KANSAI NEROLAC PAINTS LTD

Result Update: Q2 FY 12

C.M.P Target Price Date

: Rs.880.00 : Rs.994.00 : 03rd FEB 2012

BUY
SYNOPSIS

Stock Data: Sector: Face Value Rs. 52 wk. High/Low (Rs.) Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) Paints
Rs.10.00 973.95/720.00 137.00 500165 47423.20

Kansai Nerolac Paints Ltd is the second largest coating company in India and market leader in Industrial Coatings. The Company is a subsidiary of Japan based Kansai Paint Company Limited, which is one of the top ten coating companies in the world. Companys manufacturing units have received ISO 9001-2000, ISO-14001 and OHSAS-18001 for its quality management. Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 18% over 2010 to 2013E respectively. During the quarter, the company has reported Net Profit increased to Rs.571.10 million from Rs.536.10 million in previous year same quarter.

Share Holding Pattern

1 Year Comparative Graph

Kansai Nerolac paints Ltd

BSE SENSEX

Years FY 11 FY 12E FY 13E

Net sales 21398.80 25122.19 27634.41

EBITDA 3393.30 3968.54 4375.00

Net Profit 2059.80 2446.67 2687.17

EPS 38.22 45.40 49.86

P/E 23.02 19.38 17.65

Peer Group Comparison

Name of the company Kansai Nerolac Paints Asian Paints Shalimar Paints Berger Paints CMP(Rs.) 880.00 2849.65 444.60 95.45 Market Cap.(Rs.Mn.) EPS(Rs.) 47423.20 273337.8 1683.1 33039.3 38.22 92.29 31.70 4.57 P/E(x) 23.02 30.88 14.03 20.89 P/Bv(x) 5.06 13.84 3.31 4.58 Dividend (%) 100.00 320.00 80.00 65.00

Investment Highlights

Q2 FY12 Results Update

Kansai Nerolac Paints Ltd disclosed results for the quarter ended Sep 2011. Net sales for the quarter increased by 15% to Rs.6160.50 million as compared to Rs.5345.10 million during the corresponding quarter last year. During the quarter, the company has reported Net Profit increased to Rs.571.10 million from Rs.536.10 million in previous year same quarter. The Basic EPS of the company stood at Rs.10.60 for the quarter ended Sep 2011.

Quarterly Results - Standalone (Rs in mn)

As At Net sales PAT Basic EPS

Sep-11
6160.50

Sep-10
5345.10

%change
15

571.10

536.10

10.60

9.95

Basic EPS of the company stood at Rs.10.60

Break Up of Expenditure Expenditure for the quarter stood at Rs.5245.90mn, which is around 16% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 66% of the sales of the company and stood at Rs.4064.40mn from Rs.3518.40mn of the corresponding period of the previous year. Other Expenditure cost increased 11%YoY to Rs.959.5mn from

Rs.868.00mn and accounts for 16% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 15% and 9% respectively from 17% and 10% respectively of the same period of the last year.

FY11 Performance Net profit of the company has increased at 24% yoy Rs.2059.80mn from Rs.1655.00mn of same period of last year. Total revenue for the year stood at Rs.21398.80 mn from Rs.17074.10 which is 25% increased than that of a year ago. Total Income has increased from Rs. 21621.90 million for the year ended March 31, 2011 to Rs.17267.60 million for the year ended March 31, 2010.EPS for the year stood at Rs.38.22 per equity share of Rs.10.00 each. Operating profit of the company stood at Rs.3393.30mn. OPM for the year stood at 15.86%. Expenditure of the company increased 26% YoY to Rs.18228.60mn.

Company Profile
Kansai Nerolac Paints Ltd. is the second largest coating company in India and market leader in Industrial Coatings. Its Industrial Coatings it has a wide range of products in the Automotive, Powder, General Industrial and High performance Coatings space. Nerolac paint, as it is popularly known, is an established brand in decorative paints. Kansai Nerolac Paints Ltd is a subsidiary of Japan based Kansai Paint Company Limited, which is one of the top ten coating companies in the world. The technological edge of Kansai helps us constantly innovate and come up with products that meet

consumer need gaps. Kansai Nerolac has always believed that the key to its business is: Technology Research & Development Innovations Quality

Company Products Decorative Paints Automotive Coatings General Industries Coatings High Performance Coatings Powder Coatings Specialty Coatings

In India the company has presence in Assam, Goa, Gujarat, Haryana, Himachal Pradesh, Madhya Pradesh, Orissa, West Bengal, Rajasthan, Maharashtra, Punjab, Uttaranchal, Bihar, New Delhi, Tamil Nadu, Uttar Pradesh and many more. Companys manufacturing units have received ISO 9001-2000, ISO-14001 and OHSAS-18001 for its quality management. Company has also implemented Japanese 5-S and TPM (total productive maintenance) concepts in organization. Nerolac has a wide distribution network of over 11,000 dealers which one of the key strength of company. Companys R&D facility focuses on improving its manufacturing processes and innovate its products. This facility has officially recognized by the Department of Science and Technology (DTI), Government of India. Company has technically collaborated with two companies Kansai Paint Co. and Oshima Kogyo Co. of Japan. The company markets its products under the brand name such as 'Impressions', 'Beauty', 'Excel' and 'Suraksha'.

Financial Results
12 Months Ended Profit & Loss Account (Standalone)
Value(Rs.in million) FY10A 12m Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Extraordinary items Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS *A=Actual, *E=Estimated 17074.1 193.5 17267.6 -14426.9 2840.7 -12 2828.7 -442.6 2386.1 -731.1 1655 0 1655 269.5 7458.7 10 26.95 61.41 21398.8 223.1 21621.9 -18228.6 3393.3 -8.4 3384.9 -493.6 2891.3 -831.5 2059.8 0 2059.8 538.9 8828.7 10 53.89 38.22 25122.19 225.33 25347.52 -21378.98 3968.54 -8.74 3959.79 -533.09 3426.71 -980.04 2446.67 0 2446.67 538.9 11275.37 10 53.89 45.4 27634.41 229.84 27864.25 -23489.25 4375 -9.18 4365.82 -575.74 3790.08 -1102.91 2687.17 0 2687.17 538.9 13962.54 10 53.89 49.86 FY11A 12m FY12E 12m FY13E 12m

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Mar-11 3m Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Exceptional Items Profit before Tax Tax Profit after Tax Equity Capital Face Value Total No. of Shares EPS *A=Actual, *E=Estimated 5195.9 81.3 5277.2 -4361.8 915.4 -0.9 914.5 -132.1 0 782.4 -193.8 588.6 538.9 10 53.89 10.92 6520.5 56.9 6577.4 -5592.5 984.9 -2.5 982.4 -120.1 0 862.3 -250 612.3 538.9 10 53.89 11.36 6160.5 29.3 6189.8 -5245.9 943.9 -2 941.9 -135.8 0 806.1 -235 571.1 538.9 10 53.89 10.6 6425.4 32.23 6457.63 -5590.1 867.53 -2.16 865.37 -142.59 0 722.78 -213.22 509.56 538.9 10 53.89 9.46 30-Jun-11 3m 30-Sep-11 3m 31-Dec-11 3m(E)

Key Ratio
Particulars EPS (Rs.) EBITDA Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) EV/EBITDA (x) Debt-Equity Ratio Book Value (Rs.) P/BV FY10 61.41 16.64% 9.69% 14.72 21.42% 27.16% 8.58 0.14 286.76 3.15 FY11 38.22 15.86% 9.63% 23.02 21.99% 28.45% 13.98 0.09 173.83 5.06 FY12E 45.4 15.80% 9.74% 19.38 20.71% 27.08% 11.95 0.07 219.23 4.01 FY13E 49.86 15.83% 9.72% 17.65 18.53% 24.64% 10.84 0.06 269.09 3.27

Charts:

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Outlook and Conclusion

At the current market price of Rs.880.00, the stock is trading at 19.38 x FY12E and 17.65 x FY13E respectively. Price to Book Value of the stock is expected to be at 4.01 x and 3.27 x respectively for FY12E and FY13E. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.45.40 and Rs.49.86 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 18% over 2010 to 2013E respectively. During the quarter, the company has reported Net Profit increased to Rs.571.10 million from Rs.536.10 million in previous year same quarter. On the basis of EV/EBITDA, the stock trades at 11.95 x for FY12E and 10.84 x for FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.994.00 for Medium to Long term investment.

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Industry Overview
Paint industry in India has been long considered as the barometer of Industrial activity in the country. The industry has witnessed buoyant growth during the last decade riding on increasing per-capita disposable incomes in the country and the boom in real estate and automobile industry. Despite the sharp growth in recent times, the per capita consumption of paints in India remains very low at 0.8 kg per year compared with 4 kg in the South East Asian nations and 22 kg in developed countries. The global average per capita consumption is around 15 kg. This leaves much room for growth for the industry going forward as the Indian economy braces for a high growth trajectory in the current decade.

Profile of the Industry

The paint market can be divided into decorative paints which cater to household and industrial paints which cater to needs of automotive, white goods and other industries. The demand for decorative paints is highly price-sensitive and also cyclical in nature. Monsoon represents the slack season while the peak business period is the Sept-Oct festival season when most people repaint their houses close to Diwali. Decorative paints can further be classified into premium, medium and distemper segments. Premium decorative paints are acrylic emulsions used mostly in the metros and other large cities and high-end offices. The medium range consists of enamels, popular in smaller cities and towns. Distempers are economy products and are used in plenty in the suburban and rural markets. This segment is dominated by the unorganized sector players.

The industrial paints segment, on the other hand, is a high volume-low margin business. Industrial paints include powder coatings, high performance coating and automotive and marine paints. Nearly two-thirds of the industrial paint demand in the country comes from the automotive sector while the rest is constituted by producers of white goods, electronics etc.

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The share of industrial paints in the total paint consumption of the nation is very low compared to global standards. It accounts for nearly 30% of the paint market with 70% of paints sold in India belonging to the decorative purposes. In most developed countries, the ratio of decorative paints and industrial paints is around 50:50. But, with the economy growing rapidly over the last decade and industries like automotive and consumer durables picking up speed, the ratio is likely to improve going forward.

Market Structure

Paint industry is characterized by both organized and unorganized segments. Organized segment controls nearly 80% of total industry output. Asian Paints is the market leader in the organized sector with 37% of the market share. Other two big companies Berger and Nerolac accounts for 18% and 15% share respectively. Unorganized segment consists of around 2000 small companies which usually cater to the local demand, particularly in household paints.

Current Scenario

Paint industry in India has seen tremendous growth in the last decade. However, like the rest of the world, the industry faced surge in cost of production in early 2008 and some slack in demand towards end of the year as economy slowed down. However, with a rapid recovery in the Indian economy, the paint industry is back on track and saw strong growth in 2009.

Decorative Paints

As stated earlier, decorative paints account for around 70% of the overall paint market in India and most of the companies saw good revenue in this segment. The decline in raw material prices helped boost revenue of all the companies. All though cost of production has started to increase in 2010-11, with strong overall economic

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growth and revival in construction activity, the segment is set to perform well in the current fiscal as well.

Industrial Paints

With sharp surge in the industrial activity, industrial paints segment too has performed very well over the last one year. Both consumer durables and automotive sales in the country have seen an unprecedented rally over last several months, generating massive demand for the paint industry.

New Capex Cycle Begins

Riding on the strong sales seen over last few quarters and improvement in margins, the paint industry is set to enter a new capex cycle. India's largest paint maker Asian Paints is investing Rs 735 crore for a 400,000 tonne a year plant in Maharashtra and the first phase of the project is expected to be commissioned by end-2012. Second biggest paint company Kansai Nerolac Paints is also investing Rs 600 crore to raise capacity by 50% over next three years. Berger Paints, the third-largest player, plans to increase its capacity from 250,000 tonnes to 450,000 tonne over the next two years. We expect that with rapid growth in economy, rising disposable incomes and living standards and sharp surge in industrial production, the capacity expansion will help the industry to cater to rising demand and boost top line of the industry.

Outlook

The Rs 13,000-crore paint industry has been growing at over 15% due to high demand from decorative paints led by housing and real estate construction, and industrial paints led by strong performance of automotive and white goods industries. With strong outlook of the Indian economy, we expect per-capita paint consumption will grow rapidly going forward, providing the key to sustained high

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growth to the industry. Historically, the industry has grown at nearly 1.5x-2x the growth of national income. We expect the Indian economy to post 8-10% average growth over the next decade, which provides for a lot of scope for the paint industry to sustain its high growth trajectory seen in recent years. On the fillip side, the industry faces a volatile cost structure. After a surge in early 2008, cost of production for the paint industry came down as the commodity rally waned. However, over the last couple of quarters, costs have started to increase again. Prices of titanium dioxide, the key raw material, have risen 8% since January and are expected to increase another 5% in the next few months. Prices of other raw materials are also on an uptrend. Overall, however, we believe that the oligopolistic nature of the organized sector and strong demand growth scenario will provide enough market power to the paint makers to pass on most of the increase in costs to consumers, particularly in the decorative segment. In the industrial segment, while the prices often rise after substantial lag to the rise in costs, increasing volumes in wake of high growth in auto, consumer goods and infrastructure spaces projects can help mitigate the impact of rise in costs.

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Disclaimer: This document prepared by our research analysts 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 but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document

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is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email info@firstcallindia.com C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods A. Rajesh Babu FMCG H.Lavanya Oil & Gas Ashish.Kushwaha Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPOs, QIPs, F.P.Os,Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071 Tel. : 022-2527 2510/2527 6077/25276089 Telefax : 022-25276089 E-mail: info@firstcallindiaequity.com www.firstcallindiaequity.com

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