ord. Items
Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments
Debt raised/(repaid)
Interest Paid
Capital
raised/(repaid)
Dividend (incl. tax)
Other items
Net chg in cash

18,442

21,044

27,872

32,927

40,290

(2,457)

(2,659)

(2,969)

(3,309)

(3,649)

(2,494)

(7,173)

(3,185)

(3,819)

(5,166)

(5,364)

(6,587)

(8,640)

(10,207)

(12,490)
0

(100)

(276)

14,655

10,921

20,713

23,517

28,244

(2,815)

(3,844)

(7,290)

(5,000)

(5,000)

11,418

6,730

13,075

18,227

23,012

(11,279)

(1,642)

26

1,719

(1,310)

(422)

(348)

(348)

(290)

(232)

(5,904)

(6,981)

(9,203)

(10,325)

(12,345)

249

74

(381)

(5,077)

(246)

2,182

7,902

10,667

43 | IDFC SECURITIES

As of Dec 15

20 April 2016

Outshining peers
OUTPERFORMER
Berger Paints, previously a pure industrial-paints play, transformed
itself into a credible number two player in India, led by increased focus
on high-margin decorative segment. The transformation has resulted in
strong 19% earnings CAGR over FY10-16E. Moreover, we expect aheadof-industry growth to continue for Berger given its widened product
portfolio, continued dealer network expansion and incremental revenue
drivers in international/industrial businesses. We expect strong volume
growth, steady margin expansion and lower interest costs to drive
earnings CAGR to 30% over FY16-18E, ahead of peers. We value Berger
on DCF at Rs299, implying a 35x FY18E P/E, which, we believe, is fair
given its superior earnings growth. Initiate with Outperformer Berger
is one of our top mid-cap picks.

20 April 2016
BSE Sensex: 25844
Sector: Paints

Stock data
CMP (Rs)

251

Mkt Cap (Rs bn/USD m)

174.0 /2,627

Target Price (Rs)

299

Change in TP (%)

NA

Potential from CMP (%)

19.2

Earnings change (%)


FY16E
FY17E
FY18E

Bloomberg code

BRGR IN

1-yr high/low (Rs)

284/171

6-mth avg. daily volumes (m)

0.4

6-mth avg. daily traded value


(Rsm/USDm)

89.7/1.4

Shares outstanding (m)

693.5

Free float (%)

25.0

Promoter holding (%)

75

Price performance relative & absolute


110

Berger Paints India

Sensex

105

Margin expansion to drive earnings growth: Berger outperformed APNT,


the market leader, with an EBITDA CAGR of 19.5% over FY11-15. Going
forward, we expect the outperformance to continue, aided by operating
leverage benefits and increasing contribution from premium paint
products. Moreover, higher growth in the industrial segment (post the JV
with Nippon Paints) and improved profitability of the international
business is likely to propel growth. We estimate FY16-18E consolidated
EBITDA to grow at a CAGR of 24% with margin expansion of 180bps.
Impressive performance warrants premium multiples: We expect
Bergers overall performance to be impressive with improved return
profile and FY16-18E earnings CAGR at 30%. Our DCF target price is
Rs299, implying a 35x FY18E P/E, which we believe is justified given
Bergers superior earnings growth trajectory and PEG ratio of less than 1.
Initiate with Outperformer Berger is one of our top mid-cap consumer
picks.
Key valuation metrics
Year to 31 Mar
Net sales (Rs m)

FY14
38,697

FY15
43,221

FY16E
47,260

FY17E
54,440

FY18E
64,271

2,493

2,647

3,499

4,460

5,887

693

693

693

693

693

3.6

3.8

5.0

6.4

8.5

14.1

6.2

32.2

27.5

32.0

PE (x)

69.7

65.7

49.7

39.0

29.5

Price/ Book (x)

15.5

13.8

11.8

10.0

8.2

EV/ EBITDA (x)

41.3

34.9

27.5

22.4

17.5

24.0

22.2

25.6

27.8

30.4

21.3

22.2

27.3

31.9

37.1

Adj. net profit (Rs m)

100

Shares in issue (m)

95

Adj. EPS (Rs)

90

% change

85
Apr-14

(%)

Industry-leading revenue growth to continue: Over FY05-15, Bergers


standalone sales CAGR surged 17% on improved product and segment
mix, brand building, dealer network expansion and cost efficiencies.
Further, we believe this ahead-of-category growth should sustain, led by
increased focus on the premium decorative segment. Consequently, we
expect Bergers volume growth to surpass peers over FY16-18E,
translating into 16.6% consolidated revenue CAGR, ahead of peers.

3-mth

6-mth

1-yr

BRGR Equity

0.7

11.9

22.4

BSE Sensex

5.6

(5.6)

(9.1)

RoE (%)
RoCE (%)

Source: Company, IDFC Securities Research

Harit Kapoor

Mehul Desai

harit.kapoor@idfc.com
91-22-662 22649

mehul.desai@idfc.com
91-22-662 22640

For Private Circulation only.

Important disclosures appear at the back of this report

INITIATING COVERAGE

Berger Paints India

Berger Paints India

INVESTMENT ARGUMENT
Berger Paints, previously a pure industrial-paints play, transformed
itself into a credible number two player in India, led by increased
focus on the high-margin decorative segment.
Within the decorative segment, Berger grew ahead-of-industry
through successfully premiumising its portfolio, in the past five years.
We expect this outperformance to continue, led by increased
investments in manufacturing, distribution and communications as
also rising premiumisation.
These together with benign input cost should boost FY16-18E EBITDA
margin by 180bps, implying sector-leading PAT CAGR of 30%.
Bergers superior earnings growth and lower PEG are reflected in the
narrowing valuation gap (from 30% discount in FY13 to 10% currently)
with APNT.
We initiate coverage on Berger Paints with Outperformer and Rs299
DCF target price Berger is one of our top mid-cap consumer picks.

Berger Paints An overview


Promoter owned but professionally managed
Till 1991, several promoter level changes came to the fore for Berger Paints
in India (Exhibit 74). Finally, the Dhingra family acquired the company in
1991. Mr K.S Dhingra (a fourth generation) is today the Chairman of the
company and his brother, G. S. Dhingra is the Vice Chairman. Together, the
family owns 75% of the company.
However, traditionally Berger has been managed professionally and the
trend continues till date the promoter family is not part of the day-to-day
management. This trend, evident in all successful Indian consumer
companies, has led to: 1) a more efficiently run business, 2) better planning
for succession and 3) ability to attract better talent. Companies such as
Dabur, Marico, GCPL, Jyothy Labs etc. have all turned the corner and
improved their business metrics through adopting a professional
management. We believe a similar structure for Berger bodes well for its
long-term prospects.
Exhibit 74: Berger Key milestones
Bought over by
British Paints
(Holdings)
Limited.

1920
1947

Started as Hadfield's
(India) Ltd producing
ready-mixed stiff
paints, varnishes and
distempers

Name changed
to Berger paints
india ltd

1960

Acquired by
Celanese corp &
sold to BERGER
JENSON &
NICHOLSON
LTD in 1969

1983

Mr K S Dhingra &
Mr G S Dhingra
acquire
controlling stake
from UB group

1985-90

Strong portfolio
created with
brands - SILK,
RANGOLI,
LUXOL, BISON

1991

Merger of
Rajdoot paints, 2
paints facility
added to
portfolio

1996

Launch of
COLORBANK
TINTING
SYSTEM

1998

Acquisition of ICI
Indias Motors
and Industrial
business & Rishra
factory

2000

2001

Acquired Jenson
& nicholson,
Nepal

Acquisition of
100% stake in
Bolix, S.A.
POLAND

2007

Berger Paints
Overseas Ltd
commences
operation in
Russia

2008

Launch of Express
painting. Phase 1 of
Hindupur plant
commissioned

2013

2015

Acquisition of
architectural
business of
Sherwin Williams
Paints India

Source: Company, IDFC Securities Research

45 | IDFC SECURITIES

20 April 2016

Berger Paints India

Industry-leading growth to continue


Berger Paints is the second largest player in the domestic paint market
with 18% share in the organised market. The company, over the past five
years, has consistently outperformed the industry. This has been led by
increasing its share in the high-margin decorative segment and plugging
portfolio gaps (by making a strong play into premium emulsion paints).
Further, Berger has also invested aggressively in brands and
capacity/dealer network expansion.

Given Bergers impressive


track record and effective
execution, we expect
ahead-of-industry growth
to continue

Over FY05-15, Bergers consolidated sales have grown at 18% CAGR. Gross
margins over FY05-15 improved by 590bps on the back of improved mix,
cost efficiencies and input cost benefit (part of which was reinvested in
brand building). This resulted in EBITDA margin expansion of 200bps and
CAGR of 20% over FY05-15. Given Bergers impressive track record and
effective execution, we expect ahead-of-industry growth to continue.

Exhibit 75: Revenue CAGR of 18% over FY05-15


Net sales (Rs bn - LHS)

Exhibit 76: EBITDA CAGR of 20% over FY05-15


EBITDA (Rs bn - LHS)

YoY (% - RHS)

EBITDA Margins (% - RHS)

Source: Company, IDFC Securities Research

14.0%

FY15

FY13

FY14

FY12

FY11

0.0%
FY10

0.0
FY09

0.0%

FY08

0.0

FY07

3.5%

FY06

1.5

FY05

6.0%
FY15

10.0
FY14

7.0%

FY13

3.0

FY12

12.0%

FY11

20.0

FY10

10.5%

FY09

4.5

18.0%

FY08

24.0%

30.0

FY07

40.0

FY06

30.0%

FY05

50.0

6.0

Source: Company, IDFC Securities Research

Steady improvement in profitability; converging with market


leader
We expect convergence
with APNT to continue as
scale/mix improvement
drives better
profitability/return
metrics

46 | IDFC SECURITIES

Over FY05-10, Bergers revenues grew at a CAGR of 15%, lower than


APNTs 21% as APNT made a bigger play into Bergers significant mass
market business. However, post FY11 Berger outperformed the category
growth, converging with the market leader. The companys standalone
sales grew at a CAGR of 18% versus APNTs 19% over FY10-15. The
standalone gross margin differential between Berger and APNT reduced
from 680bps in FY05 to 590bp/320bps in FY11/FY15. This was led by
increased premiumisation, aggressive advertising & promotion spends to
improve
brand
equity,
consistent
distribution
expansion
and
innovation/product launches to plug portfolio gaps. We expect this
convergence to steadily continue as scale/mix improvement drives better
profitability/return metrics.

20 April 2016

Berger Paints India


Exhibit 77: Revenue growth Berger versus APNT
(%)

Asian Paints

Exhibit 78: GMs Berger converging with APNT


Berger Paints

(%)

Berger Paints

Asian Paints

46.0

30.0
25.0

42.0

20.0
38.0

15.0
10.0

34.0

5.0
FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY05

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

Source: Company, IDFC Securities Research

FY06

30.0

0.0

Source: Company, IDFC Securities Research

Decoratives Moving up the premium chain


Berger, when acquired by the Dhingra family in 1991, was primarily an
industrial paints company the share of decorative sales in its overall mix
stood at only 20%. Since then, the company has increased its decorative
share in the overall mix to ~80%.

Successful launches plug product portfolio gap


Berger regained market
share by plugging its
portfolio gap, especially in
the premium segment

Berger initially ventured into the economy segment. However, over FY0610, the companys revenue growth was lower than APNTs due to: 1) limited
presence in premium products (the segment was starting to pick pace),
and 2) loss of market share (APNT increased focus on the economy
segment). Nevertheless, Berger regained market share by plugging its
portfolio gap, especially in the premium segment.
Exhibit 79: Revenue growth over FY06-10 APNT versus Berger
(%)

Asian Paints

Berger Paints

30.0

20.0

10.0

0.0
FY06

FY07

FY08

FY09

FY10

Source: Company, IDFC Securities Research


Exhibit 80: New launches
Product

Key features

WeatherCoat Allguard
WeatherCoat Kool n
Seal

Premium Plus exterior emulsion with water repelling silicon


Two way advantage of sealing terrace cracks and cooling
interiors
Low VOC, low emission emulsion
Breathe Easy
and enamel paints
Source: Company, IDFC Securities Research

Over the past three years, Berger expanded its premium range in interior
and exterior emulsions segment, through launching variants of Breathe
Easy, Silk and WeatherCoat Allguard.

47 | IDFC SECURITIES

20 April 2016

Berger Paints India


Exhibit 81:

Premium product portfolio

Category

Segment

Brand

Variants

Interior

Designer Finishes

Silk

Silk Illusions Design Metallica


Silk Illusions Non Metallic
Silk Illusions Metallica
Silk Illusions Marble Finish

Interior Emulsion

Silk

Silk Luxury Emulsion

Easy clean
Exterior

Exterior Emulsion

WeatherCoat

WeatherCoat All Guard


WeatherCoat Longlife
WeatherCoat Smooth
WeatherCoat Tile Protektor
WeatherCoat Kool & Seal

Source: Company, IDFC Securities Research

Premium decorative focus to drive ahead-of-category growth

Focus on the premium


decorative segment to
help sustain Bergers
competitive positioning

Over FY11-15, Bergers revenue growth recovered to APNTs levels. Gross


margins improved 500bps, of which ~200bps was from an improved
product mix. We believe increased focus on the premium decorative
segment would help sustain Bergers competitive positioning and drive
ahead-of-category growth.
Exhibit 82: Revenue growth over FY11-15 APNT versus Berger
(%)

Asian Paints

Berger Paints

30.0
20.0

10.0
0.0
FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

Aggressive advertising spends to back brands


Berger has been the most aggressive company among peers in backing its
brands advertising spends, as a percentage to sales, have increased by
350bps from 3.3% in FY05 to 6.8% in FY15. The company roped in Katrina
Kaif, a popular actor, as its brand ambassador in 2012, launching a
campaign, Experience silk on all your walls. With the launch of ultrapremium range under Silk in 2014, Berger further built on the existing
campaign, taking it higher with Experience richness of silk.
Exhibit 83: A&P as percentage of sales A comparison
(%)
8.0

Berger Paints

Asian Paints

Kansai Nerolac

6.0
4.0
2.0
0.0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

48 | IDFC SECURITIES

20 April 2016

Berger Paints India


Exhibit 84: Aggressive campaigns to promote the premium range under Silk

Source: Company, IDFC Securities Research

Moreover, cash discounts as a percentage of sales, have reduced from


4.5%+ in mid-2000 to ~4% currently, which clearly indicates Bergers focus
on creating brand equity rather than pushing sales through higher trade
margins. We believe these initiatives have boosted revenue growth and
market share gains in an otherwise sticky industry.
Exhibit 85: Cash discount as a percentage of sales has moderated
Cash Discount (%)
4.3
4.1
3.8
3.6
3.3
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

Industrial segment Opportunities ahead


The industrial business accounts for 20% of Bergers sales. Within the
business, the company operates in three segments General industrials &
auto, protective and powder coatings, accounting for 9%, 9% and 2% of
sales respectively.

Protective coatings Market leader


Berger also provides
value-added services in
the protective coatings
segment

Berger is the market leader in the protective coatings segment, which is


currently seeing growth similar to the decorative segment. The segment
caters to a wide range of industries within core industrial and
infrastructure areas. Apart from a wide product range, Berger also
provides value-added services through its protection consultancy services.
Exhibit 86: Strong portfolio in protective coatings
Product

Application

Epilux FRX
Construction primer with corrosion resistance
Epilux superbuild Surface tolerant maintenance coating, used in structural steel and
ST
pipelines in refineries, chemical units, off-shore platform
Maintenance coatings for coating roof exteriors, bridge decks in
Epilux durebuild
coastal marine environments
Epimax GPE
Primer cum finish for coastal and offshore structures
Lumeros Heat
Coatings for steel structures exposed to temperatures up to 6000C
resistant coatings
Source: Company, IDFC Securities Research

49 | IDFC SECURITIES

20 April 2016

Berger Paints India

Incremental drivers Joint ventures with global players


Berger Becker Coatings: The subsidiary manufactures and sells coil
coatings and specialty paints. Becker is an international coatings group
with a leading position in its markets globally and presence in coil
coatings, industrial coatings, and consumer design finishes.
Exhibit 87: Key financials
Rs m

FY14

FY15

Net sales

2,801

2,730

EBITDA
EBITDA margins

175

213

6.2%

7.8%

Source: Company, IDFC Securities Research

BNB Coatings India Pvt. Ltd. is a joint venture (49:51) with Nippon Paint
Automotive Coating (NPAU) of Japan for manufacturing coatings for
plastic substrates of automobiles. In Nov-15, Berger Paints India and
NPAU agreed to further strengthen the capability of their JV, BNB
Coatings India Pvt. Ltd, by transferring some part of their businesses to
the JV. Berger will transfer three-wheeler and four-wheeler (passenger
cars and SUV) paint businesses to BNB, while Nippon Paints India will
transfer its four-wheeler (other than commercial vehicles, auto parts and
ancillaries) paint business. Nippon Paints (India) Pvt. Ltd and Berger
have their automotive coating manufacturing units in Bengaluru and
Howrah, respectively.
Though the quantum of the transferred revenue (from the standalone
business into the JV) is unknown, we understand that 9% of Berger Paints
standalone sales are from general industrial and automotive paints. Hence,
a part of this sum will be transferred to the JV.
The JV will have significant synergies from Nippons technology expertise,
low-cost formulations and customer relationship with Japanese auto
majors. Further, low-cost manufacturing by Berger India and increased
capacity will be additional positives. We believe the JV is will boost overall
automotive coatings business for Berger.
Exhibit 88: Revenues of BNB Coatings India
Net sales (Rs mn)
160
154
148
142
136
130
FY14

FY15

Source: Company, IDFC Securities Research

50 | IDFC SECURITIES

20 April 2016

Berger Paints India

International businesses Bright prospects


Bergers international business (in Poland, Nepal and Russia) accounts for
~6% of its consolidated sales.

Poland Long-term opportunities exist


About 60% of Bergers international business comes from the acquired
subsidiary, Bolix S.A. Berger acquired Bolix in Aug-08 for US$38.5m
(~Rs1.6bn); Bolix generated Rs1.9bn revenues at the time of the acquisition.
Bolix manufactures and markets external insulation and finishing systems
(EIFS) in Poland and other nearby markets. These systems provide exterior
walls of buildings insulation from adverse temperatures, thereby reducing
energy costs. The management has not been able to leverage this
technology in other markets, primarily India, and hence, revenues have not
grown for the business. However, with the business having 10%+ EBITDA
margins and long-term viability (with growing need for energy efficient
systems), these products can benefit in the long term.
Exhibit 89: Bolix sales largely flat
Sales(Rs bn)
2.0
1.5
1.0
0.5
0.0
CY09

CY10

CY11

CY12

CY13

CY14

Source: Company, IDFC Securities Research

Nepal Growth to recover from FY17


We expect growth to
recover from FY17, led by
impressive track record of
the Nepal business

Berger, through its wholly-owned subsidiary, Berger Jensen and Nicholson


(BJN) Nepal, has been operating in the decorative paints segment in Nepal
since 2000. The company is now the second largest paint company in
Nepal after APNT. In FY15, the entity posted revenues of Rs963m, EBITDA
margins of ~20% and PAT of Rs141m. Though the current year has been
impacted by the earthquake and political uncertainties in Nepal, we expect
growth to recover from FY17, led by the impressive track record of the
Nepal business (26% revenue CAGR over FY10-15).
Exhibit 90: BJN Nepal Strong revenue CAGR of 26% over FY10-15
Revenues (NPR mn)

1,200
900
600
300
0
FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

51 | IDFC SECURITIES

20 April 2016

Berger Paints India

Russia Marginal business; sizeable potential


Currently, Berger has a marginal business in Russia (Rs67m revenues in
FY15). However, the company and the government of the Stavropol
Region, Russian Federation have entered into an MoU for conducting a
feasibility study on establishing an industrial coatings plant in Stavropol,
Russia. The company seeks to set up the plant so as to cater to the
demands of the industries in the region and elsewhere in Russia. We
expect this market to be marginal for Berger in the near term given its
current size and the Rouble crash. However, given the size of the Russian
industrial market (over 700,000tonnes), a long-term opportunity exists.
Exhibit 91:

Russia Small business with significant growth opportunity

80.0
60.0
40.0
20.0
0.0
FY11

FY12

FY13

FY14

FY15

Revenues (Rs mn)

Source: Company, IDFC Securities Research

Berger poised to tap the next leg of growth


New service offerings to strengthen brand equity
In Oct-15, Berger launched a new colouring initiative, Express Painting
(XP), to provide services of trained painters (equipped with mechanised
tools to colour residential units at no extra cost). XP services make the
overall process much faster (reducing time taken by 40%) and cleaner,
facilitating even coating versus the traditional manual method. The
company has set up 18 centres to train ~10,000 painters by Mar-16.
Moreover, a new series of XP Advanced paints has been launched for
application through this channel.
The strategy is to become an aggregator, create a huge inventory of
trained contractors and premiumise the overall painting process through
automated tools. The service, which was test-launched in West Bengal and
Kerala, has seen strong traction and a pan-India roll-out is in progress.
Moreover, Berger has a Prolinks division, a dedicated team focusing on
large construction projects and providing services such as paint audits,
technical support and complete inspection.
We believe aggressive marketing innovations such as express painting
would strengthen Bergers overall brand equity/position.
Exhibit 92: Express painting Assessing pros and cons
Pros

Cons

40% faster than traditional painting

Higher cost

Builds brand equity

No substantial differentiation

No mess during the process

Dealer push not visible yet

More professional service


Source: Company, IDFC Securities Research

52 | IDFC SECURITIES

20 April 2016

Berger Paints India

Further headroom for dealer expansion exists


Distribution is a major entry barrier and a key success factor for the
domestic paint industry. Berger with a pan-India network (160+ stock
points) has aggressively expanded its dealer network from ~10,000 dealers
in FY07 to ~15,000 currently.
Moreover, there is further headroom for expansion as of the total dealer
universe of 60,000, APNT reaches 35,000, more than double the reach of
Berger. Further, a dealer generally displays 2-3 brands in outlets
therefore, Berger can leverage its strong brands/wide portfolio to scale up
its distribution network not only through new dealers but also via existing
dealers (not housing Bergers products).
Exhibit 93: Steady dealer expansion
(nos)

Exhibit 94: Enough headroom to scale up network


(nos)

Dealer Network
15,000

16,000
12,000
12,000

40,000
30,000

10,000

8,000

20,000

4,000

10,000

0
FY07

FY13

FY16

Source: Company, IDFC Securities Research

0
Asian Paints

Berger Paints

Kansai Nerolac

Source: Company, IDFC Securities Research

Aggressive capacity expansion


Berger has aggressively built capacity, doubling it from ~0.25mtpa in FY12
to 0.5mtpa in FY15. With strong presence in North/East India, the company
is now looking to expand into West/South India. In Goa, Berger expanded
capacity of its water-based paint plant from 28,000tpa to 96,000tpa and
at Jejuri, Maharashtra, the company commissioned a powder coating plant.
Moreover, to cater to the South, Berger is setting up a facility at Hindupur,
Andhra Pradesh. Phase I of the project with 80,000tpa capacity was
commissioned in FY15 Berger would expand it to 320,000tpa over the
next 3-4 years. The company has doubled its gross block over the past
four years. Also, we do not expect further capex (apart from the Hindupur
project), as the current capex will service Bergers needs adequately.

53 | IDFC SECURITIES

20 April 2016

Berger Paints India


Exhibit 95: Steady expansion in capacity

Exhibit 96: Bergers manufacturing supply chain

Capacity (MT)
600,000

450,000

300,000

150,000

0
FY10

FY11

FY12

FY13

FY14

Source: Company, IDFC Securities Research

FY15
Source: Company, IDFC Securities Research

Gross margin expansion to continue on cost benefits

With low crude oil prices,


Bergers gross margin
expansion should continue
through H1FY17

In the past five years, Bergers standalone gross margins expanded by


550bp, owing to adequate price hikes taken during inflationary periods
and continued price/mix benefit (with the premium portfolio growing
significantly ahead of the mass portfolio). Further, over the past five
quarters, the benefits of lower crude oil prices (35-40% of the RM basket
across different material) have resulted in a much sharper gross margin
expansion (as high as 370bp in Q3FY16). With crude oil prices remaining at
US$35-40/bbl lows and no major price reduction, we expect Bergers
gross margin expansion trajectory to continue through H1FY17.
Over the past five quarters, on an average, 70% of the standalone gross
margin expansion has translated into EBITDA margin improvement. In the
past three quarters, the figure stood at a high ~90%. Given this trend, we
believe the improvement in gross margins provides adequate visibility for
Bergers near-term earnings growth.

Financial analysis
Strong volume-led revenue growth to continue
Bergers FY11-15 consolidated revenues/volumes have grown at a CAGR of
16.6%/10%, in line with the market leader, led by strong growth in the
decorative paints business. Further, we expect the company to outperform
industry growth, led by continued traction in the decorative paints market
share and improved international business performance. We estimate
Bergers consolidated revenues to grow at a CAGR of 16.6%, led by
domestic volume CAGR of 14% over FY16-18E.

54 | IDFC SECURITIES

20 April 2016

Berger Paints India


Exhibit 97: Volume CAGR of 14% over FY16-18E
Volume (MT - LHS)

Exhibit 98: Revenue CAGR of 16.6% over FY16-18E

YoY (% - RHS)

Net sales (Rs bn - LHS)

YoY (% - RHS)

7.5%

0.0%

0.0

0.0%
FY11

Source: Company, IDFC Securities Research

FY18E

20.0

FY17E

6.0%

FY16E

200,000

FY15

15.0%

FY14

40.0

FY13

12.0%

FY12

400,000

FY18E

22.5%

FY17E

60.0

FY16E

18.0%

FY15

600,000

FY14

30.0%

FY13

80.0

FY12

24.0%

FY11

800,000

Source: Company, IDFC Securities Research

Closing the gap versus APNT


Bergers consolidated gross margins improved by 400bps over FY11-15,
significantly higher than APNTs gross margin expansion of 190bps. The
outperformance was led by an improved product mix, increase in share of
premium products (emulsions) in the decorative paints business and a far
lower base versus APNT.
Further, in FY16, gross margin improvement has been strong at over
200bp, led by input cost benefits. We factor in a modest gross margin
improvement of 50bp over FY16-18E for Berger, led completely by mix
improvement in the portfolio. We believe there could be upsides to our
modest gross margin improvement estimates.
Exhibit 99: Improved mix to drive margin expansion
Gross margins (% - LHS)

EBITDA margins (% - RHS)

45.0

16.0
14.0

40.0
12.0
35.0
10.0
30.0

8.0
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

EBITDA margin expansion, a key earnings growth driver


Bergers consolidated EBITDA has grown at a CAGR of 19.5%, with EBITDA
margin expanding 110bps over FY11-15. The EBITDA margin expansion was
lower as part of the benefit was reinvested in brands (A&P spends rose by
~200bps over FY11-15). Resultant earnings grew at a CAGR of 15%, thereby
outperforming the overall industry growth.
We estimate consolidated
EBITDA to grow at a CAGR
of 24% with margin
expansion of 180bps, over
FY16-18E

55 | IDFC SECURITIES

We expect the outperformance to continue, aided by benefits from


operating leverage and higher contribution from premium paint products.
We estimate standalone margin to expand by ~160bps over FY16-18E.
Moreover, the profitability of the international business is likely to improve,
led by a recovery in Nepal business and steady Bolix performance. The
industrial business is expected to see higher growth on the back of an
uptick in the automotive coatings business post the JV with Nippon Paints.
We estimate consolidated EBITDA to grow at a CAGR of 24% with a
margin expansion of 180bps, over FY16-18E.

20 April 2016

Berger Paints India


Exhibit 100: FY16 EBITDA growth crude led; expect steady improvement hereon
EBITDA (Rs bn - LHS)

YoY (% - RHS)

12.0

30.0%

9.0

22.5%

6.0

15.0%

3.0

7.5%

0.0

0.0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

Earnings growth ahead of peers over FY16-18E


Strong volume growth, steady margin expansion and lower interest costs
should drive earnings growth for Berger, ahead of peers. We estimate
Bergers earnings to grow at a CAGR of 30% over FY16-18E
Exhibit 101: Expect 30% PAT CAGR over FY16-18E
PAT (LHS-Rs bn)

YoY (% - RHS)

8.0

37.5%
30.0%

6.0

22.5%
4.0
15.0%
2.0

7.5%

0.0

0.0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

Working capital intensity to reduce over FY16-18E


Though Bergers working capital intensity is higher than APNTs, the
company has been able to reduce it over the past five years. Further, we
expect a steady reduction in working capital intensity, led by supply chain
efficiencies and higher growth in the decorative business. We factor in a
five-day reduction in net working capital days for Berger over FY16-18E.
Exhibit 102: Working capital intensity to gradually moderate
FY10

FY11

FY12

FY13

FY14

FY15 FY16E FY17E FY18E

Debtor

44

38

37

38

38

39

40

39

37

Creditors

42

39

40

41

45

48

46

45

44

Inventory

65

61

63

66

64

61

58

55

54

Loans & advances

10

10

13

13

10

Other CL

10

10

10

10

10

Net working capital days

68

60

61

66

60

53

51

48

46

Source: Company, IDFC Securities Research

56 | IDFC SECURITIES

20 April 2016

Berger Paints India

RoCE improvement evident given improving metrics


Despite higher earnings growth, Bergers return ratios have historically
been lower than APNTs on account of lower fixed asset turnover (3.8x for
APNT; 3x for Berger) and higher working capital intensity (51 days net
working capital for Berger; 24 days for APNT). We expect Bergers return
ratio gap with APNT to reduce led by: a) continued improvement in
profitability, b) reduction in working capital intensity and c) lower capex
requirements. We expect Bergers RoCE to cross 30% in FY18E versus the
low of ~20% in FY15.
Exhibit 103: We expect strong improvement in return ratios
(%)

ROE

ROCE

40.0
30.0
20.0
10.0
0.0
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

Cash flow generation strong to fund capex requirements


We expect higher free
cash flow generation to
act as further re-rating
trigger for the stock

Berger almost doubled its capacity over the past five years from
~0.25mtpa in FY12 to 0.5mtpa in FY15. In line with its strategy of expanding
in South/West, the company is setting up a facility at Hindupur, Andhra
Pradesh (Phase 1 with 80,000tpa capacity has been commissioned). The
company plans to scale it up to 320,000tpa over the next 3-4 years, with a
total capex outlay of Rs5.5bn. Also, Berger is looking at setting up 0.1m KL
emulsion plant to meet the raw material requirement of the facility. We
factor in Rs4.5bn capex over FY16-18E that will be invested in Hindupur
capacity expansion project. However, with operating cash flows of ~Rs14bn
estimated over FY16-18E, capex requirements will be comfortably funded.
We expect the higher free cash flow generation to act as further re-rating
trigger for the stock.

Exhibit 104: Capex requirement to be modest


Capex (Rs bn)

Exhibit 105: FY16-18E CFO CAGR at 20%


(Rs bn)

3.0

6.0

2.5

4.5

2.0

CFO

3.0

1.5
1.5

1.0

0.0

0.5
0.0

-1.5
FY11

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Source: Company, IDFC Securities Research

57 | IDFC SECURITIES

FY11

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Source: Company, IDFC Securities Research

20 April 2016

Berger Paints India

Valuation and view


We believe structural growth tailwinds exist for the Indian paints industry
as a result, its volume growth will likely be ahead of other broad consumer
industries such as staples and alcoholic beverages. Further, headwinds
faced by some other industries (staples: intensifying competition and
higher penetration; retail: e-commerce threat; cigarettes and alcoholic
beverages: regulation-led issues) are absent for the paints industry. Hence,
we believe that broader paints industry players deserve premium multiples
to other consumer segments.
Berger has transformed itself into a credible number two player in the
industry with greater focus on the consumer end of the business
(decorative segment). This has resulted in strong 19% earnings CAGR over
FY10-16E. Given its widened product portfolio, continued expansion in
dealer network and incremental revenue drivers in international/industrial
businesses, we believe Berger (along with APNT) stands to gain the most
from the structural opportunity in the Indian paints industry.

Berger Paints, one of our top mid-cap consumer picks


Our DCF target price for Berger is Rs299, led by strong growth visibility
and healthy free cash flows this implies a 17% upside from the current
levels. The stock trades at 29.7x FY18E earnings, in line with mid-cap
consumer staples companies (such as Dabur, GCPL and Marico) for a
superior earnings profile of 30% CAGR over FY16-18E. Our target price
implies a 35x FY18E P/E, which, we believe, is fair given the superior
earnings growth trajectory. Initiate with an Outperformer Berger is one of
our top mid-cap consumer picks.
Exhibit 106: DCF-based target price of Rs299
Rs m

FY15

FY16E

FY17E

FY18E

FY19E

FY20E

FY28E

Sales

43,221

47,260

54,440

64,271

75,197

87,981

272,834

9.3%

15.2%

18.1%

17.0%

17.0%

14%

5,107

6,440

7,865

9,924

11,761

13,937

47,584

12%

14%

14%

15%

16%

16%

17%

Depreciation

(925)

(1,014)

(1,113)

(1,212)

(1,309)

(1,407)

(2,187)

EBIT

4,542

5,778

7,152

9,252

10,828

12,970

46,761

Current tax

1,394

1,843

2,349

3,101

3,662

4,418

16,233

(1,265)

(1,500)

(1,500)

(1,500)

(1,500)

(1,500)

(1,500)

(28)

(836)

(1,160)

(1,028)

(1,107)

(1,316)

2,985

3,237

4,440

5,734

7,188

30,190

1.0

1.0

0.9

0.8

0.7

0.6

5,100

5,687

6,248

6,782

Sales growth
EBITDA
EBITDA margin

Capex
Change in WC
FCF
discount factor
PV of FCF (@ 12% WACC)
WACC
PV of projection period
Terminal growth rate

12%
74,100
5%

Terminal value

427,214

PV of terminal value

132,498

Total Enterprise value


Net debt (Mar'18)
Equity value
DCF based value per
share (Rs)
# shares outstanding (m)

206,598
326
206,924
299
693

Source: Company, IDFC Securities Research

58 | IDFC SECURITIES

20 April 2016

Berger Paints India


Exhibit 107: Though P/E is in line with the industry
(x)

Exhibit 108: PEG is the lowest among peers


(x)

PE (FY18E)

35.0

2.0

28.0

1.5

PEG

21.0
1.0
14.0
0.5

7.0
0.0

0.0
Kansai
Nerolac

Akzo Nobel Asian Paint

Berger
paints

Kansai
Nerolac

Akzo Nobel Asian Paint

Berger
paints

Source: Company, IDFC Securities Research

Source: Company, IDFC Securities Research

Exhibit 109: Five-year average P/E at 29.5x

Exhibit 110: Five-year average EV/EBITDA at 17.2x

(x)
50

PE (x)
+ 1 Std. Dev.

Avg. PE
- 1 Std. Dev.

(x)
30

30

18

20

12

10

Source: Company, IDFC Securities Research

59 | IDFC SECURITIES

Avg. EV/EBITDA
- 1 Std. Dev.

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

24

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

40

EV/EBITDA
+ 1 Std. Dev.

Source: Company, IDFC Securities Research

20 April 2016

Berger Paints India


Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Operating expenses
EBITDA
% change
Other income
Net interest
Depreciation
Pre-tax profit
Deferred tax
Current tax

Key ratios
FY15

FY14

FY16E

FY17E

FY18E

Year to 31 Mar

FY14

FY15

FY16E

FY17E

FY18E

EBITDA margin (%)

11.1

11.8

13.6

14.4

15.4
13.6

38,697

43,221

47,260

54,440

64,271

EBIT margin (%)

9.3

9.7

11.5

12.4

15.6

11.7

9.3

15.2

18.1

PAT margin (%)

6.4

6.1

7.4

8.2

9.2

34,384

38,113

40,820

46,575

54,347

24.0

22.2

25.6

27.8

30.4

4,313

5,107

6,440

7,865

9,924

RoCE (%)

21.3

22.2

27.3

31.9

37.1

16.2

18.4

26.1

22.1

26.2

0.4

0.3

0.2

0.1

0.0

360

360

352

401

540

(466)

(501)

(436)

(344)

(264)

Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)

1.0

0.9

0.6

0.3

0.0

0.1

1.2

1.3

1.7

2.3

Dividend yield (%)

0.4

0.5

0.7

0.8

1.0

707

925

1,014

1,113

1,212

3,499

4,041

5,342

6,809

8,988

92

85

RoE (%)

Valuations

914

1,309

1,843

2,349

3,101

Profit after tax

2,493

2,647

3,499

4,460

5,887

Year to 31 Mar

FY14

FY15

FY16E

FY17E

FY18E

Adjusted net profit

2,493

2,647

3,499

4,460

5,887

Reported EPS (Rs)

3.6

3.8

5.0

6.4

8.5

Non-recurring items

Adj. EPS (Rs)

3.6

3.8

5.0

6.4

8.5

Reported net profit

2,493

2,647

3,499

4,460

5,887

69.7

65.7

49.7

39.0

29.5

14.2

6.2

32.2

27.5

32.0

Price/ Book (x)

15.5

13.8

11.8

10.0

8.2

EV/ Net sales (x)

4.6

4.1

3.8

3.2

2.7

EV/ EBITDA (x)

41.3

34.9

27.5

22.4

17.5

9.8

9.2

8.7

8.0

7.0

% change

Balance sheet
As on 31 Mar (Rs
m)
Paid-up capital
Reserves & surplus
Shareholders' equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets

EV/ CE (x)

FY15

FY14

FY16E

FY17E

FY18E

693

693

693

693

693

10,514

11,913

13,997

16,752

20,559

11,207

12,606

14,690

17,445

21,252

7,764

7,686

8,755

9,871

11,342

6,235

6,096

4,795

3,795

2,795

538

579

579

579

579

204

192

250

250

250

14,742

14,552

14,378

14,495

14,966

25,949

27,158

29,069

31,939

36,218

9,971

10,311

10,797

11,184

11,472

Investments

907

1,345

2,140

2,140

2,140

Cash

1,841

1,698

1,230

1,761

3,121

13,218

13,734

14,831

16,783

19,414

Other current assets


Deferred tax assets
Other non-current
assets
Net working capital

12

71

71

71

71

7,295

7,745

7,305

8,672

11,192

25,949

27,158

29,069

31,939

36,218

Year to 31 Mar (Rs


m)

FY14

FY15

FY16E

FY17E

FY18E

Pre-tax profit

3,499

4,041

5,342

6,809

8,988

Depreciation
Chg in Working
capital
Total tax paid

(707)

(925)

(1,014)

(1,113)

(1,212)

Total assets

PE (x)

Revenue growth trend

Shareholding pattern

Cash flow

(113)

(336)

(749)

(1,145)

(1,560)

(914)

(1,309)

(1,843)

(2,349)

(3,101)

Interest Received

Ext ord. Items


Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments

3,671

3,810

4,257

4,771

5,803

(2,964)

(1,265)

(1,500)

(1,500)

(1,500)

240

2,043

2,322

2,928

4,039

(799)

(438)

(795)

739

(140)

(1,301)

(1,000)

(1,000)

(466)

(501)

(436)

(344)

(264)

(722)

(1,360)

(693)

(1,396)

(1,679)

112

(249)

(429)

(143)

(468)

531

1,360

Debt raised/(repaid)
Interest Paid
Capital
raised/(repaid)
Dividend (incl. tax)
Other items
Net chg in cash

60 | IDFC SECURITIES

As of Dec 15

20 April 2016

The industrial leader; prone to cyclicality


NEUTRAL
Kansai Nerolac (KNPL), a 69% subsidiary of Kansai Paint Japan, is a
market leader in the industrial coatings segment and the third largest
player in the decorative paints business in India. The decorative
segment constitutes only 55% of KNPLs revenues versus 80% and 90%
for Berger and APNT respectively. With higher industrial mix and hence
B2B exposure, KNPLs pricing power, margin profile, earnings visibility
and return ratios will continue to be inferior compared with APNT and
Berger. Consequently, we factor in 14.7% revenue and 15.5% EBITDA
CAGR over FY16-18E. Moreover, the 20% surge in the stock price, in the
past three months, captures the medium-term upside. We initiate
coverage on KNPL with a Neutral rating.

20 April 2016
BSE Sensex: 25844
Sector: Paints

Stock data
CMP (Rs)

304

Mkt Cap (Rs bn/USD m)

163.9 /2,476

Target Price (Rs)

313

Change in TP (%)

Potential from CMP (%)

2.9

Earnings change (%)


FY16E
FY17E
FY18E

Bloomberg code

KNPL IN

1-yr high/low (Rs)

317/194

6-mth avg. daily volumes (m)

0.4

6-mth avg. daily traded value


(Rsm/USDm)

105.9/1.6

Shares outstanding (m)

538.9

Free float (%)

30.7

Promoter holding (%)

69.3

Price performance relative & absolute


Kansai Nerolac Paints
110

Sensex

105

Leader in industrial segment; challenger in decorative business: KNPL


enjoys pole position in the automotive paints segment. With improved
automotive demand, we expect the company to gain ground through
leveraging its strong OEM relationship, comprehensive product portfolio
and parents R&D expertise. However, within the decorative segment,
constant market share gains seem difficult given formidable competition
from the top two players. We expect consolidated revenue CAGR at
14.7% over FY16-18E.
Modest EBITDA margin expansion likely: While improved automotive
demand would aid revenues, gross margin expansion seems unlikely
given the B2B nature of the industrial segment (weak pricing power
versus the decorative segment). As a result, we believe, KNPL is likely to
hold on to FY16 gross margins and factor in modest EBITDA expansion
over FY16-18E. We expect KNPLs FY16-18E EBITDA/PAT CAGR at
15.5%/19%.
Stretched valuation given lower earnings visibility: KNPLs stock price
rose 2.4x in the past two years, led by a sharp 33% EPS CAGR over FY1416E. However, we expect growth to be lower over FY16-18E (EBITDA
CAGR just 15.5%) as most of the RM cost benefits are behind. Given the
inherent cyclicality and inferior operational metrics that the industrial
business brings, upsides from current valuations seem limited. We
initiate coverage with Neutral rating and a DCF target price of Rs313
(implied P/E of 32x FY18E).

Key valuation metrics


Year to 31 Mar
Net sales (Rs m)

FY14
31,753

FY15
35,707

FY16E
38,787

FY17E
44,297

FY18E
51,041

Adj. net profit (Rs m)

2,080

2,741

3,672

4,463

5,208

539

539

539

539

539

3.9

5.1

6.8

8.3

9.7

17.4

31.8

34.0

21.5

16.7
31.5

Shares in issue (m)

100

Adj. EPS (Rs)

95

% change
90
Apr-14

(%)
KNPL Equity
BSE Sensex

PE (x)
3-mth

6-mth

1-yr

20.1

20.2

36.1

5.6

(5.6)

(9.1)

78.8

59.8

44.6

36.7

Price/ Book (x)

11.5

10.2

7.4

6.5

5.8

EV/ EBITDA (x)

46.9

37.7

26.7

23.0

19.7

RoE (%)

15.3

18.1

19.3

18.9

19.5

RoCE (%)

17.8

20.8

24.3

23.1

23.7

Source: Company, IDFC Securities Research

Harit Kapoor

Mehul Desai

harit.kapoor@idfc.com
91-22-662 22649

mehul.desai@idfc.com
91-22-662 22640

For Private Circulation only.

Important disclosures appear at the back of this report

INITIATING COVERAGE

Kansai Nerolac Paints

Kansai Nerolac Paints

INVESTMENT ARGUMENT
KNPL has leveraged its technology/relationships to emerge as the
largest industrial paints company in India with dominance in the
automotive paints category.
Recently, KNPL increased its focus in the decorative paints segment,
gleaning market share from Akzo India and smaller players.
KNPLs prospects in the industrial segment are attractive. However,
within the decorative segment, incremental market share gains seem
challenging given that the top-two players are well entrenched.
Valuations (at 31.5x FY18E earnings) seem stretched considering
lower earnings growth expectations and the inherent cyclicality
emanating from the industrial segment.
We initiate coverage on KNPL with a Neutral rating and a DCF-based
target price of Rs313.

Kansai Nerolac Paints An overview


Different mix Large presence in industrial paints segment
KNPL, a 69% subsidiary of Kansai Paint Co Ltd, Japan, is the third largest
paint company in India by revenues. Incorporated in 1920 and formerly
known as Goodlass Nerolac Paints, KNPL became a subsidiary of Kansai
Paint Co Ltd, Japan, when it acquired the balance 29% stake of the Tata
Forbes Group in the company. Unlike the top two players in the industry,
KNPL has a large presence in the ~Rs110bn industrial paints segment; this
segment accounts for ~45% of its revenues. By revenues, KNPL is the
largest industrial paints company in India.
Exhibit 111: KNPL Key milestones
Goodlass Wall Pvt. Ltd.
went public and established
itself as Goodlass Nerolac
Paints.

1920

1976

1957

Started as Gahagan
Paints and Varnish Co.
Ltd. at Lower Parel

Entered in technical
collaboration agreements
with Kansai Paint Co. Ltd,
Japan

1983

Became a part of Tata


Forbes Group on
acquisition by Forbes
Gokak

Renamed to Kansai Nerolac


Paints Ltd.

1999

Kansai Paint Co. Ltd.,


Japan took over the
entire stake of Tata
Forbes group

2006

Launch of experience zone.


Launched umbrella
campaign for exterior
paints & campaign for
Home painting services.

2012

Entered into JV with


Nepal Shalimar, to
acquire 68% stake in
Nepalese paint major.

2014

2015

Launch of new
impressions range
with HD technology

Source: Company, IDFC Securities Research

Effectively leveraging strong global parentage


Kansai Paints, Japan is one of the world's top-10 producers of paints and
coatings for the automotive, industrial, marine, decoration, and other
industries. In 1983, Kansai Paints Co Japan entered into technology
cooperation partnership with erstwhile Goodlass Nerolac Paints, part of
the Tata Group, and Japan's Nihon Tokushu Toryo. In 1986, Kansai Paints
acquired 36% of equity capital in Goodlass Nerolac Paints. As part of its
strategy to expand further in Asian markets, the company went on to
acquire the balance 29% stake of Tata Group in 1999, thereby gaining
majority control in Nerolac Paints.

62 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 112: Kansai Japan: Indias sales share at 18%(FY10)
Asia
18%

Exhibit 113: .increased to 21% in FY15


Africa
12%

Africa
0%

Asia
20%

Japan
47%

India
18%
Japan
64%
India
21%
Source: Company, IDFC Securities Research

Source: Company, IDFC Securities Research

Exhibit 114: EBITDA contribution at 22% in FY10

Exhibit 115: Steady in FY15, but should move up in FY16

Asia
23%

Africa
0%

Africa
4%
Asia
24%

Japan
50%

Japan
55%
India
22%

India
22%

Source: Company, IDFC Securities Research

Source: Company, IDFC Securities Research

Strategic manufacturing locations


KNPL has four paint manufacturing plants in India at Jainpur (Uttar
Pradesh), Bawal (Haryana), Lote, Chiplun (Maharashtra), and Hosur (Tamil
Nadu) and a network of 94 depots. The plants are strategically located
close to its key original equipment manufacturer (OEM) clients, thereby
providing a competitive edge in terms of logistics, supply chain efficiency
and just in time service delivery.

Industrial segment Market leader

KNPL continues to remain


the market leader in the
industrial paints business

The industrial paints business is highly technology intensive compared with


the decorative paints segment. This acts as an entry barrier and a
competitive advantage for existing players. KNPL, via leveraging its
parents R&D support, innovations and relationships with global auto
OEMs, continues to remain the market leader in the industrial paints
business.

Robust client relationships


KNPLs parent, Kansai Japan has strong relationships with major global
automotive giants such as Suzuki, Toyota, Honda, etc. Further, most global
MNC players are present in India through their subsidiaries and considering
the strong R&D/technical backing of the parent, KNPL is the leading
vendor for the Indian subsidiaries of these global MNC players. Also, KNPL
is trying to extend its customers to American/European car majors. As per
our understanding, recently Volkswagen moved to KNPL from Asian PaintPPG, which is indicative of KNPLs strong expertise in this segment.

63 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints

Strategic tie-ups
In order to improve its overall service offerings through complimentary
technologies, KNPL has entered into various strategic tie-ups in the past.
Currently, KNPL has forged technical collaborations for niche technologies
with players such as Protech Canada (a leading player in powder
coatings), Oshima Kogyo (patent holder for heat resistant paint) and
Cashew Co. Japan. Technical assistance agreements with leading
international players in the coating industry further enhances KNPLs
ability to meet stringent international quality standards.
Exhibit 116: Strategic tie-ups
Company

Technology

Nihon Parkerizing

Body seal and under seal coatings

Valspar Corporation

Powder coatings

PPG International

High performance coatings.

Drew Chemicals Corporation Water and fuel treatment chemicals


Kansai Paints (Japan)

Technology support in architectural/Industrial coatings

Oshima Kogyo

Heat resistant paints

Cashew paints

Aesthetic interior paint for cars

Protech Oxyplast Canada


Powder coatings
Source: Company, IDFC Securities Research

Automotive segment Dominant player


Within the industrial segment, KNPL caters to the automotive, general
industrial, high performance and the powder coatings segments. However,
the automotive segment is the largest sub segment for KNPL, contributing
75% to its industrial business in revenue terms. Further, KNPL enjoys ~60%
market share in the automotive segment. KNPL is the leader in the powder
coating segment as well with a formidable 35%+ market share.
Key factors that drive KNPLs competitive advantage in the industrial
paints segment in India are:

Comprehensive portfolio
Complete technical
support from Kansai
Japan has helped drive
innovation for KNPL

KNPL offers a comprehensive painting portfolio to auto makers in India


starting from pre-treatment chemicals, electro deposition primers, and
intermediate coats/primer surfacers, to solid and metallic top coats, clear
coats and touch-up paints. Moreover, complete technical support from
Kansai Japan has helped drive innovation in the automotive segment.
Exhibit 117: Automotive segment Wide product portfolio
Product

Service/usage

Pre-treatment chemicals Improved paint bonding & corrosion resistance


ED technology (E-Coat)
Primer Surfacer
Top Coats
Clear Coats

Uniform coverage, less paint consumption, edge protection


Intermediate coat between E-coat and the topcoats.
Protection against UV ray
Providing colour, aesthetics and weather protection to the
coating system
Top layer in a paint system which provides resistance to
sunlight, weather,
Chemicals and biological materials

Touch-up/Auto refinish
paints

Small touch ups if the paint film is damaged.

Heat Resistant paints

Interior & exterior surfaces of motorcycle mufflers,


withstanding up to 600 degrees

Underbody paints/PVC
Imparts anti chipping and sound deadening properties.
Sealants
Rapgaurd Transit
Protection of automotive vehicles during transit from dust,
protection films
chemicals
Source: Company, IDFC Securities Research

64 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints

Strong clientele base


Within the automotive segment, KNPL has a large and marquee clientele in
the four-wheeler and two-wheeler space, comprising major auto players
such as Maruti Suzuki (MSIL), Honda, Toyota, Volvo, M&M, Bajaj Auto, TVS
Motors etc.

In-house R&D
KNPL has a well-equipped colour R&D centre at Lower Parel, Mumbai,
backed by Kansai Paint Co., Japan, catering to specific needs of the OEM
industry for newer shades and finishes. The colour development cell of
KNPL organises colour presentations at customer locations and follows it
up with development to standardisation. Kansai Paint Co Japan spends
1.5% of its global revenues on R&D, the benefit of which accrues to the
Indian entity.
Exhibit 118: R&D spend for Kansai Global has steadily increased from CY12
R&D expense (Yen bn - LHS)

% to sales (RHS)

5.6

4.0%

5.4

3.0%

5.2

2.0%

5.0

1.0%

4.8

0.0%
CY11

CY12

CY13

CY14

CY15

Source: Company, IDFC Securities Research


Exhibit 119: and so has India R&D expense
R&D expenses for India (Yen m)
350.0
280.0
210.0
140.0
70.0
0.0
CY11
CY12
CY13
Source: Company, IDFC Securities Research

CY14

CY15

Automotive industry Outlook healthy


We take a deeper look into the automotive industry in India to understand
KNPLs key user segment.

Growth for passenger cars to see an uptick


Crisil expects FY17 volume growth for passenger cars to see an uptick, led
by improved affordability (from lower interest rates, falling fuel prices and
some external factors such as the seventh pay commission and OROP payout). As per Crisil estimates, passenger cars are likely to grow a healthy 1315%, with utility vehicles (UVs) growing by 11-13% in FY17E.

65 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 120: Passenger cars Volume growth pick-up to sustain

3.0

Total Passenger Vehicles (nos - LHS)

Volume growth (RHS)


30.0%

2.3

20.0%

1.5

10.0%

0.8

0.0%

0.0

-10.0%
FY06 FY07 FY08 FY09 FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

Two-wheelers Scooters to outperform industry growth


Crisil expects motorcycles to grow at 9-11% in FY17E, while scooters with
17-18% growth would continue to outperform the industry growth. The
growth rate is based on normal monsoons, off a relatively low base. The
growth will likely be back ended with the first half being weak.
Exhibit 121: Two wheelers Growth to remain steady, though mix could change
Total Two wheelers (nos - LHS)
18.00

Volume growth (RHS)


30.0%

14.40

21.0%

10.80

12.0%

7.20

3.0%

3.60

-6.0%

0.00
FY06 FY07 FY08 FY09 FY10
Source: Company, IDFC Securities Research

-15.0%
FY11

FY12

FY13

FY14

FY15

Analysing a key clients prospects MSIL


MSIL is KNPLs largest automotive OEM client. As per IDFC Securities
Research, MSIL would continue to maintain ahead-of-industry growth in
FY17, led by double-digit volume growth. Moreover, incremental volumes
from launches (compact SUV Brezza) would aid overall volume growth.

Strong growth in MSILs


passenger cars volumes
would boost KNPLs
automotive paint segment

MSIL is well placed to benefit from the uptick in the passenger car
segment, given its robust product line-up and strong competitive position.
Also, the recent excise hike could result in a favourable shift towards the
small petrol car segment, which is MSILs strongest segment. The company
could be one of the biggest beneficiaries of the seventh pay commission.
As MSIL is the largest client of KNPL, strong growth in MSILs passenger
cars volumes would boost KNPLs automotive paint segment (Exhibit 13).
IDFC Research estimates a 14% volume growth CAGR for MSIL over FY1618E.

66 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 122: Strong correlation between passenger car and KNPLs growths
FY06 FY07 FY08 FY09 FY10

FY11 FY12 FY13 FY14 FY15

Asian Paints

18.0

21.5

20.1

24.0

22.3

15.3

25.0

13.6

16.2

Berger Paints

19.5

19.3

14.5

16.2

16.5

23.8

25.9

13.5

15.6

11.5
11.7

Kansai Nerolac

15.7

21.1

8.0

4.1

24.1

24.6

21.6

10.2

11.4

12.5

Akzo Nobel
Passenger car volume
growth

16.2

1.4

4.7

-3.2

4.3

15.9

78.6

12.2

8.8

4.1

8.0

20.5

9.8

1.6

24.4

27.1

4.7

2.3

-5.6

5.1

Source: Company, IDFC Securities Research


Exhibit 123: MSIL to outperform industry volume growth
Maruti Sales volume (mn units - LHS)

Volume growth (RHS)

2.0

30.0%

1.6

21.0%

1.2

12.0%

0.8

3.0%

0.4

-6.0%

0.0

-15.0%
FY06

FY08

FY10

FY12

FY14

FY16

FY18E

Source: Company, IDFC Securities Research

Decorative paints Gaining ground


The industrial paint segment is a relatively low-margin business
considering its B2B nature and limited pricing power with the supplier.
KNPL derives 45% of its sales from the segment versus APNTs 5%,
Bergers 20% and Akzos 35%. As a result, KNPLs revenue growth has
been lower versus the top two players in the domestic paint industry.
KNPLs FY11-15 revenue CAGR stood at 13.5% versus 16% CAGR for APNT
and Berger Paints.
Exhibit 124: Revenue growth A comparison
(%)

Asian Paints

Berger Paints

Kansai Nerolac

30
25
20
15
10
5
0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

67 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 125: Lower decorative mix versus peers
(%)
120
90

Decorative

6.0

Industrial

20.0
45.0

40.0

55.0

60.0

Kansai Nerolac

Akzo Nobel

60
94.0

80.0

30
0
Asian Paints
(Domestic)

Berger Paints - Std

Source: Company, IDFC Securities Research

Till late 1990s, KNPL was recognised only as an industrial paints company.
However, a change in market dynamics due to the entry of global players
post liberalisation led to increased competition and low profitability for
KNPL. Consequently, the company, in 2000, increased its focus on the
decorative paints segment to offset the weakness in the industrial paint
segment. Moreover, to build its brand equity/product portfolio in the
decorative segment, KNPL ramped up its distribution network/supply
chain and focused on R&D and innovation.
Currently, KNPL is third largest player in the decorative paint segment
(55% of sales) with a market share of ~11% the company has undertaken
several initiatives to drive market share gains in the segment.

Unique product positioning


KNPL has created a unique
eco-friendly branding

Over the past 15 years, KNPL has created a unique eco-friendly branding
healthy home paints under Nerolac. Further, the launch of lead-free paints
in 2006 and low VOC products, ahead of competition, differentiated
KNPLs product offerings.
Exhibit 126: Marketing activities undertaken to build brand equity
Year
2000
2003
2010-11

Marketing campaign
Strong campaign through "Jab ghar ki raunak
sajani ho" jingle
Celeb led promotion, roped in Amitabh
Bachchan
Sharukh Khan roped in as new brand

ambassador
Source: Company, IDFC Securities Research

Positioning
Beauty
Colors
Healthy, eco-friendly home
paint

Improved product mix


KNPL improved its
decorative margins, thus
partially offsetting the
weakness in the industrial
segment

68 | IDFC SECURITIES

Five years back, KNPLs industrial margins were higher than decorative
margins as contribution from high-margin emulsion sales was low. In the
past 5-6 years, the company has increased its share of emulsion products
to 35% of decorative paint sales (from ~8-10%) Enamel accounts for 30%
while low-margin distemper now accounts for only ~10-12% of decorative
paint sales. With improvement in the overall product mix, KNPL improved
its decorative margins, thus partially offsetting the weakness in the
profitability of the industrial segment.

20 April 2016

Kansai Nerolac Paints


Exhibit 127: KNPLs Decorative segment mix

Enamel
17%
Distemper
7%
Industrial
paints
45%

Decoratives
55%

Emulsions
19%
Others
12%

Source: Company, IDFC Securities Research

Improved product offerings through innovations


KNPL, through innovation in product/service delivery, has improved its
offerings in the decorative segment. Moreover, the company continues to
engage with influencers across the value chain through special
programmes such as Archedge for Architects and Painter Loyalty, thereby
leveraging its connect to drive growth.

Product innovations: KNPL has backed its key innovations with media
spends. Some key innovations are: i) High Definition Impressions HD
paints and Impressions Ideaz in the premium segment; ii) Low VOC
products for the eco-friendly paint range and iii) economy paints
under the Soldier brand (specially targeting the rural segment).

Exhibit 128: Key innovations


Brand
Impressions HD

Key remarks
High definition technology paints with Micro-Embedded Brightness
Boosters

Impressions Ideaz Designer wall finishes


Healthy home
paints
Soldier

Low VOC lead free products


New brand targeting rural segment

Statue paint
Economy emulsions for painting statues
Source: Company, IDFC Securities Research

Service delivery: KNPL has taken several initiatives in service delivery


to improve customer experience and provide value for money. The
company was also the first player to tie up with Flipkart for its
product/services. However, this arrangement is no longer active.

Exhibit 129: Evident focus on service delivery


Service format

Key comments

Impression Style Exclusive retail shops equipped with a workstation and trained
Zones
Nerolac Color
Stylers
Nerolac Home
Stylers
E-commerce

associates, which allow consumers to experiment with colours


Shop-in-shop format franchise stores
End-to-end professional painting services
First company to tie up with Flipkart, though this arrangement is no

longer active
Source: Company, IDFC Securities Research

69 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 130: Engagement with influencers
Program

Key comment

Nerolac premium

Painter reward programme (health check-

painter

ups/insurance/scholarships)

Archedge

Architecture engagement, networking and loyalty program with


Focus on sustainability

Rangshala
Programme for painters to learn and grow with Nerolac
Source: Company, IDFC Securities Research

Other strategic initiatives


Capex plans
KNPL plans to set up a paint manufacturing unit at Sayakha Industrial
Estate in Gujarat at Rs3.5bn with 42,000MT annual capacity (can be
expanded in two phases). In July-15, the board approved a manufacturing
unit in Goindwal Sahib, Punjab (38,000MT/year capacity at Rs1.8bn capex).
A global R&D centre at Navi Mumbai (capex of Rs400m) was also
approved. All such initiatives are likely to further improve KNPLs
competitive positioning in the market.

Sale of Chennai land


In July-13, KNPL closed down its factory at Perungudi, Chennai as the unit
was old with outdated and unproductive machinery. Recently, the
company monetised the asset, with land sale (~15acres) to Brigade
Properties (formed by the Brigade Group and GIC Singapore) for Rs5.5bn.
The company plans to use part of the proceeds from the land deal for its
greenfield expansion.

JV with Maharaja Group


In Jan-15, KNPL entered into a JV agreement with Capital Holdings
Maharaja Pvt. Ltd., a group company in the Maharaja Group, at an
estimated total project cost of Sri Lankan rupees 650m. The equity
contribution of KNPL in this proposed JV would be 60%, amounting to
390m SLR (Rs184m). The Maharaja Group is a diversified group in Sri
Lanka with presence in businesses such as media, hardware, FMCG
products, etc. KNPL seeks to leverage the Maharaja Groups strong
presence in hardware outlets to tap the paint market in Sri Lanka.

Financial overview
Gross margin expansion to continue through H1FY17
KNPLs revenue growth/profitability is cyclical in nature versus peers given
the companys higher revenue contribution from the industrial segment.
Further, despite improvement in the decorative segment, KNPLs average
gross margins declined to ~33% from ~37% in FY05-10, largely impacted by
weakness in the industrial segment.
For KNPL, 55-60% of its raw materials are crude linked and titanium
dioxide accounts for 10% of the total raw material cost. In the past five
quarters, the benefit of lower crude oil prices and a pick-up in the
passenger car segment have resulted in sharper gross margin expansion
(630bp in Q3FY16 to ~38.9%). With benign titanium oxide prices and crude
oil remaining at steady US$40-45 levels, we expect the gross margin
expansion trajectory to continue through H1FY17.

70 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 131: Gross margin over the past eight quarters
Gross margins
40.0%
37.5%
35.0%
32.5%
30.0%
Q4FY14

Q1FY15

Q2FY15 Q3FY15 Q4FY15

Q1FY16

Q2FY16 Q3FY16

Source: Company, IDFC Securities Research

Given the B2B nature of the industrial business, customers are likely to
demand lower pricing in an environment of deflation. Hence a
disproportionate increase in industrial margins is unlikely. Analysing
APNTs financials, we understand that the difference in industrial and
decorative gross margins can be as high as 800bp (difference between
standalone and JV profitability) with decorative margins being higher.
Hence, we believe that KNPL will do well to hold on to the gross margins
achieved in FY16. We factor in no expansion in gross margins for KNPL
over FY16-18E. Any improvement will only be a function of improved mix
of decorative paints versus industrial paints, only if industrial margins
remain healthy.
Exhibit 132: Raw material break-up
Pigments,
Extenders and
Resins
45%
Organic Acids
6%
Packaging
material
12%

Raw material
consumed
88%
Others
6%

Solvents, Oils
and Fatty Acids
31%

Source: Company, IDFC Securities Research

71 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints

We estimate FY16-18E revenue CAGR at 14.7%


Increased contribution
from the decorative
segment to act as a key
growth trigger

KNPLs FY11-15 standalone revenue CAGR stood at 13.5%, lower versus that
for APNT and Berger, largely on weakness in the industrial/automotive
paint segments. These segments account for ~45% of KNPLs sales. With
steady growth in automotive demand and MSIL (a key client), and inflation
led price increases, we expect KNPLs sales trajectory to improve. Further,
increased contribution from the decorative segment could act as a key
trigger (though a challenge given the strength of the top two players). We
estimate revenues to grow at a CAGR of 14.7% over FY16-18E.
Exhibit 133: Return of pricing and higher volume growth to drive revenues
Net sales (Rs bn - LHS)

YoY (% - RHS)

60.0

28.0%

45.0

21.0%

30.0

14.0%

15.0

7.0%

0.0

0.0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

EBITDA margin expansion to be muted over FY16-18E


KNPLs gross margin has been lower versus peers due to higher share of
the low-margin industrial paint segment. Further, KNPLs FY10-15 gross
margin declined 240bps (against a rise for leading industry players) due to
an unfavorable revenue mix and pressure in the industrial paints business.
IN spite of the recent increase in gross margins, they remain 600-900bp
lower than peers owing to its industrial mix. We do not expect further
expansion from current levels as KNPL would have to pass on the input
cost benefit to OEMs in the automotive paints segment. Hence, operating
profit growth will not be very different from the companys revenue
growth trajectory. PAT growth will be higher given the additional other
income that will be generated from its recent land sale which fetched the
company Rs5.4bn. We estimate EBITDA/PAT CAGR at 15.5%/19% in FY1618E.
Exhibit 134: Consolidated EBITDA and EBITDA growth
EBITDA (Rs bn - LHS)

YoY (% - RHS)

10.0

40.0%

8.0

30.0%

6.0

20.0%

4.0

10.0%

2.0

0.0%
-10.0%

0.0
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

72 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints


Exhibit 135: Margins rose in FY16; we expect modest increase hereon
Gross margins (% - LHS)

EBITDA margins (% - RHS)

50.0

20.0

40.0

15.0

30.0
10.0
20.0
5.0

10.0
0.0

0.0
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research


Exhibit 136: Earnings CAGR at 19% over FY16-18E
PAT (Rs bn - LHS)

YoY (% - RHS)

6.0

40.0%

4.5

25.0%

3.0

10.0%

1.5

-5.0%

0.0

-20.0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

Working capital intensity to remain high


KNPLs working capital intensity has been the highest among the industry.
This has been on the back of higher contribution
from
the
industrial
segment, wherein inventory/debtor days are higher versus the decorative
segment. Going forward, we do not foresee substantial reduction in
working capital intensity as the revenue mix is unlikely to shift to
decorative significantly.
Exhibit 137: Working capital to remain high
Days of revenue

FY10

FY11

Debtor

50

45

Creditors

63

55

Inventory

53

61

Loans & advances

10

11

Other CL
Net working capital

FY12

FY13

FY14

FY15 FY16E FY17E FY18E

51

54

52

51

50

50

38

50

51

33

31

31

31

64

68

74

55

55

55

55

10

11

12

50

13

48

54

72

72

76

74

78

79

81

Source: IDFC Securities Research, Company

One-time dividend from land sale possible


Given that KNPL is a debt free company, Rs5.4bn received from the land
sale could result in a one-time dividend of Rs10. This along with normal
dividend could imply a 4% dividend yield. However, the management has
not alluded to the same at present.

73 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints

Improvement in return ratios to be gradual


Given KNPLs lower profitability and working capital metrics, return ratios
have also been lower than the market leader. We expect a gradual
improvement in return ratios, but the inherent nature of KNPLs business
will not allow its return ratios to reach the market leaders 45%+ levels.
Exhibit 138: Return ratios: Steady improvement, but touching APNTs levels unlikely
(%)

ROE

ROCE

40.0
30.0
20.0
10.0

FY17E

FY18E

FY16E

FY15

FY14

FY13

FY12

FY11

FY10

0.0

FY17E

FY18E

Source: Company, IDFC Securities Research


Exhibit 139: Steady improvement in operating and free cash flows
CFO

(Rs bn)

FCF

6.0
4.5
3.0
1.5
0.0
-1.5
FY10

FY11

FY12

FY13

FY14

FY15

FY16E

Source: Company, IDFC Securities Research

Valuation & view


We believe structural growth tailwinds exist for the Indian paints industry.
As a result, volume growth will likely be ahead of other broad consumer
industries such as staples and alcoholic beverages. Further, headwinds
faced by some other industries (staples: intensifying competition and
higher penetration, retail; e-commerce threat, cigarettes and alcoholic
beverages; regulation-led issues in) are absent for the paints industry.
Hence, we believe that the broader paints industry players deserve
premium multiples to other consumer segments.

Valuations expensive given inherent cyclicality and financial


metrics
KNPLs stock price moved up 2.4x in the past two years, led by a sharp
uptick in earnings/volume growth off a low base and benign input costs
(33% EPS CAGR over FY14-16E). We expect growth to now be more
gradual as most of the RM benefits are behind. As a result, we factor in 19%
earnings CAGR over FY16-18E.

74 | IDFC SECURITIES

20 April 2016

Kansai Nerolac Paints

Initiate with Neutral


We value KNPL on DCF and arrive at a target price of Rs313 (implying a
32x FY18E P/E). At the current market price, the stock trades at 31.5x
FY18E earnings, at a premium to Berger Paints and a marginal discount to
APNT. Given the inherent cyclicality and inferior metrics of the business,
we believe upsides from current valuations are limited, which is reflected in
our DCF valuation.
Though positives exist in the form of robust industrial paints segment and
increased decorative push, stretched valuations and the inherent cyclicality
of the business are key concerns. We initiate coverage on KNPL with a
Neutral rating. We recommend waiting for a better opportunity to enter
the stock and prefer APNT and Berger Paints at current levels.
Exhibit 140:

DCF based target price of Rs313

Rs m
Sales

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY28E

35,707

38,787

44,297

51,041

59,208

68,503

2,00,235

8.6%

14.2%

15.2%

16.0%

15.7%

14%

4,349

6,002

6,927

8,003

9,414

11,029

35,442

12.2%

15.5%

15.6%

15.7%

15.9%

16.1%

17.7%

(683)

(756)

(856)

(956)

(1,006)

(1,056)

(1,456)

4,044

5,401

6,563

7,659

9,000

10,658

35,454

1,283

1,728

2,100

2,451

2,970

3,517

11,700

(588)

(2,000)

(2,000)

(2,000)

(1,000)

(1,000)

(1,000)

(820)

(1,080)

(1,338)

(1,192)

(1,377)

(2,407)

1,608

2,238

2,826

4,844

5,820

21,803

1.0

0.9

0.8

0.3

4,325

4,639

1,12,320

Sales growth
EBITDA
EBITDA margin
Depreciation
EBIT
Current tax
Capex
Change in WC
FCF
discount factor
PV of FCF (@ 12% WACC)

WACC
PV of projection period
Terminal growth rate
Terminal value
PV of terminal value

12.0%
57,381
5.0%
3,27,045

1,05,300
Source: Company, IDFC Securities Research

75 | IDFC SECURITIES

Total Enterprise value


Net debt (Mar'18)
Equity value
DCF based value per share
(Rs)
# shares outstanding (m)

1,62,681
6,250
1,68,930
313
539

20 April 2016

Kansai Nerolac Paints


Exhibit 141: While P/E is in line with industry leader
(x)

Exhibit 142: PEG is the highest among top four players


(x)

PE (FY18E)

35.0

2.0

28.0

1.5

PEG

21.0
1.0
14.0
0.5

7.0
0.0

0.0
Kansai
Nerolac

Akzo Nobel Asian Paint

Berger
paints

Kansai
Nerolac

Akzo Nobel Asian Paint

Berger
paints

Source: Company, IDFC Securities Research

Source: Company, IDFC Securities Research

Exhibit 143: Five-year average P/E at 28x


PE (x)
Avg. PE
(x)
+ 1 Std. Dev.
- 1 Std. Dev.
40

Exhibit 144: Five-year average EV/EBITDA at 17x


EV/EBITDA
Avg. EV/EBITDA
(x)
+ 1 Std. Dev.
- 1 Std. Dev.
25
20

30

15
20
10
10

Source: Company, IDFC Securities Research

76 | IDFC SECURITIES

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

0
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

Source: Company, IDFC Securities Research

20 April 2016

Kansai Nerolac Paints


Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Operating expenses
EBITDA
% change
Other income

Key ratios
FY15

FY14
31,753

35,707

FY16E
38,787

FY17E
44,297

FY14

FY15

FY16E

FY17E

EBITDA margin (%)

11.0

12.2

15.5

15.6

15.7

51,041

EBIT margin (%)

8.9

10.3

13.5

13.7

13.8

PAT margin (%)

6.5

7.7

9.5

10.1

10.2

RoE (%)

15.3

18.1

19.3

18.9

19.5

RoCE (%)

17.8

20.8

24.3

23.1

23.7

Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)

0.0

0.0

(0.2)

(0.2)

(0.2)

0.0

0.0

(0.7)

(0.7)

(0.8)

0.4

1.5

3.3

1.6

2.1

Dividend yield (%)

(0.4)

(0.5)

(0.7)

(0.8)

(1.0)

FY18E

11.4

12.5

8.6

14.2

15.2

28,259

31,358

32,785

37,369

43,038

3,493

4,349

6,002

6,927

8,003

8.9

24.5

38.0

15.4

15.5

278

378

155

492

611

Net interest

(18)

(9)

Depreciation

655

683

756

856

956

Pre-tax profit

FY18E

3,098

4,035

5,401

6,563

Deferred tax

229

105

108

131

153

Current tax

783

1,178

1,620

1,969

2,298

Valuations

2,087

2,752

3,672

4,463

5,208

Year to 31 Mar

FY14

FY15

FY16E

FY17E

FY18E

Reported EPS (Rs)

3.9

5.1

13.6

8.3

9.7

(7)

(11)

Adj. EPS (Rs)

3.9

5.1

6.8

8.3

9.7

2,080

2,741

3,672

4,463

5,208

78.8

59.8

44.6

36.7

31.5

Price/ Book (x)

11.5

10.2

7.4

6.5

5.8

EV/ Net sales (x)

5.2

4.6

4.1

3.6

3.1

46.9

37.7

26.7

23.0

19.7

9.8

8.8

6.5

5.7

5.0

Profit after tax


Preference dividend
Minorities
Adjusted net profit

7,659

Year to 31 Mar

Non-recurring items

3,658

Reported net profit

2,080

2,741

7,331

4,463

5,208

% change

(29.1)

31.8

167.5

(39.1)

16.7

PE (x)

EV/ EBITDA (x)


EV/ CE (x)

Balance sheet
As on 31 Mar (Rs
m)
Paid-up capital
Preference capital
Reserves & surplus
Shareholders'
equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets

FY14

FY15

FY16E

FY17E

FY18E

539

539

539

539

539

13,718

15,476

21,545

24,495

27,811

14,295

16,064

22,134

25,083

28,400

6,141

5,183

5,341

6,016

6,813

619

503

503

503

503

662

754

754

754

754

1,079

1,226

1,325

1,584

1,970

8,500

7,666

7,923

8,857

10,040

22,795

23,730

30,057

33,941

38,440

9,675

9,581

10,825

11,969

13,013

Investments

486

2,077

2,077

2,077

2,077

Cash

553

345

4,449

5,433

6,753

12,059

11,705

12,683

14,439

16,574

Other current assets


Deferred tax assets
Other non-current
assets
Net working capital

23

23

23

23

23

6,471

6,867

11,792

13,856

16,514

22,795

23,730

30,057

33,941

38,440

Year to 31 Mar (Rs


m)

FY14

FY15

FY16E

FY17E

FY18E

Pre-tax profit

3,098

4,035

5,401

6,563

7,659

Depreciation
Chg in Working
capital
Total tax paid

(655)

(683)

(756)

(856)

(956)

Total assets

Net sales trend

Shareholding pattern

Cash flow

(890)

(604)

(820)

(1,080)

(1,338)

(783)

(1,178)

(1,620)

(1,969)

(2,298)

Interest Received

Ext ord. Items


Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments

3,658

1,991

3,091

7,474

4,628

5,365

(1,254)

(588)

(2,000)

(2,000)

(2,000)

719

2,493

5,474

2,628

3,365

41

(1,591)

(130)

(116)

(18)

(9)

694

912

1,261

1,514

1,892

(1,386)

(1,907)

(2,631)

(3,158)

(3,937)

(62)

(208)

4,105

984

1,320

Debt raised/(repaid)
Interest Paid
Capital
raised/(repaid)
Dividend (incl. tax)
Other items
Net chg in cash

77 | IDFC SECURITIES

As of Dec 15

20 April 2016

In rationalisation mode
NEUTRAL
Akzo Nobel India (Akzo), despite its strong parentage, has remained a
distant number four player in the domestic paints market with just ~11%
market share. Given the companys limited decorative range and its
current focus to rationalise the portfolio, we expect Akzos growth to
continue to lag peers. Consequently, we expect the company to post
just 13% earnings CAGR (19%/30% for APNT/Berger) over FY16-18E.
Though Akzo trades at a 20-25% discount to peers, we do not expect
this gap to reduce until growth visibility and operational metrics
improve. We initiate coverage on Akzo with Neutral rating and a DCFbased target price of Rs1,442.

20 April 2016
BSE Sensex: 25844
Sector: Paints

Stock data
CMP (Rs)

1,345

Mkt Cap (Rs bn/USD m)

64.5 /974

Target Price (Rs)

1,442

Change in TP (%)

NA

Potential from CMP (%)

7.2

Earnings change (%)

Underperformance to continue versus peers Akzo has underperformed


peers owing to a limited product range, especially in the decorative
segment, and given one-sixth the distribution reach of the market leader.
Moreover, lacklustre volume growth, lower capacity utilisation and higher
share of low-margin industrial segment will keep the companys
profitability significantly below peers. Also, given the higher cyclicality in
its product portfolio due to 40% of the business coming from the
industrial segment, we expect Akzo to be more prone to fluctuations in
profitability. We expect a 5-6% volume CAGR over FY16-18E which will
be significantly below peers.

FY16E
FY17E
FY18E

Bloomberg code

AKZO IN

1-yr high/low (Rs)

1,549/1,201

6-mth avg. daily volumes (m)

6-mth avg. daily traded value


(Rsm/USDm)

16.2/0.2

Shares outstanding (m)

48.0

Free float (%)

27.0

Promoter holding (%)

73

Price performance relative & absolute


Akzo Nobel India

Sensex

110
105

despite presence of a favourable environment: The environment remains


favourable given improving consumer sentiment, Akzos strong global
parentage, lower raw material prices and the companys healthy cash
position. However, lack of urgency in re-engineering the global portfolio to
suit Indian needs and inability to use its cash position for accretive
acquisitions have led to continued underperformance in growth, which we
expect to continue through FY16-18E.
Valuation discount justified Initiate with Neutral: Despite Akzos strong
parentage, below-peer revenue CAGR of 11%, market share loss and
weaker margin profile would continue to drag medium-term earnings
growth. Given the inferior metrics versus peers, we believe the valuation
discount (20-27% to peers) is justified. Our DCF-based target price for
Akzo is Rs1,442, implying a 25.5x P/E on FY18E earnings. Initiate with
Neutral.

Key valuation metrics


Year to 31 Mar
Net sales (Rs m)
Adj. net profit (Rs m)
Shares in issue (m)

100

Adj. EPS (Rs)

95

% change
90
Apr-14

(%)

PE (x)
3-mth

6-mth

1-yr

AKZO Equity

4.3

(3.3)

(4.8)

BSE Sensex

5.6

(5.6)

(9.1)

FY14
24,179

FY15
25,270

FY16E
27,053

FY17E
29,568

FY18E
33,049

1,502

1,836

2,069

2,274

2,647

47

47

47

47

47

32.2

39.3

44.3

48.7

56.7

(31.4)

22.2

12.7

9.9

16.4
23.7

41.8

34.2

30.4

27.6

Price/ Book (x)

7.4

6.8

6.3

5.7

5.2

EV/ EBITDA (x)

29.4

22.5

19.1

17.0

14.3

RoE (%)

15.4

20.8

21.5

21.7

23.1

RoCE (%)

12.6

19.4

22.5

25.7

28.0

Source: Company, IDFC Securities Research

Harit Kapoor

Mehul Desai

harit.kapoor@idfc.com
91-22-662 22649

mehul.desai@idfc.com
91-22-662 22640

For Private Circulation only.

Important disclosures appear at the back of this report

INITIATING COVERAGE

Akzo Nobel India

Akzo Nobel India

INVESTMENT ARGUMENT
Akzo Nobel India, a 73% subsidiary of Akzo Nobel, remains a distant
number four player in the Indian paints industry.
In the past two years, focus on improving profitability led to market
share losses to the top-three players. We expect this trend to
continue for Akzo until it achieves its stated 12% EBITDA margin
target.
We find Akzos premium positioning in the decorative paints segment
attractive. Also, the company is on track to achieve its profitability
target over FY16-18E, led by rationalisation of its portfolio.
However, Akzos inability to successfully leverage its parents
portfolio and a higher industrial mix are key concerns.
We believe Akzos steep 27% valuation discount to APNT is warranted
given the companys subdued growth visibility and inferior
operational metrics. We initiate coverage with Neutral and DCF target
price of Rs1,442.

Akzo India Underperformance to continue


A distant number four in India despite strong parentage
Akzo Nobel India is a 73% subsidiary of Akzo Nobel, one of the two largest
coating companies globally. The Indian entity, earlier ICI India, came into
Akzo Nobels fold when Akzo Nobel acquired ICI in 2008. Since then, Akzo
Nobel has consolidated its India entities (in 2011) into one listed entity,
which houses all its India coatings (decorative and industrial) and specialty
chemicals businesses. The company is in the decorative market through
the Dulux brand and has several brands catering to the industrial
segment.
Exhibit 145: Akzo India Key milestones since the companys inception
Commissioned polyester plant in
Thane(exited in 1993),paint &
rubber plant in Rishra(exited in
2005),urea facility in
Kanpur(exited in 1993), paint
plant in Hyderabad

1954-63
1964-74

Incorporated as Indian
Explosives Limited in West
Bengal, for manufacture of
commercial blasting
explosives, safety fuses

Set up Dulux color centre in


key markets.
Exited agrochem unit.
Commissioned surfactants
unit in Thane

1975-86

1987-95

Set up R&D centre in


Thane.
Established agrochemical &
pharma units (exited in
2002) in Chennai.
Amalgamated 3 ICI
companies

Set up R&D centre at


Banglore, Introduced 5 in 1
supergloss enamel, Dulux
weathershield max

1996-99

2000-09

Commissioned paint plants


in Thane & Mohali. Acquired
Courtaulds Coatings facility
in Bangalore

2010-14

Changed name to Akzo


Nobel, Merged 3 Akzonobel
companies to create
coatings powerhouse,
Commissioned water based
paint plant at Gwalior

Source: Company, IDFC Securities Research

79 | IDFC SECURITIES

20 April 2016

Akzo Nobel India


Exhibit 146: Akzos key brands in decorative/industrial paint segments

Source: Company, IDFC Securities Research

Akzo Nobel is present in over 80 countries, with ~200 production sites and
leadership in many markets. Two-thirds of its revenues are from the
coatings business, with one-third coming in from the specialty chemicals
business. In spite of its strong parentage, however, the India entity is only
the fourth largest coatings company in the country. Revenue-wise, the
company is just one-fifth the size of the largest player, APNT.
Exhibit 147: Akzo Global Segment-wise presence
Global
General
Akzo Nobel
Architecture
coatings
Industrial
Industry Size($
48.0
35.0
bn)
Global Position
2
1
1

Protective
& Marine

Refinish/
Collision

Auto
Packaging
OEM

13.0

7.0

9.0

3.0

1.0

Aerospace

Source: Company, IDFC Securities Research


Exhibit 148: Akzo India Share of revenues among top four players

Akzo
Nobel
11%
Kansai
Nerolac
16%
Asian Paints
56%
Berger
17%

Source: Company, IDFC Securities Research

80 | IDFC SECURITIES

20 April 2016

Akzo Nobel India

Revenue growth to lag peers


In 2011, when all three Akzo Nobel group companies in India were merged
with Akzo Nobel India, the managements vision was to achieve EUR1bn
(Rs60bn) revenues by 2015, benefitting from combined synergies.
However, in the next two years, Akzos revenue CAGR stood at 10%, lower
than the top two players, impacted by an industrial segment slowdown
and some share loss to the top two players in the decorative segment.
Also, EBITDA margins declined from 8.8% to 7.9% from FY12-14.
The managements target
is to achieve 12% EBITDA
margins by FY18

Since then, the focus has shifted to improving profitability, which is more a
global mandate now. Consequently, EBITDA margin improved to 10.3% in
FY15 and we expect it to rise to 11.3% in FY16. The managements target is
to achieve 12% EBITDA margins by FY18 and Akzo is likely to give up some
revenue growth to improve its product mix and gross margins. We believe,
for a distant number four player, achieving ahead-of-industry revenue
growth without conceding on profitability is likely to be a challenge. Over
the next 18-24 months, Akzos revenue growth should lag peers as focus
continues on profit improvement.

Exhibit 149: Revenue growth trajectory lower than peers


Asian Paints

(% yoy)

Exhibit 150: EBITDA margins have dipped since FY11

Berger Paints

Kansai Nerolac

(%)

Akzo Nobel

Asian Paints

Berger Paints

Kansai Nerolac

Akzo Nobel

20.0

85.0
65.0

15.0

45.0
25.0

10.0

Source: Company, IDFC Securities Research

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

5.0

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

-15.0

FY06

5.0

Source: Company, IDFC Securities Research

Higher cyclicality; lower margin profile after merger


Given higher cyclicality in
Akzos portfolio, we
expect the company to be
more prone to fluctuations
in profitability

Pre-merger, 20% of Akzos revenues came in from the industrial business,


specifically the vehicle refinish segment. However, post the merger, this
contribution increased to 40-45% from industrial sub segments such as
protective, metal (coil), marine, powder, protective and specialty coatings.
The EBITDA margin profile came off in FY12 to 8.8% from 12.1% pre-merger
as the entities were integrated led by lower margins in the industrial
business. The EBITDA margins have not yet recovered to FY11 levels and
given the higher cyclicality in its portfolio, we expect Akzo to be more
prone to fluctuations in profitability going forward.
Exhibit 151: Akzo Nobel India Revenue and EBITDA trajectory
Revenue growth`(% - LHS)

EBITDA margins (% - RHS)

90.0

14.0

65.0

10.5

40.0

7.0

15.0

3.5

-10.0

0.0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: Company, IDFC Securities Research

81 | IDFC SECURITIES

20 April 2016

Akzo Nobel India

.despite presence of favourable environment


Re-engineering needed to plug in India portfolio gaps
Within the decorative segment, historically, Akzo has been more
prominent in the premium segment with a 20% market share through its
brand Dulux. However, its overall share in the domestic market is ~11%.
Previously, Akzo, attempted to tap the mass distemper segment through
ICI Magik, though it failed to gain adequate traction.
Akzo is focusing on India
specific re-engineering to
introduce products at
competitive price points

Going forward, the parents portfolio offers scope for new


products/technology, but most products are over-engineered, in line with
US/European standards. Nevertheless, the management is focusing on
India specific re-engineering so that the products can be introduced at
competitive price points. However, we expect the benefits from new
product launches to be spread over the next 2-3 years.
Exhibit 152: Decorative paints Product range under Dulux brand

Source: Company, IDFC Securities Research


Exhibit 153: Focus on innovations and premiumisation

Source: Company, IDFC Securities Research

Capabilities in place to augment volumes


Akzo owns six plants in India one each in Mohali, Gwalior, Bengaluru and
Hyderabad and two near Mumbai. The companys current capacity is
~230m litres, implying ~70% capacity utilisation. Given that volume growth
is unlikely to exceed 10% annually, Akzo is unlikely to spend on major
capex in the next 18-24 months. Further, Akzos staff costs as a percentage
to sales are higher versus peers. On an absolute basis too, staff cost is
higher than that for Berger Paints/KNPL due to higher legacy salaries and
increased salary cost of the entities merged in FY12. We believe that at the
current opex level, Akzo can augment volumes by 50% in the long term.
However, in the medium term, higher operational costs and lower capacity
utilisations will keep profitability significantly below peers.

82 | IDFC SECURITIES

20 April 2016

Akzo Nobel India


Exhibit 154: Adequate manufacturing capabilities

Source: Company, IDFC Securities Research


Exhibit 155: Higher staff cost compared with peers
Staff cost (% to sales FY15)
9.00

6.00

3.00

0.00
Akzo Nobel

Asian Paints

Berger Paints

Kansai Nerolac

Source: Company, IDFC Securities Research


Exhibit 156: Strong gross margins due to premium mix
(% yoy)

Asian Paints

Berger Paints

Kansai Nerolac

Akzo Nobel

Exhibit 157: EBITDA margins however lag peers


(%)

Asian Paints

Berger Paints

Kansai Nerolac

Akzo Nobel

20.0

50.0
45.0

15.0

40.0

Source: Company, IDFC Securities Research

83 | IDFC SECURITIES

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

5.0

FY07

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

30.0

FY06

10.0

35.0

Source: Company, IDFC Securities Research

20 April 2016

Akzo Nobel India

Strong cash position Acquisitions a possibility


In FY15, Akzo had ~Rs4bn net cash (including marketable securities) on
books. Continued healthy operating cash generation and lower capex are
likely to result in increased cash pile once again. We estimate cash and
cash equivalents to be ~Rs6.5bn by FY18E end.
Excess cash can be
utilised for special
dividends and acquisitions

In FY13 and FY14, Akzo paid dividends of Rs80 and Rs75/share (170% and
230% dividend pay-out ratio) as cash pile had moved up to Rs9.5bn. In
FY15, however, the dividend payout normalised to 50%. We believe excess
cash can be utilised for: 1) a special dividend component, as was the case
in FY13/14 and 2) acquisitions. Acquisition targets in the decorative
segment are hard to find, but the industrial segment could offer some
opportunities (indigenous players that have created a niche in specific
segments).

Exhibit 158: Cash position expected to strengthen

Exhibit 159: Special dividends in FY13/14

Cash & CE (Rs bn)

DPS (Rs)

12.0

Special DPS (Rs)

90

9.0

60

6.0
30
3.0

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY18

FY17

FY16

FY15

FY13

FY14

FY12

FY11

FY10

FY09

FY08

FY07

FY06

Source: Company, IDFC Securities Research

FY06

0.0

Source: Company, IDFC Securities Research

Lower raw material prices to drive gross margins


We factor in 20bp gross
margin expansion over
FY16-18E

About 30-35% of Akzos raw material is crude linked and titanium dioxide
constitutes 13% of its total raw material consumed. Currently, titanium
dioxide prices are marginally lower versus last year levels. Further, the
benefits of lower RM prices have reflected in improved gross margins for
the industry and Akzo from Q3FY15. Assuming that crude oil prices stay at
current levels of US$40/bbl and led by continued rationalisation (to
improve mix), we expect gross margin expansion to sustain. Consequently,
we factor in 20bp gross margin expansion over FY16-18E.

Exhibit 160: Input cost scenario favourable

Exhibit 161: Raw material cost break-up


Titanium
Dioxide
13%

Raw material (% to sales)


64.0
60.5
Packing
materials
11%

57.0
53.5

84 | IDFC SECURITIES

Q3FY16

Q2FY16

Q1FY16

Q3FY15

Source: Company, IDFC Securities Research

Q4FY15

Q2FY15

Q1FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

Solvents
12%

FY06

50.0

Others
15%

Pigments /
Extenders
/ Tinters
15%

Resins
21%

Latex,
Monomers
13%

Source: Company, IDFC Securities Research

20 April 2016

Akzo Nobel India

Financial analysis
Revenue growth to pick up but still lag peers
Akzos FY13-16E revenue CAGR stood at 6.7%, 500bp lower than the
average for top-three paint companies in India, mainly due to lacklustre
volume CAGR (estimated at sub 2% over FY13-16E). However, we expect
volume growth to pick up in in the next two years (~6% volume CAGR in
FY16-18E) on three years of low base, lower rationalisation intensity and
benefits from macro injections. This would translate into 10.5% revenue
CAGR over the period. However, we believe growth will continue to lag
peers till the portfolio rationalisation is complete. Given Akzos recent track
record, we do not expect upsides to our revenue growth estimates.

Akzos growth will


continue to lag peers till
its portfolio rationalisation
is complete

Exhibit 162: Sales growth to pick up but lag peers


Net sales (Rs bn - LHS)

YoY (% - RHS)

35.0

100.0%

28.0

80.0%

21.0

60.0%

14.0

40.0%

7.0

20.0%

0.0

0.0%
FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

We expect FY16-18E PAT CAGR at 13%


Akzos global parent is targetting a 12% EBITDA margin for the Indian
entity, similar to Akzos pre-merger levels. A combination of improved mix
(on continued rationalisation) and better cost efficiencies should drive this.
We estimate EBITDA margin to rise from 11.3% to 12% over FY16-18E,
translating into 14% EBITDA CAGR over the same period. Given that the
increase in other income will be lower than EBITDA growth (lower cash
pile versus FY12 levels of Rs10.2bn and decreased yields), we factor in
FY16-18E PAT CAGR at 13%.
Exhibit 163: EBITDA growth to sustain at healthy levels

4.4

EBITDA (Rs bn - LHS)

YoY (% - RHS)
40.0%

3.3

Exhibit 164: Steady improvement expected in margins


Gross margins (LHS)

EBITDA margins (RHS)

7.0

1.1

10.0%

41.0

3.5

0.0%

38.0

0.0

Source: Company, IDFC Securities Research

85 | IDFC SECURITIES

FY17E

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

FY11

0.0

FY18E

44.0

FY16E

20.0%

FY15

2.2

FY14

10.5

FY13

47.0

FY12

30.0%

FY11

14.0

FY10

50.0

Source: Company, IDFC Securities Research

20 April 2016

Akzo Nobel India


Exhibit 165: We expect 13% PAT CAGR over FY16-18E
PAT (Rs bn - LHS)

YoY (% - RHS)

4.4

30.0%

3.3

12.5%

2.2

-5.0%

1.1

-22.5%

0.0

-40.0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

Lower capex to keep pay-out ratios healthy


Given insignificant volume growth in the past three years and lacklustre
growth outlook (volume growth to only rise to mid-single digit in the next
two years), Akzos current capacity is adequate to service current demand.
We factor in Rs1.5bn capex over FY16-18E. Lower capex and steady
working capital should keep dividend pay-out healthy. We factor in steady
pay-out ratio at 50% for the next two years.
Exhibit 166: Limited capex requirement over FY16-18E

Exhibit 167: Expect steady payout ratio going forward

(Rs bn)

(Rs bn)

Capex

2500

DPS

250.0

2000

182.5

1500
115.0
1000
47.5

500

Source: Company, IDFC Securities Research

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

FY11

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

-20.0
FY11

Source: Company, IDFC Securities Research

Special dividends could result in further RoCE accretion


Akzos RoCE has improved from 9.8% in FY10 to 22.9% in FY15 in spite of
EBITDA margin declining from 12.5% to 10.3% during the same period. This
was due to a reduction in the cash pile on the books as Akzo increased its
average pay-out ratio to 50% and issued special dividends (Rs60/share
each for FY13 and FY14). With limited capex requirements, improving
margin profile and steady dividend payouts, we expect steady RoCE
accretion to 28% in FY18E. Further, we estimate cash and cash equivalents
to increase from Rs4bn in FY15 to Rs6.5bn in FY18. Another round of
special dividends could result in further RoCE accretion going forward.

86 | IDFC SECURITIES

20 April 2016

Akzo Nobel India


Exhibit 168: Gradual improvement in Cash and CE
(Rs)

Exhibit 169: Strong payout likely to continue

Cash & CE

Dividend payout ratio (%)


250.0

10.0
8.0

182.5

6.0
115.0
4.0
47.5

2.0

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

FY18E

FY17E

FY16E

FY15

FY14

FY13

FY12

FY11

FY11

-20.0

0.0

Source: Company, IDFC Securities Research

Source: Company, IDFC Securities Research

Exhibit 170: Return ratios below peers; likely to improve


(%)

ROE

ROCE

40.0
30.0
20.0
10.0
0.0
FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company, IDFC Securities Research

87 | IDFC SECURITIES

20 April 2016

Akzo Nobel India

Valuation and view


We believe structural growth tailwinds exist for the Indian paints industry
consequently, its volume growth will likely be ahead of other broad
consumer industries such as staples/alcoholic beverages. Also, headwinds
faced by some industries (staples: intensifying competition and higher
penetration; retail: e-commerce threat; cigarettes and alcoholic beverages:
regulation-led issues) are absent for paints. Therefore, broader paints
industry players deserve premium multiples to other consumer segments.

Inferior metrics justify P/E discount; initiate with Neutral


An improvement in
volumes, market share and
profitability are re-rating
triggers until these play
out, we initiate with
Neutral

Akzo has been in rationalisation mode ever since all the Indian entities
were merged together. We believe lack of volume growth visibility
(assuming 5-6% volume growth in FY16-18E), market share loss, lower
EBITDA margin and inferior return ratios justify the significant P/E
discount for Akzo versus peers. Our DCF target price is Rs1,442, implying
25.5x P/E on FY18E earnings. We believe this valuation discount (20-25%
to peers) is justified. An improvement in volumes, market share and
profitability are re-rating triggers until these play out, we initiate with
Neutral.

Exhibit 171: Akzo India FY18 DCF target price Rs1,442


Rs m

FY15

FY16E

FY17E

FY18E

FY19E

FY20E

FY28E

Sales

25270

27053

29568

33049

36850

41088

91987

7.1%

9.3%

11.8%

11.5%

11.5%

10%

2614

3054

3382

3959

4422

4931

12510

10%

11%

11%

12%

12%

12%

14%

Depreciation

-526

-569

-621

-675

-838

-1000

-1780

EBIT

2738

3103

3409

3965

4340

4773

12570

Sales growth
EBITDA
EBITDA margin

Current tax
Capex
Change in WC

887

1019

1120

1304

1432

1575

4148

-478

-750

-750

-750

-2500

-2500

-1000

FCF

-124

69

93

41

51

99

1764

2214

2665

1286

1749

9301

discount factor
PV of FCF (@ 12% WACC)
WACC

12%

PV of projection period

5%

Terminal value

132099

PV of terminal value

0.9

0.8

0.7

0.3

1144

1384

2658

43959

Total Enterprise value

23203

Terminal growth rate

1.0
2665

41067

64270

Net debt (Mar'18)

3050

Equity value
DCF based value per
share (Rs)
# shares outstanding
(m)

67321
1442
47

Source: Company, IDFC Securities Research


Exhibit 172: Akzo trades at discount to peers
(x)

Exhibit 173: PEG is highest in the industry


(x)

PE (FY18E)

35.0

2.0

28.0

1.5

PEG

21.0
1.0
14.0
0.5

7.0
0.0

0.0
Kansai
Nerolac

Akzo Nobel Asian Paint

Source: Company, IDFC Securities Research

88 | IDFC SECURITIES

Berger
paints

Kansai
Nerolac

Akzo Nobel Asian Paint

Berger
paints

Source: Company, IDFC Securities Research

20 April 2016

Akzo Nobel India


Exhibit 174: Five-year average P/E at 25x
(x)
45

PE (x)
+ 1 Std. Dev.

Avg. PE
- 1 Std. Dev.

Exhibit 175: Five-year average EV/EBITDA at 17.4x


(x)
25

27

15

18

10

Source: Company, IDFC Securities Research

89 | IDFC SECURITIES

Avg. EV/EBITDA
- 1 Std. Dev.

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

20

Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16

36

EV/EBITDA
+ 1 Std. Dev.

Source: Company, IDFC Securities Research

20 April 2016

Akzo Nobel India


Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Operating expenses
EBITDA
% change

Key ratios
FY15

FY14

FY16E

FY17E

FY18E

FY16E

FY17E

FY18E

10.3

11.3

11.4

12.0

27,053

29,568

33,049

EBIT margin (%)

6.1

8.3

9.2

9.3

9.9

8.3

4.5

7.1

9.3

11.8

PAT margin (%)

6.2

7.3

7.6

7.7

8.0

22,260

22,656

23,999

26,186

29,090

RoE (%)

15.4

20.8

21.5

21.7

23.1

1,919

2,614

3,054

3,382

3,959

RoCE (%)

12.6

19.4

22.5

25.7

28.0

Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)

(0.8)

(0.5)

(0.4)

(0.5)

(0.5)

(3.8)

(2.4)

(1.4)

(1.6)

(1.6)

1.7

2.3

2.4

3.0

3.6

Dividend yield (%)

5.6

1.5

1.6

1.8

2.1

1.8

36.2

16.8

10.7

17.1

650

618

648

681

Net interest

(15)

(15)

(15)

(15)

(15)

Deferred tax

FY15

7.9

25,270

567

Pre-tax profit

FY14

EBITDA margin (%)


24,179

Other income
Depreciation

Year to 31 Mar

437

526

569

621

675

2,034

2,723

3,088

3,394

3,950

97

30

435

857

1,019

1,120

1,304

Valuations

1,502

1,836

2,069

2,274

2,647

Year to 31 Mar

FY14

FY15

FY16E

FY17E

FY18E

Preference dividend

Reported EPS (Rs)

32.2

39.9

44.3

48.7

56.7

Minorities

Adj. EPS (Rs)

32.2

39.3

44.3

48.7

56.7

Adjusted net profit

1,502

1,836

2,069

2,274

2,647

PE (x)

41.8

34.2

30.4

27.6

23.7

Non-recurring items

27

Price/ Book (x)

7.4

6.8

6.3

5.7

5.2

Reported net profit

1,502

1,863

2,069

2,274

2,647

EV/ Net sales (x)

2.3

2.3

2.2

1.9

1.7

% change

(31.4)

24.0

11.0

9.9

16.4

29.4

22.5

19.1

17.0

14.3

5.8

5.0

5.7

5.1

4.6

Current tax
Profit after tax

EV/ EBITDA (x)


EV/ CE (x)

Balance sheet
As on 31 Mar (Rs
m)
Paid-up capital
Preference capital
Reserves & surplus
Shareholders'
equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets

Revenue growth & EBITDA margin trend


FY14

FY15

FY16E

FY17E

FY18E

467

467

467

467

467

8,011

8,733

9,560

10,470

11,529

9,464

11,542

10,027

10,937

11,996

11,647

8,521

8,838

9,541

10,517

143

161

161

161

161

121

109

109

109

109

11,911

8,791

9,108

9,811

10,787

21,375

20,333

19,135

20,748

22,783

5,331

5,283

5,464

5,593

5,668

Investments

500

500

500

500

500

Cash

722

601

1,124

1,973

3,050

14,804

13,944

12,043

12,677

13,560

18

3,879

6,024

4,328

5,109

6,093

21,375

20,333

19,135

20,748

22,783

Year to 31 Mar (Rs


m)

FY14

FY15

FY16E

FY17E

FY18E

Pre-tax profit

2,034

2,723

3,088

3,394

3,950

Depreciation
Chg in Working
capital
Total tax paid

(437)

(526)

(569)

(621)

(675)

213

(475)

(411)

(237)

(332)

(435)

(857)

(1,019)

(1,120)

(1,304)
0

Other current assets


Deferred tax assets
Other non-current
assets
Net working capital
Total assets

Shareholding pattern

Cash flow

Interest Received

Ext ord. Items


Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments

27

2,264

1,959

2,241

2,673

3,005

(1,163)

(478)

(750)

(750)

(750)

1,086

1,466

1,476

1,908

2,240
0

2,200

Debt raised/(repaid)

(47)

18

Interest Paid
Capital
raised/(repaid)
Dividend (incl. tax)

(15)

(15)

(15)

(15)

(15)

Other items
Net chg in cash

(4,354)

(3,884)

(954)

(1,058)

(1,163)

(6)

(63)

(135)

(121)

523

850

1,077

90 | IDFC SECURITIES

As of Dec 15

20 April 2016

Akzo Nobel India

Disclaimer
This document has been prepared by IDFC Securities Ltd (IDFC SEC). IDFC SEC is a full-service, integrated investment banking, and institutional broking
group. There are no material disciplinary actions taken against IDFC SEC. Details of associates of IDFC SEC are attached as annexure.
This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any
transaction.
The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the
information herein on reasonable basis, the opinions and information in this report are subject to change without notice and IDFC SEC, its subsidiaries
and associated companies, their directors and employees (IDFC SEC and affiliates) are under no obligation to update or keep the information current.
Also, there may be regulatory, compliance, or other reasons that may prevent IDFC SEC and affiliates from doing so. Thus, the opinions expressed herein
should be considered those of IDFC SEC as of the date on this document only. We do not make any representation either express or implied that
information contained herein is accurate or complete and it should not be relied upon as such.
The information contained in this document has no regard to the specific investment objectives, financial situation or particular needs of any specific
recipient. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.
The investment discussed or views expressed in the document may not be suitable for all investors. Investors should make their own investigations as
they deem necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the
merits and risks involved) and investment decisions based upon their own financial objectives and financial resources. Investors assume the entire risk of
any use made of the information contained in the document. Investments in general involve some degree of risk, including the risk of capital loss. Past
performance is not necessarily a guide to future performance and an investor may not get back the amount originally invested.
Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or the price of, or
income derived from, the investment. In addition, investors in securities, the values of which are influenced by foreign currencies, effectively assume
currency risk.
Affiliates of IDFC SEC may have issued other reports that are inconsistent with and reach different conclusions from, the information presented in this
report.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state,
country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IDFC
SEC and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale
in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of, and
to observe, such applicable restrictions.
Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's
fundamentals and, as such, may not match with a report on a company's fundamentals.
IDFC SEC and affiliates, their directors, officers, and employees may from time to time have positions in, purchase or sell, or be materially interested in
any of the securities mentioned or related securities. IDFC SEC and affiliates may from time to time solicit from, or perform investment banking, or other
services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall IDFC SEC, any of its affiliates or any third party
involved in, or related to, computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or
consequential loss or damage, however arising, from the use of this document. Any comments or statements made herein are those of the analyst and do
not necessarily reflect those of IDFC SEC and affiliates.
This document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed and may contain
confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited.
Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. IDFC SEC will not treat recipients
as customers by virtue of their receiving this report.
The analyst certifies that all of the views expressed in this research report accurately reflect his/her personal views about any and all of the subject
issuer(s) or securities. The analyst certifies that no part of her compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) and/or views expressed in this report.

Additional Disclosures of interest:


Unless specifically mentioned in Point No. 9 below:
1. The Research Analyst(s), IDFC Sec, Associate of Analyst or his relative does not have any financial interest in the company(ies) covered in this report.
2. The Research Analyst, IDFC SEC or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities
of the company (ies) covered in this report as of the end of the month immediately preceding the distribution of the research report.
3. The Research Analyst, his associate, his relative and IDFC SEC do not have any other material conflict of interest at the time of publication of this
research report.
4. The Research Analyst, IDFC SEC and its associates have not received compensation for investment banking or merchant banking or brokerage
services or for any other products or services from the company(ies) covered in this report, in the past twelve months.
5. The Research Analyst, IDFC SEC or its associates have not managed or co-managed in the previous twelve months, a private or public offering of
securities for the company (ies) covered in this report.
6. IDFC SEC or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connection with the research report.
7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report.
8. The Research Analyst and IDFC SEC has not been engaged in market making activity for the company(ies) covered in the Research report.
9. Details of IDFC SEC , Research Analyst and its associates pertaining to the companies covered in the Research report:
Sr.
No.
1.
2.
3.
4.
5.

Yes /
No.

Particulars
Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for
investment banking transaction by IDFC SEC
Whether Research Analyst, IDFC SEC or its associates or relatives of the Research Analyst affiliates collectively hold more than 1%
of the company(ies) covered in the Research report
Whether compensation has been received by IDFC SEC or its associates from the company(ies) covered in the Research report
IDFC SEC or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for
the company(ies) covered in the Research report
Research Analyst, his associate, IDFC SEC or its associates have received compensation for investment banking or merchant
banking or brokerage services or for any other products or services from the the company(ies) covered in the Research report, in
the last twelve months

No
No
No
No
No

Explanation of Ratings:
1. Outperformer
2. Neutral
3. Underperformer

:
:
:

More than 5% to Index


Within 0-5% (upside or downside) to Index
Less than 5% to Index

Copyright in this document vests exclusively with IDFC Securities Ltd.

91 | IDFC SECURITIES

20 April 2016

Akzo Nobel India


SEBI Registration Nos. of IDFC Securities Limited
Research Analyst
Stock Broker
NSE Capital Markets
NSE Futures & Options
BSE Capital Markets
BSE Futures & Options

INH 000000 131


INB 23 12914 37
INF 23 12914 37
INB 01 12914 33
INF01 12914 33

US Disclaimer:
This report is distributed in the US, by IDFC Securities (Parent of IDFC Capital (USA) Inc.) only to major U.S institutional
investors (as defined in Rule 15a-6 under the U.S Securities Exchange Act of 1934 (the Exchange Act)) pursuant to the
exemption (a)(2) of the Rule and any transaction effected by a U.S customer in the securities described in this report
must be effected through IDFC USA as defined in the Rule.
Neither the report nor any analyst who prepared or approved the report is subject to U.S legal requirements or Financial
Industry Regulatory Authority, Inc. (FINRA) or other regulatory requirements pertaining to research reports or research
analysts.
This communication is produced by an analyst/strategist of IDFC Securities Ltd.
This material was produced by IDFC Securities solely for information purposes and for the use of the recipient, It is not to
be reproduced under any circumstances and is not be copied or made available to any person other that the recipient, it
is distributed in the United States of America by IDFC Securities under 15a-6(a)(2). And elsewhere in the world by IDFC
Securities or any authorised affiliate of IDFC Securities.

Annexure to Research Disclosure


Associates of IDFC Securities Limited
Sr.
No.

Name of Company

Category

IDFC Ltd.

Parent of
IDFC
NOFHC

Nature of business

3.

IDFC Financial Holding Company Ltd.


(IDFC NOFHC)
IDFC Capital (USA) Inc.

Subsidiary

Non-Banking Finance Company,


SEBI registered Merchant Banker,
SEBI registered Debenture Trustee
Non-Banking Finance Company
(Non-operative Financial Holding Company)
Broker Dealer registered with FINRA

4.

IDFC Securities Singapore Pte. Ltd.

Subsidiary

Dealing in Securities

5.

IDFC Fund of Funds Ltd.

Subsidiary

Sponsor Investments

1.
2.

92 | IDFC SECURITIES

Parent

20 April 2016

Akzo Nobel India

www.idfc.com
Anish Damania

CEO, Strategy

anish.damania@idfc.com

91-22-6622 2522

Analyst

Sector/Industry/Coverage

E-mail

Shirish Rane

Head of Research; Construction, Power

shirish.rane@idfc.com

91-22-662 22575

Nitin Agarwal

Pharmaceuticals, Real Estate

nitin.agarwal@idfc.com

91-22-662 22568

Mahrukh Adajania

Financials

mahrukh.adajania@idfc.com

91-22-662 22574

Bhoomika Nair

Engineering, Cement, Power Equipment, Logistics

bhoomika.nair@idfc.com

91-22-662 22561

Shashi Bhusan

IT Services

shashi.bhusan@idfc.com

91-22-662 22631

Amit Rustagi

Oil & Gas

amit.rustagi@idfc.com

91-22-662 22688

Ashish Shah

Construction, Power

ashish.shah@idfc.com

91-22-662 22560

Deepak Jain

Automobiles, Auto ancillaries

deepak.jain1@idfc.com

91-22-662 22562

Vijayaraghavan G

Agri-inputs, Midcaps

vijayaraghavan.g@idfc.com

91-22-662 22690

Rohit Dokania

Media & Entertainment, Midcaps

rohit.dokania@idfc.com

91-22-662 22567

Abhishek Gupta

Telecom, IT services

abhishek.gupta@idfc.com

91-22-662 22661

Mohit Kumar, CFA

Construction, Power

mohit.kumar@idfc.com

91-22-662 22573

Param Desai

Pharmaceuticals, Real Estate

param.desai@idfc.com

91-22-662 22579

Probal Sen

Oil & Gas

probal.sen@idfc.com

91-22-662 22569

Harit Kapoor

FMCG, Retail, Alcoholic Beverages

harit.kapoor@idfc.com

91-22-662 22649

Saumil Mehta

Metals, Mining

saumil.mehta@idfc.com

91-22-662 22578

Abhishek Ghosh

Engineering, Cement, Power Equipment, Logistics

abhishek.ghosh@idfc.com

91-22-662 22658

Saksham Kaushal

Automobiles, Auto ancillaries

saksham.kaushal@idfc.com

91-22-662 22529

Jiten Rushi

Construction

jiten.rushi@idfc.com

Mehul Desai

FMCG, Retail, Alcoholic Beverages

mehul.desai@idfc.com

Bhawana Chhabra

Strategy, Economy

bhawana.chhabra@idfc.com

91-22-662 22629

Dharmendra Sahu

Database Analyst

dharmendra.sahu@idfc.com

91-22-662 22580

Equity Sales

Designation

E-mail

Ashish Kalra

Managing Director, Sales

ashish.kalra@idfc.com

91-22-6622 2525

Rajesh Makharia

Director, Sales

rajesh.makharia@idfc.com

91-22-6622 2528

Nilisha Barbora

Director, Head Asia Sales

nilisha.barbora@idfc.com

91-22-6622 2595

Palak Shah

SVP, Sales

palak.shah@idfc.com

91-22-6622 2696

Varun Saboo

SVP, Sales

varun.saboo@idfc.com

91-22-6622 2558

Hemal Ghia

SVP, Sales

hemal.ghia@idfc.com

91-22-6622 2533

Pranav Verma

SVP, Sales

pranav.verma@idfc.com

91-22-6622 2597

Abhinav Rathee

VP, Sales

abhinav.rathee@idfc.com

91-22-6622 2586

Nirav Bhatt

AVP, Sales

nirav.bhatt@idfc.com

Chandan Asrani

AVP, Sales

chandan.asrani@idfc.com

Sneha Baxi

Manager, Sales

sneha.baxi@idfc.com

Equity Sales Dealing

Designation

E-mail

Suryakant Bhatt

Director & Head - Sales trading

suryakant.bhatt@idfc.com

Mukesh Chaturvedi

Director, Sales trading

mukesh.chaturvedi@idfc.com

91-22-6622 2512

Viren Sompura

SVP, Sales trading

viren.sompura@idfc.com

91-22-6622 2527

Tel.+91-22-6622 2600

91-22-662 22615
91-22-662 22640

Tel.+91-22-6622 2500

91-22-6622 2681
91-22-6622 2540
91-22-6622 2537
Tel.+91-22-6622 2500
91-22-6622 2693

Rajashekhar Hiremath SVP, Sales trading

rajashekhar.hiremath@idfc.com

91-22-6622 2516

Alok Shyamsukha

SVP, Sales trading

alok.shyamsukha@idfc.com

91-22-6622 2523

Suketu Parekh

VP, Sales trading

suketu.parekh@idfc.com

91-22-6622 2674

Devanshu Soni

Senior Manager

devanshu.soni@idfc.com

91-22-6622 2536

IDFC Securities
th
Naman Chambers, C-32, 7 floor,
G- Block, Bandra-Kurla Complex,
Bandra (East), Mumbai 400 051
INDIA

IDFC Capital (USA) Inc,


Regus Business Centre
600 Third Avenue,
nd
2 Floor,
New York,10016

Tel: +91 22 6622 2600


Fax: +91 22 6622 2503

Tel: +1 646 571 2303


Fax: +1 646 571 2301

Our research is also available on Bloomberg and Thomson Reuters


For any assistance in access, please contact research@idfc.com

93 | IDFC SECURITIES

20 April 2016