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India | Consumer
19 January 2011
India Paint Sector
We expect India’s paint sector to maintain its growth trajectory given favourable macroeconomic factors and evolving consumer preferences. India’s paint industry is likely to report volume growth of 13-15%, the fastest in Asia Pacific, driven mainly by repainting demand, change in consumer perception and resumption in the capex cycle. We expect incumbents to maintain their positions given high entry barriers – a tough to create direct-to-retail distribution model, low consumer involvement making brand building difficult, negligible contract manufacturing and high logistics costs that require plants near markets. We initiate coverage on Asian Paints (APL) with an OUTPERFORM rating given its faster-than-industry growth, high margins, quality management and strong balance sheet. Given this, we believe its above-median forward P/E of 24x is justified. We initiate coverage on Kansai Nerolac (KNPL) with an UNDERPERFORM rating as we believe its current valuation – at a 25% premium to its five-year median P/E – is high given lack of pricing power and margin sensitivity to input cost fluctuations. We value it at a 25% discount to APL.
BB code Rec OP UP Mkt cap Price (US$bn) (Rs) 5.8 2,726 1.1 900 PT Up/Down* Impl. PE EPS (Rs) EPS CAGR (Rs) (%) FY12E 2012E 2013E FY10-13E (%) 3,077 852 14.1 -4.3 28.0 20.5 109.8 41.5 132.8 48.8 18.6 16.9 PE (x) FY12E FY13E 24.8 21.7 20.5 18.4
Asian Paints Kansai Nerolac
APNT IN KNPL IN
Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 14 January 2011; *includes dividend yield Source: Company, Bloomberg, Standard Chartered Research estimates
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India Paint Sector l 19 January 2011
Investment summary Stock summary & valuation A structural growth story
Decorative paints to grow faster Uptrading in decoratives happening at a fast pace Growth in Industrial paints steady
3 4 7
8 10 11
Industry structure − A cosy oligopoly
Distribution − Highly challenging as compared to FMCG Brand building relatively more difficult vis-à-vis FMCG Manufacturing – Key barrier, unlike most FMCG categories Different entry different barriers for industrial paints
14 14 16 16
Margins – Steady and improving
Volatile raw material costs, but not a major concern Any demand slowdown in a scenario of sharp capacity expansion can hurt margins
Annexure − Comparison with international peers Company updates
Asian Paints Kansai Nerolac
l Equity Research l
India Paint Sector l 19 January 2011
We expect India’s paint sector to maintain its growth trajectory given favourable macroeconomic factors and evolving consumer preferences. We initiate on Asian Paints (APL) with an OUTPERFORM rating given its faster-than-industry growth, high margins, quality management and strong balance sheet. Given this, we believe its above median forward P/E of 24x is justified. We initiate on Kansai Nerolac (KNPL) with an UNDERPERFORM rating as we believe its current valuation – at a 25% premium to its fiveyear median P/E – is expensive given lack of pricing power and margin sensitivity to input cost fluctuations. A structural growth story – India’s paint industry has reported consistent growth over FY05-10 − volume and revenue CAGRs of 13.6% and 17.8%, respectively. Given volume growth is typically 1.5-2.0x GDP growth and our economist forecasts GDP growth of 8-9% in the medium term, we expect the paint industry to maintain volume growth of 13-15%. The industry growth drivers would likely be:
Repainting demand fuelled by the real estate boom over the past few years Changing consumer preferences, from pure aesthetics to value added features Resumption in the capex cycle raising demand for industrial paints
High entry barriers favour incumbents – Unlike in the FMCG sector, where many new entrants (eg, Perfetti, L’Oreal) have been successful, there is not even one such instance in the paint industry. This is because of the high entry barriers – a tough to create direct-to-retail distribution channel, low consumer involvement making brand building difficult, negligible contract manufacturing and high logistics costs implying plants need be close to markets. In addition, with APL commanding above 50% market share without making ‘abnormal’ margins makes it the price setter and reduces the relative pricing power of competitors. Margins steady and improving – Being an oligopolistic industry, margins have been resilient in the past, but suffered in FY09 due to the increase in crude prices and demand slowdown. Nevertheless, softening input prices in FY10 and sharp demand recovery saw margins not just recover but rise to higher-than-historical levels. In 1H FY11, the industry has maintained margins at these levels despite the sharp rise in input costs. Going forward, we expect margins to remain steady or improve as up trading happens at a faster pace. In addition, strong volume growth is likely to lead to operating leverage. However, note that the industry is in capacity expansion mode and any demand slow down could hurt margins. Paint companies have consistently outperformed the broader market – All the paints companies have benefited from the strong fundamental growth in the sector and have significantly outperformed the Sensex in the past 10 years. Fig 1 – Paint companies have outperformed the broader market in the past 10 years
Asian Paints 10-yr volume CAGR (FY00-10) 10-yr sales CAGR (FY00-10) 10-yr PAT CAGR (FY00-10) 5-yr stock return CAGR w/o dividend 10-yr stock return CAGR w/o dividend
Kansai Nerolac 11.1 12.2 14.5 17.3 37.0
Berger Paints BSE Sensex 12.6 14.7 14.1 16.7 29.4 15.0 16.7
14.1 16.7 17.7 36.0 31.5
l Equity Research l
India Paint Sector l 19 January 2011
Stock summary and valuation
APL is our preferred pick (OUTPERFORM; Price target: Rs3,077) APL is best-placed to ride on the structural growth of the paints sector in India. We expect its market leadership, comprehensive product portfolio, nation-wide dealer network and continuous launch of innovative products/services to support higher-than-industry growth. We estimate 17.8% consolidated sales CAGR over FY10-13E.
Supported by the rapid shift to premium products and strong operating leverage, we expect APL to maintain higher-than-historical margins in the medium term, leading to strong consolidated EPS CAGR of 18.6% over FY10-13E. At FY12E P/E of 24.8x, APL trades at a premium of 27% to its historical five-year median, which we feel is rational especially given the sharp improvement in return ratios (RoE has improved from 32.1% in FY05 to 52.5% in FY10). We initiate coverage with an OUTPERFORM rating and price target of Rs3,077 (valuing it at a forward P/E of 24x). We note that as per our Standard Chartered Category Attractiveness model (Refer to our India Consumer Sector report), decorative paints stands among the top-5 categories (when weighed against top-25 FMCG categories) indicating high growth and stable profitability even when compared with FMCG categories. In our relative valuation model, APL rates as the third best company in our consumer universe on the back of high growth, sustainable margins, good RoE and dividend payout. Hence, it deserves to trade in line with peers like ITC & HUL and thus we value it at forward P/E of 24x.
Fig 2 – APL: P/E bands
3,500 3,000 2,500 Rs 2,000 1,500 1,000 500 0 Mar-06 Mar-07 Apr-05 Aug-07 Aug-08 Aug-09 Jan-10 Jul-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 32x 28x 24x 20x 16x
Source: Company data, Bloomberg, Standard Chartered Research
Fig 3 – APL: One-year forward P/E chart
35 30 PE (x) 25 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10
One year forward P/E
Source: Company data, Standard Chartered Research
l Equity Research l
however.5% due to a rapid increase in crude prices and a demand slowdown. Price target: Rs852) Strong growth in auto sales enabled KNPL to post over 20% volume growth in the past 18 months. Fig 5 – KNPL: P/E bands 1.5% in FY12 and FY13E. a discount of 25% to APL’s target multiple.India Paint Sector l 19 January 2011 Fig 4 – APL: Premium over Sensex 100 80 60 % 40 20 0 -20 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Premium to sensex Source: Company data. We estimate KNPL would post 18. we expect FY11E volume growth to be equally strong at 20%.7x. KNPL has delivered stable EBITDA margins at ~14-15% in FY04-08 except in FY09. we expect volume growth to slow to 14. We value KNPL at a forward P/E of 18x. when it declined to 11. Standard Chartered Research Five-year median KNPL − Valuations expensive (UNDERPERFORM. Nevertheless. due to a high base and likely moderation in auto sales. Our EPS CAGR estimate over FY10-13E is 16. note that margins are vulnerable to any sharp increase in input prices or a demand slowdown. Bloomberg. valuations are dear.000 800 Rs 600 400 200 0 Mar-06 Mar-07 Aug-07 Aug-08 Aug-09 Jan-10 Jul-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 Apr-05 28x 24x 20x 16x 12x Source: Company data.200 1.9%. Standard Chartered Research l Equity Research l 5 . At FY12 P/E of 21. and hence we initiate with UNDERPERFORM and price target of Rs852. compared with its 18% five-year median discount to APL due to growth moderation. We expect KNPL to maintain EBITDA margin at ~15% over FY11-13E.2% sales CAGR over FY10-13E.
In the near-term. In addition. l Equity Research l 6 . Standard Chartered Research Five-year median Risks Paint demand is highly correlated to economic growth. Hence. Deferral or delays from government/ private companies in infrastructure capex could reduce uptake for industrial coatings. hence a slowdown from current levels of GDP growth could be detrimental to the sector. margins might be impacted. companies’ plans to raise capacity could create supply-side pressure and impact margins. as they have already taken ~10-11% price hike since May ’10.India Paint Sector l 19 January 2011 Fig 6 – KNPL: One-year forward P/E chart 30 25 PE (x) 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 One year forward P/E Source: Company data. possible withdrawal of excise stimulus and continued increase in raw material costs will make it difficult for paint companies to transfer the entire increase to consumers immediately. Standard Chartered Research Median P/E Fig 7 – KNPL: Discount to Asian Paints 60 40 20 % 0 -20 -40 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Discount to APL Source: Company data.
5kg and 7. This makes paints one of the fastest-growing categories. behind leader China.0kg for Asia Pacific and the World. Asian Paints Annual Reports Source: Company data. Volume growth of the top-five organised players stood at 13. hence. Despite fast growth. Standard Chartered Research estimates Note: Total volume growth of top-five paint companies in organised sector l Equity Research l Vietnam China India 7 . we expect industry volume to post CAGR of 13-15% over the same period.8% Fig 11 – Volume growth 1. the paint industry has posted strong sales CAGR of 17. Fig 8 – Paints growth in various countries 25 20 CAGR 04-08 (%) 15 10 5 0 -5 India Indonesia Malaysia Vietnam Australia Thailand Japan Korea China Fig 9 – Per capita paints consumption 25 kg consumed per person 20 15 10 5 Malaysia 0 Australia Japan Korea 1. this robust volume increase is structural in nature. India’s low per-capita consumption compared with Asian peers implies ample scope for growth and.6x (on an average) real GDP growth. In addition.5kg/year compared with 4. biscuits is the largest FMCG category).8% over FY05-10.6% during the same period.0% over FY11E-13E. Fig 10 – Paints market size by value 200 180 160 140 Rs bn 120 100 80 60 40 FY05 FY06 FY07 FY08 FY09 FY10 CAGR 04-10: 17. respectively. Standard Chartered Research Paint volume growth likely to be 13-15% over FY11-13E India’s paint industry size is estimated to be Rs190bn (~2m kilolitre by volume).5-2x GDP growth 18 16 14 12 10 8 6 4 2 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY13E % Real GDP growth Paint volume growth Source: Industry.5-9. Despite the large size.India Paint Sector l 19 January 2011 A structural growth story India is the fastest growing paint market in Asia Pacific India’s strong economic growth has propelled the paint industry to double-digit growth over the past few years and has made it Asia Pacific’s fastest growing paint market.5 Indonesia FY12E Avg. Asia Pacific Thailand Avg. India’s per capita paint consumption is still abysmally low at 1. Given estimated GDP growth of 8. World Source: PPG Presentation 2009. There is a high correlation between GDP growth and paint volume growth – paint volume has increased 1. even when compared with other large high-growth FMCG categories. Standard Chartered Research Source: PPG Presentation 2009. India is also the second largest coatings market in Asia-Pacific ex-Japan (16% share). nearly double the size of the largest FMCG category (at Rs113bn.
While organised players have a nationwide manufacturing presence. while the remaining is from new civil construction with a lag of 12-18 months between construction and painting. their unorganised peers are mainly regional and deal in low-value products. In addition. Introduction of goods and service tax (GST). Company data. resulting in increasing share for their organised counterparts. with decorative paints growing at a higher rate than industrial paints. ~65% of the paint market is organised. Introduction of VAT. where entry barriers are high and the ‘top-5’ players capture most of the market. decline in excise duty and preference for better quality products have resulted in slower growth for the unorganised players. Repainting accounts for ~70% of demand. The organised market is highly concentrated and a classic example of an oligopoly. both in value and volume terms. 3) continued growth in real estate. translating into increase in demand for repainting. 5) change in perception towards painting. Fig 13 – Product segmentation – Decorative paints form the bulk of the market Industrial 33% Decorative 67% Source: Industry data. in India decorative paints form the bulk of the market. apart from overall volume growth.000 players. Decorative paints are set for higher growth. We expect the paint industry to register 13-15% volume CAGR through FY11-13E. cement paints to exterior emulsions and low-end emulsions to premium emulsions. 2) real estate boom in the past few years. high growth in emulsion and premium products. 6) shift in demographic profile resulting in increase in number of households and 7) various innovations by large players. while the unorganised market is highly fragmented with over 2. Standard Chartered Research Repainting accounts for ~70% of decoratives demand Demand for decorative paints is derived from two sources – repainting and new construction. 4) launch of ‘affordable housing’. Unlike in most developed countries. we expect significant up-trading – from distemper to interior emulsions. which are 1) robust economic growth resulting in higher disposable income. Standard Chartered Research Volume Share of unorganised players to decline further from the current 35% According to the India Paints Association (IPA).India Paint Sector l 19 January 2011 Fig 12 – Growth in paints versus top 10 FMCG categories in the past five years CAGR FY05-10 (%) Paint category growing faster than many FMCG categories 40 30 20 10 0 35 33 24 20 23 18 22 15 21 14 18 14 15 4 14 0 Detergent cakes 14 4 Packaged Tea 12 9 11 5 Namkins Hair Oils Edible Oils Biscuits Skin Creams Tooth Pastes Decorative 76% Paints Value Source: Industry. l Equity Research l Washing Powder Industrial 24% Toilet Soaps 8 . Decorative paints to grow faster The paint market can be divided into two broad product segments – decorative and industrial. volatility in raw material prices and increasing brand awareness should result in a further decrease in the share of unorganised players. given in-place demand drivers. where the decorative paints to industrial paints ratio is 50:50.
with focus on affordable housing Notwithstanding temporary hitches. This will increase consumption of low-cost emulsions going forward. respectively. Fig 14 – Tata’s affordable housing projects Tata Housing’s Value Homes project in Boisar. They are not only changing perception toward paints but also making it convenient for the consumers. Mumbai was over subscribed 7x the flats available for sale. These factors will be direct demand boosters for the paint industry.5 in 1991 to 4. from being perceived as an aesthetic product to being aware about the protective nature of paints. driven by strong growth in private consumption. Favourable demographic profile Increase in number of households owing to urbanisation and nuclearisation of Indian families is driving demand for housing. Average household size in urban areas has decreased from 5.5 in 1991 to 4. However. Also. Inflation. Launch of various innovative offerings Various paint companies are creating new avenues of demand for paints by launching innovative products and services. With organised retail growing steadily and discussions on FDI relaxation taking place.5% and 5.3 in 2007 Painting was considered to be a messy affair involving a lot of pre-planning.4m units. it is estimated that need for retail space will grow multi-fold. low-cost cans (Rs60/200ml) – by APL to help consumers visualise the real look of the wall 9 l Equity Research l . largely in the middle and low-income groups) and repainting of existing stock built in the housing boom of the past five years will increase usage of decorative paints. This is probably one of the key reasons for the significantly higher growth in tier 2 and 3 towns. Standard Chartered Research Real estate boom in the past few years should lead to strong demand for repainting Exterior emulsions fastest-growing subsegment within decorative paints Perception change from aesthetic to protective coating Perception about paints is changing rapidly – from being the most delayed decision in the household to being a core part of home décor. hasslefree painting services with other colour selection-related help offered by players like APL and Berger are increasingly making the painting experience convenient Introduction of ‘samplers’ – small-size. Rapid urbanisation leading to strong demand for new residential units (current space shortage is close to 19. we expect decorative paints to grow on the back of strong economic momentum.India Paint Sector l 19 January 2011 Robust economic growth will continue to be the macro driver Our economist estimates strong GDP growth of 8. the government and the developers are focusing on affordable housing projects.0% in FY12E and FY13E. is likely to soften gradually to 6. Availability of low ticket-size home loans at cheaper rates is also increasing demand for affordable housing.3 in 2007. In Dec’10 it launched another value homes project in Vasind near Mumbai.5-9% over FY11-13E. It plans to invest Rs25bn in value homes segment by 2011. Rise in advertising by paint companies for protective exterior coatings with long durability has led to increasing consumption of exterior emulsions and made it one the fastest growing paint categories. Growth in IT and ITES and financial services will require additional commercial space. the proportion of the population in the earning age bracket (20–59 years) is expected to increase 200-300bps by 2015E. This will further boost housing demand. This rapid change in perception is likely to help drive demand in semi-urban households. Given the high correlation between GDP and paint volume growth. Some examples of various innovative offerings are: Average household size in urban area has decreased from 5. the real estate sector is likely to play a significant role in the country’s economic growth. Source: Company data.2% in FY11E. though likely to be high at 8. Real estate boom in the past few years. To address the shortage.
cement paints and enamels. Fig 15 – Decorative paints segmentation Wood finishes Cement 5% paint 4% Putty 4% Distemper 13% Emulsions (exterior) 14% Primers. comprising nearly one-third of the market. We note that material cost for painting an apartment of 1000 sq ft carpet area with the most premium paint is ~Rs16.200 <100 Vol.8 1. In the past five years. Standard Chartered Research l Equity Research l 10 . High durability.1-0. This trend could be attributed to marketing attention being focussed on premium emulsions. improving affordability.6 Source: Industry data. Standard Chartered Research Fig 17 – Price segmentation Price range (Rs/lt) > 200 100 .5% of the asset value. According to industry experts. Also. market leader Asian Paints has heavily advertised its luxury emulsion brands Royale and Apex Ultima with minimal ad-campaigns for its other brands. water-based emulsions. more environmental-friendly and increasing affordability due to availability of economy emulsions at a relatively lower cost have been driving the shift to emulsions. contribution 20% 40% 40% Fig 18 – Paint material costs Paint type Luxury Emulsion Premium Emulsion Economy Emulsion Distemper Material cost Rs/sqft 3. Standard Chartered Research Source: Industry data. growth in emulsions has been significantly higher than that of other paints. increasing awareness about the protective nature of paints and the fact that the cost of painting has not increased in proportion to the asset value could have added to this trend. our industry interactions point towards a new trend – higher-end emulsions like Royale & Apex Ultima have been growing at a much faster pace than the overall category. Standard Chartered Research Source: Asian Paints. premium products (>Rs200 per litre) contribute only ~20% to industry volumes indicating that there is a significant scope for up trading. Uptrading in decoratives happening at a fast pace Emulsions increasingly substituting lower-end paints In the past few years.India Paint Sector l 19 January 2011 Royale Play brand of APL is positioned as a lifestyle brand to be used in creating various special effects & texture on walls Nerolac tying up with Walt Disney to target children by painting cartoon characters on the wall Launch of various metallic colour shades such as gold and silver by APL and Nerolac Launch of ‘Surprise your Spouse’ initiative by APL whereby the company helps to re-design a particular wall in the house in a day.500. As per our interactions with industry sources.5 1. thinners 11% Enamels 33% North 26% Emulsions (interior) 17% Premium & luxury emulsions growing at a rapid pace Fig 16 – Geographic segmentation East 14% West 32% South 28% Source: Indian Small Scale Paints Association. IPA. While the trend of higher growth in emulsions continue. which works out to 0.7 2. have been increasingly substituting lower-end paints such as distempers. better looking finish in a wider colour range.
Fig 19 – Industrial paints segmentation Other industrial coatings 15% Powder coatings 15% Fig 20 – Growth in automobile-segments 40 30 20 10 % Auto paints 45% 0 -10 -20 -30 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Protective coatings 25% Source: Industry. With robust growth in domestic sales of automobiles. on a high base. Standard Chartered Research PV CV Two-wheeler Source: SIAM. respectively. Standard Chartered Research estimates Strong growth in consumer appliances to increase demand for powder coatings Powder coatings. Moreover. India has emerged as a favourite investment destination and is slowly transforming into an export hub for global auto manufacturers. easier financing and wider distribution. expected revival of capex cycle augurs well for powder coatings. electrical equipments and interiors of trains & buses. where as coil coatings are used in industrial construction. In developed markets. Consumer durables and auto-ancillary products use powder coatings. Performance coatings. etc. growth rates for the automotive sector are expected to moderate. the nextlargest segment (25% of industrial paints segment) derives its demand from industrial plants and machinery setups. Our auto analyst expects PVs to grow at 16% and 14% in FY12E and FY13E.India Paint Sector l 19 January 2011 Growth in Industrial paints steady The industrial paints segment is dominated by the organised sector owing to its high technology orientation. but in India. price rationalisation. On the back of increasing affordability. power plants. a technologically intensive segment. the segment’s growth is dependent on various industries such as automobiles and consumer durables as well as infrastructure spending on roads. demand for industrial paints is expected to grow at a healthy pace. we expect growth rates of white goods to be strong going forward. moderation in growth rates expected Economic growth in the past few years has attracted global auto companies to Indian markets.4% in FY10 and is expected to be an impressive ~25% in FY11E. As demand for industrial paints is mainly derived in nature. industrial paints contribute 50% of the overall industry. it forms one-third of the industry in terms of value and we don’t see it changing significantly in the near term as we expect decorative growth to be marginally higher than industrial. is amongst the fastest-growing industrial coatings segments. All industrial segments to contribute to growth Automotive paints form ~45% of the industrial paints segment. Growth in domestic sales of passenger vehicles (PVs) was 29. l Equity Research l FY13E 11 . marine development. Volume in auto sector has revived handsomely post the poor show due to global economic slowdown in FY09. However. Auto sector – On a high base. increasing auto exports and rising investments in infrastructure projects. This revival in growth has resulted in strong performance of auto paint companies like Kansai Nerolac (auto paints comprises ~35% of overall sales).
growth 50 40 30 20 % 10 0 -10 -20 Apr'05 Apr'06 Apr'07 Apr'08 Apr'09 Oct'05 Oct'06 Oct'07 Oct'08 Oct'09 Apr'10 Oct'10 Source: Industry. All the sectors like ports. The projected investment in the infrastructure sector is expected to double to US$1trn over 2007-12 compared with US$514bn during 2002-07. Standard Chartered Research Significant investments in infrastructure projects Other industrial paint segments such as performance coatings. ports and roads. coil and marine coatings are expected to surge on the back of strong investment in infrastructure projects such as power.India Paint Sector l 19 January 2011 Fig 21 – Growth expected in white goods Product TV Refrigerator Washing m/c AC Value growth FY03-08 FY08-13E 3 7-9 8 9-11 12 10-12 16 14-16 Fig 22 – Consumer durable ind. l Equity Research l 12 . Standard Chartered Research Source: CSO. roads. railways and airports are expected to witness significant investments.
this seems unlikely. Source: Standard Chartered Research l Equity Research l 13 . APL has ensured that on a ‘like-to-like’ basis it does not make ‘abnormal’ margins. it has not been able to significantly scale up its presence. commencing operations in the South by investing Rs800m to build a manufacturing unit in Chennai. Standard Chartered Research Fig 24 – International players have not been able to gather momentum Nippon Paints Nippon.0% Shalimar 10. Various international players such as Jotun.5bn in CY08. it has not only passed-on raw material cost hikes to the consumer. it has only been able to have 500 dealers with presence in seven states and intends to have a pan-India presence by 2012. but also gained market share.0% Industrial Others 9.2% Kansai Nerolac 11.0% Source: Industry. other large players have not attempted to gain market share via price cuts. the Jotun Group set up shop in India in 2005 – It invested Rs1.000 Nitco dealers. the other top-four players have also largely maintained their share. brand building and manufacturing. The margin improvement has been better for APL because of the sharp improvement in its product mix (due to up trading as discussed earlier) and ability to derive significant benefits from economies of scale. In the past four years. Nippon and Sherwin Williams have also entered the Indian market in the past few years. Fig 23 – Market share of organised players (top-5) Akzo Nobel 9. Jotun India Part of the Norway-based paints major. but have also risen marginally. It currently has a small network of >175 dealers.25bn to set up a manufacturing unit in Pune. Since the acquisition. Despite this.1 Overall Shalimar 3.India Paint Sector l 19 January 2011 Industry structure − A cosy oligopoly Top five players have maintained market share despite entry of foreign players Decorative paints’ low technological requirement had historically attracted various small players foraying into the segment.0% Asian Paints 20. Also. exhaustive product portfolio. the industry works as a cosy oligopoly. industry margins have not only been stable. As per industry estimates.0% Berger 13. Thus. with turnover of ~Rs2. It is also looking for land to setup one more unit with an investment of Rs1bn in North India.7 Kansai Nerolac 18. APL has not only maintained leadership position.7 Kansai Nerolac 48. with 50m litre capacity of wet paint and 10.5bn over the next three years to double capacity of the Chennai plant.0% Decorative Akzo Nobel 10.000 players in the unorganised segment.0% Berger 16. and strong brand equity. Thus. entered India in 2006. Sherwin Williams Sherwin Williams started operations in India by acquiring the paints unit of the Nitco Group in ’06 for ~Rs2bn. It also operates through a network of 3. APL has established itself as a ‘price setter’ in the industry. there are over 2. APL has been able to improve its leadership position on account of its nationwide distribution network. No new player has been able to garner any scale mainly owing to the high entry barriers in distribution. but has also taken judicious price cuts when input costs have reduced. Asia’s largest coatings maker.8 Berger 20.000te of powder coating.0% APL has established itself as a ‘price setter’ Asian Paints 51. It opened its first store in February ’09 in Bangalore. It has opened two new plants and plans to invest another Rs2. despite sharp increase in input costs.0% Asian Paints 59. It initially planned to gain market share of 8% by ’10. hence. hence. but.
Distribution in paints extremely difficult Tinting machine requires significant space at the retail outlet Brand building relatively more difficult vis-à-vis FMCG Brand building in FMCG entails differentiated positioning (Bingo! versus Lays. it is probably easier to set up FMCG distribution than distribution in paints. even though the latter may give credit to retailers. Also. distribution is direct to retail Unlike in the FMCG sector. as the number of retailers.000 is much lower than the ~ 7 m FMCG stores. in paints. any FMCG company has to directly deal with only 500-1. any company planning a pan-India presence needs to directly deal with thousands of retailers and manage credit with them (on average. thereby discouraging retailers to introduce new brands. However. contractors and dealers/retailers signifying higher involvement of influencers. brand building is a much more complex and time-consuming process. However. Thus. hence. paint companies’ relationship with painter associations and architects is critical in establishing a stronghold as the latter largely influence paint usage. paint retailers are not inclined to introduce new products. distribution for a new paint company is difficult High consumer involvement in FMCG categories leads to consumers demanding for new brands/ products from retailers after being exposed to advertising for these brands/ products in the media. We believe that there is no significant positioning difference between large paints players. the industry gives a credit of three weeks to retailers). low consumer involvement and high retailer involvement and non-existence of third-party wholesale channel makes distribution in paints extremely difficult. Hence. However.35 sq ft). Unlike FMCG. Also. However. despite increased advertising spends by various companies to increase brand awareness.500 distributors. the distribution chain does not have any wholesale distributors. This has become a significant entry barrier. paint being a bulky product tends to occupy significant shelf space. Thus. l Equity Research l 14 . tinting machines require significant space (25. in paints. at ~ 40. traditional avenues of brand building are not easily available. Also. Fair & Handsome versus Fair & Lovely). high spend on advertising and sampling. etc. it is extremely difficult for a new company to set up new tinting machines in existing outlets. Hence. consumer decisions of buying paints continues to be highly influenced by painters. Compared with this. the paint industry has no wholesale distributors who break bulk or help manage credit to retailers. Most FMCG companies do not give credit to wholesale distributors. Provided there is sufficient brand pull. the presence of a passive distribution network through third-party wholesale dealers enables distribution of FMCG products even if a company is not able to create an active distribution network.India Paint Sector l 19 January 2011 Distribution − Highly challenging as compared to FMCG Paints distribution chain does not have any wholesaler Unlike FMCG. in paints. thereby leading to lack of space for a retailer to keep more than 1-2 tinting machines. Thus. because of low space & capital requirement retailers are not hesitant to stock new FMCG brands/ products. Tinting machines required to sell emulsions act as significant barrier Most large outlets that sell emulsion paints have tinting machines that are used to generate the desired shade.
Perfetti entered India in the ‘90’s and very quickly became the undisputed leader in the highly competitive confectionary category – while it had no distribution to begin with. Also. it achieved its leadership status through unconventional advertising and superior products. Similarly. consumers tend to seek superior/ differntiated offerings and lap up new brand/ product offerings if they find it to be relevant (most recent examples being Fair & Handsome and Bingo!). while earlier most APL advertising used to be on the ‘har ghar kuch kehta hai’ theme. contractors and dealers. While there are many such success stories in FMCG. Significant outlay of space (due to many SKUs and need for tinting machine) and capital requirement makes decorative paints a high involvement category for retailers and hence they are reluctant to keep many brands of paints. While distribution in FMCG is difficult. Low space and capital requirement backed by sufficent consumer demand makes the retailer stock up new FMCG brand/ products. we see this changing especially at the premium end – this is also reflected in the advertising of companies where there has been a shift from corporate advertising to specific premium brands (For example. Due to high consumer involvement in FMCG. hence in most cases they tend to stock just one or two brands. For example. signifying low retailer involvement. many companies have been able to build a distribution network from scratch. This was possible mainly on the back of launch of superior & differentiated brands/ products. we do not find a parallel example in paints. The key reason that describes this anomaly is the fact that while most FMCG categories tend to have high consumer and low retailer involvement. Fig 26 – Consumer vs retail involvement of various FMCG categories Consumer involvement High Personal care Packaged food Auto Consumer Durables Low Homecare Staples Paints Low High Retailer involvement Source: Standard Chartered Research l Equity Research l 15 . In contrast.India Paint Sector l 19 January 2011 Fig 25 – Why many new companies have been successful in establishing themselves in FMCG but there has been no such success story in Paints? In the past 10-15 years many new companies have been able to establish themselves firmly in various FMCG categories. consumer involvment is limited in decorative paints and mainly restricted to overall cost the consumer is willing to incur and the corporate brand the consumer prefers while significant influence is wielded by painters. L’Oreal was successful in achieving leadership position in the hair colour market and significant shares in other categories through superior & differentiated brands/ products. the company is now focussing on specific premium products like Royale and Apex Ultima). However. they tend to lose out on volume discounts offered by companies. decorative paints tend to have low consumer and high retailer involvement. Lower consumer involvement makes it difficult for paint companies to come up with a differentiated or ‘niche’ offering.
where the product can be manufactured in a few locations and then distributed across the country. High technology and customised requirements in industrial paints have made global tie ups important. For example. in paints. which acts as a natural barrier. Plants in Khandala (Asian Paints). Also. Replacing such a large relationship can be challenging and acts as a barrier. This results in high initial capital outlay. in certain cases. Hindupur (Berger) are expected to be commissioned in next 2-3yrs Different entry different barriers for industrial paints Entry barriers in industrial paints are completely different versus decorative paints. Fig 27 – Plant locations of major paint companies Outsourcing is limited only to low-end paints Source: Company data. the rest of it was manufactured in-house. However. a large number of Kansai Nerolac’s engineers work closely with Maruti Suzuki. the paint company has to work closely with major customers and. The top-four players purchased nearly 29% of their total sales volumes. because of the high capex and technological access. outsourcing in paints is limited to low end Some FMCG categories such as biscuits. Unlike some FMCG manufacturing.India Paint Sector l 19 January 2011 Manufacturing – Key barrier. Passing on increased cost pressures to institutional customers becomes difficult in an inflationary environment but cost benefits in the event of softening of input prices need to be passed on. Kansai Nerolac’s (KNPL) global tie up with Suzuki is an entry barrier for other players. replacing a long-term relationship could be major hindrance as it could disturb production. Hosur (Kansai Nerolac). However these high entry barriers come at the cost of low bargaining power. l Equity Research l 16 . Hence. any new player planning a pan-India presence also requires manufacturing presence across the country. unlike most FMCG categories Paints have high volume-to-value ratio and requires manufacturing near markets Requires manufacturing units in close vicinity to markets Paints have a high volume-to-value ratio and are thus expensive to transport. outsourcing of product manufacturing is limited to certain low-end paints. requiring a manufacturing presence in close vicinity to markets – unlike in other FMCG categories such as personal products and cigarettes. Most organised players have installed their own manufacturing units to maintain product quality. alcohol and detergents outsource manufacturing. For example.
these capacities might come up again once the situation in these global economies improve. while we are cautious. However. Standard Chartered Research l Equity Research l 17 .8 20 Source: Industry data.2 13.1 14 12 10 8 6 4 2 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 % 13. We might witness another round of price hikes in the next quarter on the back of rising crude prices and possibility of withdrawal of stimulus package. paint companies have been able to manage stable EBITDA margins during this period. Standard Chartered Research Source: Company data. Hence.0 14. margins have not only recovered but have also increased compared to historical levels mainly because 1) Strong volume growth has led to economies of scale and 2) Uptrading has led to a better product mix. passing of excise benefits to inventory carried by retailers.the industry has hiked prices four times in a staggered manner by a cumulative ~11% in FY11 – this should enable the industry to maintain margins. Despite high material costs and volatile nature. The margin correction in FY09 was not only due to the sharp rise in crude prices but also due to a combination of factors like sharp drop in demand. Due to this global demand supply imbalance. The recession experienced in 2008-09 resulted in the closure of various titanium dioxide and monomoer manufacturing units in Europe. Nearly 45% of the raw material is linked to crude and.7 14. Fig 28 – SCSI Paints RM Index 180 170 160 150 140 130 120 110 100 90 80 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-10 Oct-10 Margins higher than historical Our Paints RM index has increased 18% from Jan’10 to Nov’10 Fig 29 – Industry EBITDA margins 18 13. prices shot up and availability has become an issue. paint companies have successfully transferred cost to consumers in the past.5 11. Strong pricing power has enabled the industry to pass on these costs to consumers . we are not overly concerned by raw material inflation.0 14. we note that it would be difficult for the industry to pass on the input cost increases to industrial consumers in general and automotive companies in particular. hence. Our Paints RM index has increased 18% from Jan ’10 to Nov ’10.1 14. but not a major concern Industry raw material intensive (~60% of sales) The paint industry is raw-material intensive (~60% of sales) and requires >300 constituents. With demand recovery and softening input prices.2 16 17. etc.5 14.5%. is volatile in nature. However.India Paint Sector l 19 January 2011 Margins – Steady and improving Volatile raw material costs. CAGR in input costs over FY05-10 has been ~8. however. According to our Paints RM Index.
any global shocks or slowdown in the Indian economy can create serious supply-side pressure. Akzo Nobel India. Standard Chartered Research Note: Capacity of top four paint companies including Asian Paints.500 2. This implies a capacity CAGR of ~20%. strong demand in the sector has resulted in ambitious expansion plans for various paint companies.000 1. Kansai Nerolac.500 1.India Paint Sector l 19 January 2011 Demand slowdown in current expansion mode can hurt margins Significant ramp up in capacities of major paint companies Capacities of the top four organised players have increased at a CAGR of 9% over FY05-10.000 500 0 FY05 FY06 FY07 FY08 FY09 FY10 FY13-14E A demand shock can create supply side pressure Source: Company data. As per announced plans. the capacity of the top four companies is expected to nearly double in the next four years. However. Fig 30 – Manufacturing capacity of top-four paint companies Manufacturing capacity expected to double in the next three to four years 2. This can seriously impact margins for the industry. companies will be more focussed on pushing volume rather than sitting on idle capacity or very poor utilisation. We believe if economic growth is robust and resultant demand remains strong then this capacity can be absorbed easily. However. Berger Paints l Equity Research l Thousand tonnes 18 . In this event.
3 3.6 14.5 12.5 9.3 13.9 15.5 7.3 13.8 12.8 14.2 3.5 13.5 15.701 2.7 11.8 7.9 8.0 7.096 3.3 10.5 13.6 10.3 8. P/E (x) EV/EBITDA (x) yield CY11E CY12E CY11E CY12E (%) EPS CY11E CY12E CY11E CY12E Source: Bloomberg.8 1.3 10.4 38.9 6.2 10.3 12.0 11.0 6.441 5. Prices as of 13 January 2010 Kansai and Nippon has March YE.8 1.0 6.4 11.463 9.4 6.6 6.1 14.5 12.9 13.4 12.1 10.3 4.5 10.9 7.0 12.9 5.3 10.2 (US$m) CAGR (CY10-12E) Sales EBITDA EBITDA margins (%) RoE (%) Div.2 15.9 33.3 11.4 8.1 14.6 16.4 1.8 1.2 4.3 16.1 7. Valspar has October YE l Equity Research l 19 .9 6.4 1.3 6.9 13.0 10.5 14.8 7.India Paint Sector l 19 January 2011 Annexure − Comparison with international peers Fig 31 – Operational parameters and valuations of international paint companies Mcap Name Paint companies Kansai Paint Nippon Paint Akzo Nobel Sherwin Williams Valspar Average 2.3 1.067 14.0 7.9 14.9 13.3 10.4 8.3 1.6 14.
India Paint Sector l 19 January 2011 l Equity Research l 20 .
India Paint Sector l 19 January 2011 Company Section l Equity Research l 21 .
478m (US$5. Our 12-month price target of Rs3.813 91.9 56.4 48.7 37.8% over FY10-13E.077. initiate with OUTPERFORM We initiate coverage on APL with an OUTPERFORM rating and 12-month price target of Rs3. APL trades at a premium of 27% to its historical fiveyear median.6 229 -30 45.045 12.8 18.9 11. management action (it hiked prices a cumulative 11% in FY11 despite the high margin) indicates comfort with current margins.7 2013E 107.3 18.1 30.8x.400 2.800 2.800 1.518 8. APL is well-placed to ride the structural growth in India’s paint sector.4 12.9 15.855 7.761 .5 18.484 12.4 18.8% over FY10-13E.email@example.com 9. In addition.105 10.2 7. We expect APL to post higher-than-industry growth with consolidated sales CAGR of 17.726 Bloomberg code Rs3.000 2.0 54.9 29.600 2. leading to strong consolidated EPS CAGR of 18. we expect APL to maintain current levels in the medium term given an improving product mix (premium emulsions growing at a fast pace).5 2.7 20.2 5.3 11.179 3.BO 12 month range Rs261.com +91 22 6755 9898 Pratik Biyani pratik.0 2011E 75.com +91 22 6755 9851 l Equity Research l 22 . Standard Chartered Research estimates Share price performance 3.7 7.1 Source: Company. which we feel is rational especially given the sharp improvement in return ratios (RoE has improved from 32.8 27.977 - High margins for the medium term – APL’s current standalone EBITDA margin of >19% is significantly higher than historical margins (15-16%).6 178 -29 52.9 11. Bloomberg BSE SENSEX 30 INDEX (rebased) -1 mth 0 5 -3 mth -12 mth 1 45 8 35 Promoter (52.7 1. Supported by rapid growth in premium products and strong operating leverage.000 firstname.lastname@example.org 35.889 19.3 17. higher margins and improved return ratios are likely to keep APL’s valuations at a premium.4 18.158 Sanjay Singh sanjay.2 22. change - Rs1.5 45.3%) 6.9 15.1 11.6 49.8 20. Note that management is planning aggressive capacity expansion – doubling capacity in the next four years.2 11.9 20.3 34.374 3.2 6. Robust growth.032 16.8 19.292 16.693 16.9 30. Nevertheless. higher operating leverage and economies of scale.8 285 -35 42.0 18.4 18.3 39.1 38.019 2.2 1.276 11.862 2.4 44.9 15.139 12. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROCE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%) 2010 66.642 79.8 1.533 109.6 37.005 13.174 19.457.077 is based on forward P/E of 24x.3 2012E 90.077 Reuters code APNT IN Market cap ASPN.5 24.1% in FY05 to 52.679 13.0 6.6% over FY10-13E.7 92.738 132.700 14. We expect it to post robust standalone sales CAGR of 22.200 2.671 20. we expect APL to maintain higher-than historical margins in the medium term. Valuations still in a rational zone – At FY12E P/E of 24.600 Jan‐10 Apr‐10 Jul‐10 Oct‐10 Jan‐11 Asian Paints Limited Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$) Source: Company.5 42.3 17.3 353 -34 41. OUTPERFORM (initiating coverage) PRICE (as at 14 January 11) PRICE TARGET Rs2. Risks – Adverse movement in raw material prices coupled with complete withdrawal of stimulus benefits and any demand slowdown in an environment where capacities are expected to increase sharply. Higher-than-industry growth rate – We expect APL to not only ride the structural growth in the paints category but also post above industry growth mainly supported by 1) strong brand equity built in premium emulsions in the past couple of years coming into play and 2) unmatched distribution network in Tier 2 & 3 towns where growth is likely to remain high. Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj.India Paint Sector l 19 January 2011 Asian Paints Limited (APL) High margins here to stay.2.811m) EPS est.5% in FY10).
5 4.6 4. however.9 45. APL’s market share in decorative paints.0 2.0 4.7 % 13 10 7 4 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 16. APL posted 15.0 Source: Company data.0 3.4 17.6 16. It has also been able to reposition the paint category from a commodity product to a branded product with aesthetic and protective values.8%.8 Source: Company data.9 Fig 4 – APL − Adspends-to-sales increased 5.1 13.5 3. expected withdrawal of excise benefits could result in lower net sales CAGR of 20.4 15.6 4. Consistently increasing ad-spend has worked in its favour – its market share improved from 44% in FY05 to 52% in FY10 in the overall paints market.7%.4 19 13.4 11. Over FY05-10.5 48 % 46 44 42 40 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 44.7 44.0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 3.6%.2 13. which contributes ~76% of total market volume.7 54 52 50 46.6 17.0 4.8 16 11.9 45.India Paint Sector l 19 January 2011 Investment argument and valuation Growing faster than industry APL has consistently registered higher-than industry growth in the past five years Growth in paints is structural in nature and volume is normally in the mid-teens.7 3.3 Source: Company data.5 2. Standard Chartered Research Market share amongst top five paint companies 44.6 4. Fig 1 – APL vs.0 9.5 51. Fig 3 – APL − Market share 50.0 4.8 14.7 45. Standard Chartered Research 8.6 13. 3) unmatched distribution network especially in Tier 2 & 3 towns where the growth has been higher in recent times and 4) successful launch of new products and innovative services.0 % 4.1 8.8% over FY10-13E. Standard Chartered Research l Equity Research l 23 .5 5. We expect APL to continue posting higher-than-industry growth supported by 1) strong brand equity. Standard Chartered Research estimates Improved market share from 44% in FY05 to 52% in FY10 Strong brand equity with focus on decorative paints APL’s successful marketing campaigns over the years have made it the leading player in the decorative segment with nearly three times the market share of the nearest competitor.3 3.5 Fig 2 – APL − Standalone sales & growth 110 90 Rs bn 70 50 30 10 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 30 25 20 15 10 5 % Net sales (LHS) YoY growth (RHS) Industry APL Source: Company data. We estimate gross sales CAGR of 22. Industry volume growth 15. Asian Paints (APL) has not only successfully leveraged the strong category growth but has also consistently outperformed the industry.7 3.9 4. 2) comprehensive product portfolio with strong presence in premium emulsions. gross sales CAGR was a robust 19. is even higher at ~60%. Decorative paints contribution to APL’s standalone sales is greater than 95%.8% volume CAGR compared with the organised industry’s 13.
000 12. For example. online consultations with experts to select paints. Fig 5 – APL’s tinting machines 20. It has benefited from its strong presence in tier 2 and 3 cities. services and retail initiatives. APL made shade selection easier by introducing small 200ml ‘samplers’ that made colour visualisation convenient – now one could paint a wall to check the shade rather than look at a shade card It has been highly successful in marketing its premium brand Royale and has regularly introduced paints with a variety of special effects and textures in the premium segment Small but useful services on its website such as a calculator to estimate cost of painting. nearly twice the size of its nearest competitor (Berger Paints). while only a couple of campaigns were run for its economy brands Tractor (emulsion) and Utsav (distemper). but where consumers can view and experience the finish of different paints It runs the highly successful ‘Home Solutions’ service where it takes care of the whole painting process and in effect takes the ‘pain’ out of painting.000 20. Advertising focus in past five years on premium emulsions Its premium emulsion brands Royale (interior) and Apex Ultima (exterior) are growing at a much faster pace than other emulsions. A strong advertising push for premium brands might have urged consumers to up trade – in the past five years Royale and Apex Ultima were the most advertised APL brands on television. shades. Unmatched distribution network − Strongest in tier 2 & 3 cities APL has a wide and formidable distribution network of 26. Standard Chartered Research * Tinting machines installed till Nov’10 Source: Company data.000 8.000 0 APL KNPL 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11* Berger Akzo Nobel India Strong and wide network of 26. It has products ranging from low-end distemper to specialty premium paints with brands varying across price points in each paint type.000 by Nov ’10.000 dealers across India. This is also a departure from its marketing campaigns in the past – earlier the company used to focus on the “corporate umbrella brand” with its highly memorable ‘Har ghar kuch kehta hai’ campaign. which has 14.India Paint Sector l 19 January 2011 Comprehensive product portfolio − Exterior and premium emulsions growing faster APL has the most comprehensive product portfolio among paint companies.000 dealers. Standard Chartered Research Launch of innovative products/services APL has been at the forefront of making painting a convenient and colourful experience by introducing innovative products.000 16. in interior emulsions it has the highest-selling and attractively priced economy brand Tractor and hugely successful Royale in the premium end.000 5.000 4.000 15. In FY08. enamels or distempers. etc It launched a retail signature store ‘Colour with Asian Paints’ in 2009 which doesn’t sell paints.000 dealers Fig 6 – Competitors tinting machines 30. l Equity Research l 24 .000 10.000 25.000 Tinting m/c Dealers Source: Company data. The number of tinting machines had risen over eight times in the past 10 years to ~17.000 machines for the second-largest player. as smaller towns have posted faster growth than large towns. in enamels it has Gattu at the economy end and Apcolite at the premium end. compared with 6.
9 4. evident in declining other cost-to-sales. despite margins at all-time high Despite EBITDA margin being at an all-time high of 19. especially titanium dioxide (Standard Charetered RM index up 23% yoy in Nov ’10).7% – supported by higher operating leverage.0 4. EBITDA margin rose higher – up 660bps yoy to 19. as inputs costs softened and product mix improved.0 16. demonstrating management’s intent to maintain margins at these levels. Industry interactions indicate that premium emusions are growing faster than other segments. APL has increased product prices by a cumulative of 11% in FY11 in response to increase in input costs.7 Source: Company data. Standard Chartered Research estimates Source: Company data.8 22.1 FY04 FY05 FY06 FY07 FY10 19. Standard Chartered Research estimates Source: Company data.0 4. We expect APL to maintain EBITDA margin above 19% (higher than historical level of 15-16%) in the medium term given 1) management’s intent to maintain margins at these levels reflected in recent price increases.2 58.3 FY13E 22 20 57.0 2.9 21.8 58. We note that APL’s EBITDA margin and gross margin expansion (since FY08) have been higher than those for other players. Standard Chartered Research estimates Raising prices four times in FY11 shows management’s intent Significant price increases.1 FY11E 25 . Fig 7 – APL: Standalone RM cost-to-sales 66 64 57.4 FY13E 18.5 2.3 20. 3) operating leverage from strong volume growth and 4) economies of scale benefits.8 FY12E 19.9 26 24 22 20 % 18 16 14 12 FY04 FY05 FY06 FY07 FY08 FY09 FY11E 22.8 4.2 FY08 FY09 13. gross margin bounced back 580bps yoy. APL was able to maintain EBITDA margin in the tight range of 15-16%.3 15.6 56. margin fell to 13.India Paint Sector l 19 January 2011 Higher-than-historical margins here to stay Over FY04-08.7 4. This also helps APL to command higher margins than competitors.6 4.0 % 3.0 4.5 EBITDA margin likely to remain above 19% Fig 8 – APL: Standalone EBITDA margin 19.7% in FY10.5 18 % 16 14 12 10 15.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 3.5 4.7 19. however. 2) improving product mix.5 3.8 FY10 Source: Company data.0 21.3 FY12E 18.7 15. In FY09.6 Fig 10 – APL: Standalone other cost-sales 22. This has helped APL to post standalone EBITDA margin of 19.2 15. l Equity Research l 19.4 19.1 62 60 58 56 54 52 50 48 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E % 57.2 55.7 4.0 4.1% as demand slowed and input costs rose. indicating that APL’s margin expansion could partly be attributed to improvement in product mix. In FY10.9% in 1H FY11.8 4. Improving product mix with high growth in premium emulsions Most of Asian Paints’ marketing campaigns are currently targeted at premium emusions like Royale and Apex Ultima.5 5. Standard Chartered Research estimates Fig 9 – APL: Standalone adspends-to-sales 5.6 61.8 57.9 59.
However.7 15.9 12.4 2.0 60 14.5 10.9 8.1 8. Source: Company data.7% (adjusted for 15 months’ sales) in FY10.1 Kansai Nerolac FY08 FY09 FY10 FY09 FY10 Source: Company data. We expect this to help APL maintain higher-than-histroical margins. Standard Chartered Research International business − Grim economic scenario Rationalisation of international operations improved profitability The global slowdown and divestment of some international businesses resulted in muted sales growth of 6. Fig 11 – EBITDA margin of paint companies 16.India Paint Sector l 19 January 2011 Benefits from economies of scale and higher capacity utilisation Economies of scale offer significant advantages APL’s current manufacturing capacity is ~440.5 10.5 11. Hong Kong. Standard Chartered Research estimates * FY10 results for overseas business includes result for 15 months l Equity Research l Berger Paints Asian Paints Akzo Nobel India 16.2 19.7 33.0 14. YoY growth numbers are adjusted for it.1 11. Fig 13 – International sales and growth 18 15 12 Rs bn 9 6 3 0 FY04 FY05 FY06 FY07 FY08 FY09 FY11E FY12E FY13E FY10* 15 10 5 30 25 20 % Fig 14 – International EBIT margin 16 14 12 10 % 8 6 4 2 0 FY06 FY07 FY08 FY09 FY11E FY12E FY13E FY10* 0. double that of the second-largest decoratives player. APL’s high capacity utilisation of ~90% compared with peers’ 70% result in higher asset turnover and better return on capital employed (RoCE) than competitiors.2 14.3 13.5 15. the new plants are much larger than existing plants.8 25 20 15 % 10 5 0 Kansai Nerolac Berger Paints Asian Paints Akzo Nobel India Fig 12 – RoCE of paint companies 50 47.2 16.9 14. Standard Chartered Research estimates * FY10 results for overseas business includes result for 15 months.4 10.4 7.6 International sales (LHS) YoY growth (RHS) Source: Company data.4 40 % 30 20 10 0 20.3 21. Standard Chartered Research Source: Company data. China and Thailand in FY10 improved the profitability of the international business – from a loss of Rs175m in FY09 to a profit of Rs480m. In addition. the divestment of loss-making international subsidiaries in Malaysia.6 20.1 14.000 tonnes. APL plans to increase capacity to ~1m tonnes over the next three to four years.3 26 . offering it significant benefits from economies of scale.
Sales in the Caribbean region declined 11% yoy in 1H FY11. Standard Chartered Research * FY10 results for overseas business includes result for 15 months Conditions in APL’s largest international markets. Growth in Asian markets was strong at 21.6x. Standard Chartered Research * FY10 results for overseas business includes result for 15 months Source: Company data. where as in the Middle East it was flat. we find the paint category highly attractive. we note that over FY05-10. As discussed earlier. while the South Pacific region posted a modest 7. Fig 17 – Industrial sales 6 5 4 35 30 25 20 15 10 5 0 -5 Fig 18 – Second in industrial paints Others 9% Shalimar 10% Kansai Nerolac 48% Rs bn 3 2 1 0 % Berger 13% APL + PPG 20% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Net Sales (LHS) YoY growth (RHS) Source: Company data. even when compared with other FMCG categories. We expect international margins to be in the range of 14-15% going forward. however.8x. While valuations may appear expensive compared with the historical median. Non-auto industrial paint demand has not yet picked up due to deferral of capex spends. Industrial paints − Capex growth yet to pickup Deferral in capex spends impact nonauto industrial paint demand Industrial paints’ growth has been largely driven by strong growth at its automotive JV (Asian PPG Industries).2% in 1H FY11.initiate with Outperform Given long-term structural growth prospects and oligopolistic nature of the industry. APL is currently trading at FY12E P/E of 24.7% yoy in 1H FY11. Standard Chartered Research Valuations in a rational zone . the Middle East and the Caribbean. we expect APL to deliver higher-than-industry volume growth for some time to come. APL has consistently seen earnings upgrades and hence the historical median might l Equity Research l 27 . continue to remain uncertain and challenging. We also expect APL to maintain higher-than-historical margins. 27% premium to its five-year median P/E of 19. which we expect to improve further in FY12-13E.9% yoy. An extended monsoon has also led to delays in projects and maintenance demand. FY13E Source: Company data. We estimate sales growth of 15% in FY11E.2% in FY11E followed by mid-double digit growth in FY12-13E.India Paint Sector l 19 January 2011 Fig 15 – International sales breakup FY10* South East Asia 8% South Asia 15% South Pacific 7% Middle East 54% Fig 16 – International EBIT breakup FY10* South Pacific South 7% East Asia 8% South Asia 13% Middle East 66% Caribbean 16% Caribbean 6% Source: Company data. saw some up-tick in non-auto industrial paint demand in 2Q FY11 over 1Q FY11. Overall. APL. We expect international market conditions to improve and estimate growth of 7. which will enable it to post strong EPS CAGR of 18. Standard Chartered Research estimates APICL: Asian Paints Industrial Coatings Ltd. international sales grew 3.6% over FY10-13E.
Our one-year price target of Rs3.500 Rs 2. increasing EBITDA margin and improving return ratios (RoE increased from 32.077 is based on forward P/E of 24x.000 500 0 Mar-06 Mar-07 Apr-05 Aug-07 Aug-08 Aug-09 Jan-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 Jul-10 32x 28x 24x 20x 16x Source: Company data.1% in FY05 to 52. Standard Chartered Research Five-year median APL stock performance has been strong since the last market peak APL has outperformed the broader indices on a consistent basis.5% in FY10) enable APL to trade at higher valuations. Fig 19 – APL − P/E bands 3. We believe APL will continue to command premium valuations on the back of strong growth. we expect stock returns to be moderate from a one-year perspective. Bloomberg.000 2. Given the sharp outperformance over the past few years.India Paint Sector l 19 January 2011 not give the true picture. l Equity Research l 28 .000 1. Standard Chartered Research Median P/E Fig 21 – APL − Premium over Sensex 100 80 60 % 40 20 0 -20 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Premium to sensex Source: Company data. Standard Chartered Research Fig 20 – APL − One-year forward P/E chart 35 30 PE (x) 25 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Dec-10 One year forward P/E Source: Company data. APL stock has jumped 140% versus a flat BSE Sensex. stable cash flows and excellent return ratios. superior margins.500 3.500 1. Since the market peaked in Jan ’08. Also.
implying a capacity increase CAGR of ~19% over the next four years.5 Risks Further increase in prices of raw materials like titanium dioxide or crude combined with complete withdrawal of stimulus benefits could force APL to absorb some of the costs as it has already increased prices four times in FY11. APL plans to more than double its manufacturing capacity in the next three to four years.0 16.0 31.4 36. the returns are annualised FMCG Index 28.1 15.7 44.7 13. l Equity Research l 29 .3 -3.9 34.India Paint Sector l 19 January 2011 Fig 22 – APL stock performance vis-à-vis broader indices APL 1 year 3 year 5 year 10 year Source: Bloomberg Note: For periods greater than a year. Any economic slowdown (due to global shocks or otherwise) which can potentially disrupt domestic demand can cause margins to slide as APL will be more focussed on volume growth.5 BSE Sensex 7. This could lead to short term margin squeeze.7 14.2 16.
18.5 3.5 4.0 4.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Fig 26 – APL: Other costs as % of sales 24.0% & 18.2 Source: Company data. APL’s cash flows are strong and similar to any FMCG company.5 4. Its average operating cash flow in the past five years have been at 95% of reported net profit. Standard Chartered Research estimates Fig 27 – APL: EBITDA margin 18.3 8 6 4 2 0 PAT YoY growth (RHS) Source: Company data.India Paint Sector l 19 January 2011 Financials We estimate consolidated sales.5 4.6 4.7 61 57.0 2. EBITDA & EPS CAGR for APL to be at 17. Standard Chartered Research estimates Fig 25 – APL: A&P as % of sales 4.6% respectively over FY10-13E.9 18 13.5 30 25 20 % 15 10 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY13E 100 80 60 40 20 0 -20 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E % 25.4 4.0 Net sales (LHS) YoY growth (RHS) Source: Company data.3 20. Fig 23 – APL: Sales & sales growth 120 100 Rs bn 80 60 40 20 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 35 30 25 % Fig 24 – APL: RM cost to sales 63 58.5 5.6 Source: Company data. Dividend payout is at 40-50% and its RoE is a healthy >40%.4 20 14. Standard Chartered Research estimates Source: Company data.6 4.4 19.2 65 60. Standard Chartered Research estimates l Equity Research l 18.6 21.8%.3 20 15 10 5 % 59 57 55 53 51 FY04 FY05 FY06 FY07 FY08 FY09 FY10 56. Standard Chartered Research estimates 3.0 16 % 14 12 10 8 6 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 18.5 59. Standard Chartered Research estimates Source: Company data.2 13.9 FY11E 57.1 30 .3 18.0 13.5 3.3 18.2 19.7 22.8 60.5 22 Fig 28 – APL: PAT & PAT growth 14 12 10 Rs bn 12.7 FY12E 58.1 13.8 62. Relatively high capex results in FCF post capex as proportion of reported net profit to be lower at 55-60%.5 22.7 FY13E 58.0 % 3.5 2.6 3.0 4.8 20.
751 18.3 FY11E 75.312 691 54.730 31.693 19.Growth (%) .of which subsidiaries Other operating income Total Revenue Raw materials consumed Gross Profit .Growth (%) .998 31.738 12.0 703 12.694 32.964 -4.533 43.9 18.Net margin (%) FY09 53.809 37.174 20.648 855 76.813 15.5 483 8.642 92.789 42.533 10.138 1.India Paint Sector l 19 January 2011 Fig 29 – APL: Cash flow as % of PAT 160 130 100 Fig 30 – APL: Return ratios 60 50 40 % % 70 40 10 -20 30 20 10 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY11E FY12E Operating Cash Flow FCF post capex FY13E RoE RoCE Source: Company data.632 33.518 0 4.889 89.096 16.484 0 6.8 11.7 216 3.232 6.855 715 3.729 46.031 13.4 FY12E 90.926 38.679 62.630 11.694 1.4 26.706 20.9 11.030 32.5 1.3 11.481 186 1.7 12.045 51.5 11.021 15.954 12.230 43.978 3.956 62.941 42.067 108.043 31.053 20.775 186 1.005 14.357 7.2 18. Standard Chartered Research estimates l Equity Research l FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 31 .986 52.8 7.079 16.533 19.4 836 285 699 11.9 18.2 491 8.6 Source: Company.833 14.Gross Margin (%) Other operating expenses EBITDA .032 74.105 0 4.187 183 882 13.403 15.276 83.272 19.204 21 2.0 574 10.3 744 263 517 6.3 14.8 16.197 38.4 18.3 1.023 765 66.6 22.580 29.4 FY13E 107.813 8.227 42.effective tax rate (%) Less: Minority Interest Net Income (Reported) Recurring Net Income .of which Standalone .629 954 90.EBITDA margin (%) Depreciation & Amortisation Gross Interest Other Income Recurring PBT Add: Extraordinaries Less: Taxes . Standard Chartered Research estimates Source: Company data.3 1.215 31.738 20.839 42.2 FY10 66. Standard Chartered Research estimates Fig 31 – APL: Income statement (Rs m) Year end: March Net Sales .1 18.
518 17.810 11.179 882 64 -4.626 3.000 25.945 -2.086 533 756 16.899 FY11E 2.072 367 20.529 14.018 4.of which Strategic .104 7.292 562 945 20.904 959 21.356 562 1.India Paint Sector l 19 January 2011 Fig 32 – APL: Balance sheet (Rs m) Year end: March Cash & Bank balance Inventory Sundry Debtors Loans and Advances Other Current Assets Total Current Assets Sundry Creditors Other Current Liabilities Provisions Current Liab.124 8.073 12. Net Current Assets Investments .100 31.783 14.187 -392 9.653 9.066 784 10 774 9.217 2.899 713 22.716 5.877 33.746 646 18.058 FY11E 8.233 12.100 2.904 FY12E 5.743 10 6.100 37. & Prov. Standard Chartered Research estimates FY09 3.580 6.356 562 1.483 2.003 -5.019 579 -4.559 5.309 13.of which Marketable Net Fixed Assets .801 4.855 Fig 33 – APL: Cash Flow statement (Rs m) Year end: March Reported Net Income Depreciation & Amortisation Others Operating Cash flow Working Capital Changes Capital Commitments Free Cash Flow Investing Activities Inc (Dec) in Borrowings Dividend paid Extraordinary Items Chg.889 1.026 21.003 22.817 5.383 2.233 14.987 7.719 1.593 2.908 21 997 1.374 -4.107 2.658 1.356 562 1.051 921 506 16.045 2.716 FY12E 10.585 4.775 1.243 10 6.556 25.690 5.of which CWIP Goodwill Total Assets Equity Share Capital Reserves & Surplus Net Worth Borrowings Deferred Tax Liability Minority Interest Capital Employed Source: Company.713 4.541 6.150 16.836 2.200 367 37.659 7.508 558 -5.738 1.091 4.401 FY13E 6.425 1.931 6.329 -3.423 27.209 3.104 FY10 8.398 10. In Cash & Bank balance Add: beginning balance Closing balance Source: Company.569 2.533 1.188 715 -1.899 959 16.862 772 -5.309 FY13E 12.435 10. Standard Chartered Research estimates FY09 2.401 959 26.072 367 25.141 17.243 10 7.760 -794 -2.220 5.921 6.171 3.104 1.100 5.733 18.058 2.407 FY10 1.529 l Equity Research l 32 .251 867 33.032 3.309 6.813 1.985 2.978 497 17.608 -1.947 1.531 2.058 9.488 6.941 14.243 10 6.481 -505 11.710 1.775 -568 13.910 4.211 7.080 6.120 367 31.233 21.033 1.357 -208 -932 7.337 2.818 4.698 -3.010 6.804 -1.066 786 28.712 -2.750 4.716 10.855 959 32.280 -189 2.281 4.407 959 11.182 6.978 147 -322 3.048 7.499 334 -1.
7 12.7 11.4 83.5 17.5 12.6 1.India Paint Sector l 19 January 2011 Fig 34 – APL: Ratios Year end: March Per Share Data (Rs) Recurring EPS Reported EPS Dividend per share (DPS) Book Value per share (BV) Growth Ratios (%) Net Sales EBITDA Recurring EPS Valuation Ratios (x) P/E P/BV EV / EBITDA EV/ Net Sales Operating Ratio (%) Raw Material/Sales SG&A/Sales Effective Tax Rate NWC / Total Assets Inventory Turnover (days) Receivables (days) Payables (days) D/E Ratio (x) Return/Profitability Ratio (%) RoCE RoNW Dividend Payout Ratio Dividend Yield Source: Company.2 41.9 18.7 38.8 48.7 48.7 36.0 FY11E 91.2 47.3 2.8 1.4 29.7 87.8 20.7 30.1 28.3 3.9 285.6 1.7 12. Standard Chartered Research estimates FY09 41.5 7.9 51.2 15.6 14.4 23.7 32.3 FY12E 109.6 49.8 48.3 29.4 92.5 15.5 2.0 31.11 37.2 47.2 7.5 39.2 45.3 22.9 0.1 27.1 47.6 FY10 79.7 FY13E 132.2 352.9 56.1 50.9 31.8 0.5 125.4 57.5 19.5 0.9 12.13 38.4 4.8 56.30 27.9 0.3 49.9 31.7 2.9 91.0 12.0 178.7 24.8 31.3 20.2 19.1 l Equity Research l 33 .09 37.1 13.5 24.9 35.8 132.6 29.0 21.9 20.17 42.8 66.9 20.8 45.9 58.7 48.0 2.8 109.0 52.3 41.8 9.3 48.1 44.1 229.6 47.0 5.8 1.9 3.0 19.8 0.4 0.8 62.8 34.1 15.4 58.2 42.2 34.7 -4.2 14.8 19.4 2.
materials. India.T.4% Promoter 52.D. in Math and Post Graduate in Management from IIM. It plans to double its manufacturing capacity in the next three to four years from 440. Non-auto industrial paints are offered through its wholly-owned subsidiary Asian Paints Industrial Coatings Ltd. Decorative paints contribute >95% of standalone sales and command a market share of 60% share. He is a B. post joining the company in 1965.Sc. Source: Company l Equity Research l 34 . Choksi is one of the promoters of the company and has been Non-Executive Chairman since April 2009.Sc. Mr.000 having tinting machines).M.7% DIIs 11. It has a comprehensive product portfolio ranging from mass-end distempers to premium emulsions at varied price points and a strong distribution network of 26.6% Source: BSE Fig 36 – Management profile Name Designation Background Mr.India Paint Sector l 19 January 2011 Company profile Asian Paints is the world’s 10th largest decorative paints company and India’s largest with a 52% market share. P. He has also served as MD for the company for a short period from Dec’08 to Apr’09. nearly three times the nearest competitor.3% FIIs 14.000 dealers (with nearly 17. International operations contribute ~1520% to its consolidated sales and it has a presence in various Middle East. from the Institute of Science and from U. He holds a Master’s degree in Commerce from the University of Mumbai. He also holds a Masters Degree in Polymer Science from Ohio and Diploma in Colour Science from New York. Fig 35 – Shareholding pattern as of Dec’10 Others 21. Asian and Caribbean countries. It has a market share of 20% in industrial coatings and offers auto paint products through its 50:50 JV with PPG Industries. He has also Ashwin Choksi Chairman served as MD from 1984 to 2008. (APICL). Murty MD & CEO manufacturing plants and human resources. He holds Ashwin Dani Vice Chairman a B.C. He has been in the company for the past 37 years and has worked in various capacities in sales. Calcutta of 1971 batch. Dani is the co-promoter and has been engaged with the company since 1968. Bombay.000 tonnes in FY10.
2 2013E 28. but will not be sustainable in the longer run.2 14. At FY12E P/E of 21.637 2.6 66. KNPL’s volume has grown at a strong 20%.7x.6 229 -37 22. We value it at a forward P/E of 18x leading to 12-month price target of Rs852 (implying ~5% downside).3 29. Risks – Continued momentum in auto sales with volume growth of >20% can impact topline growth & consequently improve earnings.9 1.7 17.7 3. initiate with UNDERPERFORM – Strong performances in FY10 and 1H FY11 saw the stock outperform the Sensex by ~50% in CY10.000 900 800 700 600 500 Jan‐10 Apr‐10 Jul‐10 Oct‐10 Jan‐11 Kansai Nerolac Paints Limited BSE SENSEX 30 INDEX (rebased) Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$) Source: Company.5%).100 1.262 3. Also.629 48.3 24. we note margins can face downward pressure if demand slows and/or input prices increase sharply. which we believe is high given a likely slowdown in volume email@example.com 32.207 3. Nevertheless.9% over FY10-13E Our price target of Rs852 is based on a forward P/E of 18x.2 34.1 30. Margins likely to remain stable.BO 12 month range Rs48. any sharp crude price decline can expand margins in near-term.5 9.5 14.6 14. strong volume growth and resultant operating leverage led to operating margin remaining stable at 14-15% over FY0510 (except in FY09 when a sharp and rapid increase in input prices combined with a demand slowdown reduced it to 11.0 15.833 4.950 36.6 Source: Company.8 964 1.5 143 -43 23.245 3. we estimate KNPL’s volume growth could slow to 14%/15% in FY12/FY13 from above 20% over the past 18 months We expect margins to be steady leading to EPS CAGR of 16. which is at a justifiable 25% discount to APL given KNPL’s cyclical business and lower return ratios.com +91 22 6755 9851 l Equity Research l 35 .5 14.9 365 2.6 21.064 2.7 11.751 Sanjay Singh sanjay. Valuations expensive.4 9.3 6.1026 - Volume growth likely to slow – In the past 18 months. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROCE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%) 2010 17.5 28. but prone to risks – Despite gross margin dipping 580bps in the past five years.0 15. We expect KNPL to broadly maintain margins over FY10-13E (with a marginal drop in FY11E). we expect volume growth to moderate to 14%/15% in FY12/FY13 given a high base and a likely moderation in auto sales growth.9 18.8 2011E 21.2 20.826 1. UNDERPERFORM (initiating coverage) PRICE (as at 14 January 11) PRICE TARGET Rs900 Bloomberg code Rs852 Reuters code KNPL IN Market cap KANE.122 2.6 10.579 3.India Paint Sector l 19 January 2011 Kansai Nerolac Paints Ltd (KNPL) Growth slowdown.3 15.236 41.7 4. Bloomberg -1 mth -1 3 - -3 mth -12 mth -10 67 -4 56 Promoter (69.1 20. initiate with UNDERPERFORM We initiate coverage on KNPL with an UNDERPERFORM rating and price target of Rs852 Given a high base and cooling auto sales firstname.lastname@example.org 9. Initiate with UNDERPFERFORM.4 9.520m (US$1.647 30.2 18.3%) 177. change - Rs509 .4 14.5 25.061 2.5 169 -38 23.2 30.1 9. However. KNPL trades at a 25% premium to its five-year median.315 3.com +91 22 6755 9898 Pratik Biyani pratik. driven mainly by robust auto demand and stable growth in decoratives. Standard Chartered Research estimates Share price performance 1.241 2.5 26.6 731 2.5 0.386 1.8 13.398 2. Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj.9 7.5 1.7 1.078m) EPS est.1 2012E 24.7 20.0 13.811 2.9 21.5 14.2 872 1.846 3.9 12.8 17.6 5.8 197 -39 22.7 13.
Barring Hyundai Motors.1% in FY10 and 22. Most global automobile OEMs prefer paint suppliers who have global tie-ups with their parent. Fig 1 – KNPL: Industrial sales breakup Others Fig 2 – KNPL vs PV volume growth 34 29 Rs bn 24 19 14 9 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 30 25 20 % 15 10 5 0 FY13E Powder coating Auto Net sales (LHS) Source: Company data. Given a high base and cooling auto sales growth. Industrial segment growth dependent on auto demand growth KNPL is the leader in automotive paints and powder coatings.4% yoy in FY10 and 27% in 1H FY11). KNPL’s volume has grown at a strong 20%. Though the entry barriers are high given the collaborative 36 l Equity Research l . Standard Chartered Research YoY growth (RHS) Source: SIAM. Currently. In our view. which accounts for 70% of its industrial paint revenue. the stock looks expensive at current valuations. Standard Chartered Research estimates KNPL has built an unassailable position in automotive paints Leadership position in automotive paints KNPL has a competitive advantage in automotive paints. driven mainly by robust auto demand and stable growth in decoratives. KNPL is the supplier to all leading automotive industry leaders. Given Kansai’s relationships and technology. It supplies 95% of Maruti Suzuki’s paint requirements. KNPL’s strong relationship with OEMs has made it dominant in this segment. Auto paints contribute 70% to KNPL’s industrial paint sales The company has a dominant 60% market share in the auto paint category.4% in FY10 and 25% in FY11. KNPL has built for itself an almost unassailable position in automotive paints.India Paint Sector l 19 January 2011 Investment argument and valuation We initiate coverage on KNPL with an UNDEPERFORM rating and price target of Rs852. Given this. where OEMs have a major say in which company’s products are used for repainting. though the actual decision depends on the authorised service station. and has successfully riden on the growth in these sectors. We now expect volume growth to moderate to 14%/15% in FY12/FY13 given a high base and a likely moderation in auto sales growth.8% yoy in 1H FY11 (PV volume rose 29. Volume growth likely to slow In the past 18 months. we estimate KNPL’s volume growth would slow to 14%/15% in FY12/FY13 from above 20% over the past 18 months. auto demand growth plays a major role in KNPL’s industrial paint growth. Company data. KNPL is also dominant in the auto-refinish market. KNPL is enjoying the upswing in auto demand – KNPL’s net sales grew 24. Our 12-month price target of Rs852 is based on 18x on one-year forward earnings. Other paint companies are not as cyclical given most of their sales come from the stable decoratives segment. We expect 20% volume growth in FY11. But our auto analyst expects auto volume growth to cool to 16%/14% in FY12/FY13 from 29. The flip side of this auto sector dominance is that KNPL is prone to cyclicality in sales/earnings given its high dependence on the sector (~35% of total sales). at a justifiable 25% discount to Asian Paints’ given KNPL’s cyclical business and lower return ratios.
KNPL’s competence in addressing these critical issues gives it a competitive advantage over other players. Increased participation of KNPL in various infra projects and rising investments in infrastructure development will also increase demands for performance coatings and other industrial paints. In the past few years. Despite auto manufacturers’ high bargaining power. Intermediate Coats/primer Surfacers. KNPL offers a total painting system to auto makers in India with a range of products such as Pretreatment Chemicals. we believe. Solid & Metallic Top Coats and Clear Coats Touch-up Paints. US Country Japan Japan Japan USA Products ED Primers.000 have tinting machines supplied by the company. the company has been riding the strong category growth witnessed in decorative paints. cutting painting cycle time and overcoming myriad material and finish-related issues on the spot are critical in adding value to the customer.000. Higher focus to drive growth in decorative paints KNPL is the third-largest player in the decorative paint segment and has a strong dealer network of 12. An efficient supply chain that reduces inventory at the customers’ end.. Electro Deposition Primers. Japan Nihon Parkerizing.India Paint Sector l 19 January 2011 nature of the business. it has taken various initiatives to bolster its decoratives segment and increase the proportion of its emulsion sales from the current ~30%. KNPL has forged strong technological collaborations to deliver superior products to its customers which. KNPL’s initiatives: KNPL is the thirdlargest player in decoratives Enhanced branding efforts by increasing advertising of its emulsions brand Impressions Leveraging its technology expertise in the decorative segment by introducing innovative products – Impressions tile guard. will keep the company at the edge of innovation. Automotive paints require a high level of technological intervention Technological edge – Continuously changing painting trends in the automotive industry necessitate the development of compatible paint formulations and paint processes. this is a low margin business that can easily be impacted when there are steep fluctuations in raw material prices. Japan Oshima Kogyo. Impressions texture coating and Suraksha Plus Positioning its paints as environmental friendly. In addition. KNPL introduced ‘Nerolac Style Icon’ awards for architects and interior designers in ’07 KNPL has taken many initiatives to bolster its decoratives portfolio l Equity Research l 37 . Japan Ameron/PPG. Impressions marble finish. Standard Chartered Research Growth in other industrial coatings to be strong Powder coatings will witness robust growth driven by strong performance of white goods industry and also shift from liquid paints to powder coatings in auto ancillary industries. quick response to client needs. Differentiates itself through better service quality – KNPL has around 40 of its 200 technical support personnel on customers’ shop floors helping them manage their paint lines.3% equity in KNPL - Source: Company. Through its various strategic collaborations. out of which 5. Fig 3 – Technological collaborations give KNPL an edge Collaborating company Kansai Paint Co. KNPL is the only company to have launched a campaign to educate consumers about its ‘lead free’ range of paints Setting up experience centres where consumers can experience the paints through application on walls Organising meetings with paint influencers – contractors and painters. Automotive & Industrial Coatings Pre-Treatment Chemicals Heat Resisting paints High Performance Coatings Remark Owns 69.
5% in FY10.000 18. While this has led to loss of market share in FY09.000 0 APL KNPL Berger Akzo Nobel India Tinting m/c Dealers Source: Industry data.9 20.India Paint Sector l 19 January 2011 Improved efficiency of its distribution system KNPL has instituted a host of measures to correct credit systems in its distribution network to make it more efficient and to prepare it to handle higher volume and growth. especially when crude price movements are rapid.7% and 17. Standard Chartered Research. part transfer of increase in raw material prices and stable volume growth expected in auto sales is likely to enable KNPL to maintain margins at ~15% in FY12-13E.000 10. in our view. Standard Chartered Research Margins likely to be stable Strong volume growth.6 Fig 5 – Distribution networks of companies 30.6% in 1H FY11 (despite a 210bps yoy decline in gross margin). a gradual increase in input prices can be partly passed through.000 15. Furthermore.5 20. Continuing momentum in auto sales has supported higher sales growth of 23% yoy and kept margin steady at 15. However.5 24 22 20 18 % 16 14 12 10 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 20.000 19. it is positive in the longer run as it will help KNPL control its working capital requirements. We expect recurring EPS growth to be healthy at 14.2 25. Hence. Fig 4 – KNPL: Overall market share 20. respectively.4% in FY11. as most of KNPL’s raw materials are crude linked. hence making it difficult for KNPL to completely transfer sharp and adverse increases in raw material prices.000 5.4% yoy. Fig 6 – Adverse price increase in raw materials impacted margins in FY09 20 18 16 % 14 12 30 10 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10 Dec-10 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 10 150 130 (US$/bl) 110 90 70 50 Margins vulnerable to rapid movement in crude prices Quarterly EBITDA margins (LHS) Source: Company data. Margins for Dec-10 are our estimates Crude prices (RHS) l Equity Research l 38 . lower than net sales growth. Strong margins and a low base (earnings declined 18% in FY09) helped KNPL post strong earnings growth of 67% in FY10. Margins likely to be maintained at ~15% The institutional nature of buyers in auto paints result in relatively lower pricing power. the recent increase in input costs is likely to soften margins in the next few quarters and result in FY11E EBITDA margin of 14.2 20.6% in FY12E and FY13E.9 21.8%. However. We expect earnings growth to be 18. We expect FY11E net sales to grow 23.1 17. lower prices of crude-linked raw materials and excise benefits helped KNPL post EBITDA margin of 15.9 20. Standard Chartered Research Source: Company data. its margins tend to depend on the movement of crude prices.
we do not factor in the land value in our price target. An excellent performance in the past 18 months. At present. While some land tracts are no longer used for manufacturing. Hence. the company has no plans to sell/ develop the existing land at present and hence. Any move to appropriate value from its landbank can be a positive trigger for the stock. However. we believe current valuations are expensive and expect the discount to APL to increase. We value the total ready-for-sale land (Thane. Hence. 25% discount to our target multiple for APL However.India Paint Sector l 19 January 2011 Valuations dear.4x. KNPL trades at FY12E P/E of 21. Bloomberg. Standard Chartered Research Median P/E l Equity Research l 39 . inherent cyclicality in auto sales and higher vulnerability of margins to crude prices. Net cash and cash equivalent per share amounts to Rs62. Fig 7 – KNPL: P/E bands 1. given the expected slowdown in growth. initiate with UNDERPERFORM KNPL enjoys a strong competitive position in automotive and industrial paints and has favourable growth prospects in decorative paints. Intrinsic value of land and cash per share provide strong support KNPL has significant landbank in various parts of the country. We value KNPL at a forward P/E of 18x.7x versus the five-year median P/E of 17.000 800 Rs 600 400 200 0 Mar-06 Mar-07 Apr-05 Aug-07 Aug-08 Aug-09 Jan-10 Jul-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 Dec-10 28x 24x 20x 16x 12x Source: Company data. there are other valuable land tracts where production continues.200 1. has reduced the moving five-year discount to APL from 27% last year to 18% currently. we initiate with an UNDERPERFORM rating and a 12month price target of Rs852 based on a forward P/E of 18x (25% discount to our target multiple of 24x for APL). Standard Chartered Research Fig 8 – KNPL: One-year forward P/E chart 30 25 PE (x) 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 One year forward P/E Source: Company data. but it is prone to the cyclicality linked with the automotive sector. Lower Parel and Vatva) at Rs4bn and the value of land at the Chennai plant at Rs3bn. driven by strong volume growth in auto paints. the total intrinsic value of land (ready-for-sale) and cash stands at Rs136/share.
high margins will not be sustainable in the long run as KNPL will have to pass on any input cost benefits to its institutional auto buyers.7 14.2 16.0 16.0 Risks Continued momentum in auto sales for a longer period and volume growth surprises >20% compared to our auto analyst’s estimate of 14-16% in FY12/13. the returns are annualised FMCG Index 28. a sharp and rapid decline in crude can increase near-term margins for a few quarters and can create a spurt in stock prices. For example.3 -3.6 17. Erratic movement in crude. l Equity Research l 40 . Standard Chartered Research Five-year median Fig 10 – KNPL stock performance vis-à-vis broader indices KNPL 1 year 3 year 5 year 10 year Source: Bloomberg Note: For periods greater than a year.India Paint Sector l 19 January 2011 Fig 9 – KNPL: Discount to APL 60 40 20 % 0 -20 -40 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Discount to APL Source: Company data.1 15. can result in higher-thanexpected paint volume growth for KNPL.3 28. However.7 13.7 67.3 37.5 BSE Sensex 7.
KNPL’s cash flow has been relatively more volatile compared to APL. in FY10. respectively.5 41 . return ratios RoE and RoCE are lower compared to APL at 23.8 3.1 Net sales YoY growth (RHS) Source: Company data. Standard Chartered Research estimates Source: Company data.9% respectively over FY10-13E.9 FY11E FY13E 16.6 14.9 3. Standard Chartered Research estimates Fig 14 – KNPL: A&P as % of sales 6 4.5 15 % 10 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 64. KNPL’s reserve as a proportion of share capital is at 26 times compared to 17 times for APL in FY10.1 60.6 3.8 14.9 3.4 5 4 3 % 4.2 19. Fig 11 – KNPL volume growth to be healthy 17.9 3.India Paint Sector l 19 January 2011 Financials We estimate net sales.6 12.1% and 20. but has been strong with operating cash flow at 97% of reported net profit in the past five years.6%.5 63.5 11.7 62.2% & 16. Low dividend payout at 30-35% has resulted in swelling reserves.5 FY13E 64. 17.2%. Standard Chartered Research estimates l Equity Research l FY10 17. EBITDA & EPS CAGR for KNPL to be at 18.2 2 1 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E % 18 16 14 12 10 FY04 FY05 FY06 FY07 FY08 FY09 Source: Company data. As a result.3 20. Standard Chartered Research estimates Source: Company data.9 20.1 24 22 20.7 4.4 67 63.0 25 20 12.6 Source: Company data Fig 12 – KNPL: Sales & Sales growth 34 29 Rs bn 24 19 14 9 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 30 25 20 % 15 10 Fig 13 – KNPL: RM cost to sales 65.1 3.7 5.4 20 19.8 FY12E FY11E 64.3 19.6 FY12E 16.9 22.9 3.3 3.4 65 60.0 Fig 15 – KNPL: Other costs as % of sales 22.4 16.9 63 % 61 59 5 0 57 55 FY04 FY05 FY06 FY07 FY08 FY09 FY10 60.
0 14.9 1.0 1.241 1.0 1.4 15.7 15.2 FY12E 24.601 35.5 0.5 Fig 17 – KNPL: PAT & PAT growth 3.215 9.950 1.997 13.4 14.747 4.579 14.826 876 31.181 31.012 10.6 14.236 14.5 FY11E 21.996 4.1 FY13E 28. Standard Chartered Research estimates l Equity Research l 42 .8 501 20 225 2.7 986 986 -17.236 2.9 9.7 9.0 16 15 14 13 % 12 11 10 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 11.811 1. Standard Chartered Research estimates Fig 18 – KNPL: Cash flow as % of PAT 250 200 150 % Fig 19 – KNPL: Return ratios 35 30 25 % 20 15 10 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY13E 100 50 0 -50 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Operating Cash Flow FCF post capex RoE RoCE Source: Company data.0 0.629 17.207 85 28.0 2.402 416 29.718 6. Standard Chartered Research estimates Source: Company data.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY12E 80 60 % 40 20 0 -20 -40 14.6 15.992 35.629 2.022 3.245 18.0 684 22 272 3.242 15. Standard Chartered Research estimates Source: Company data.India Paint Sector l 19 January 2011 Fig 16 – KNPL: EBITDA margin 15.749 34.8 14.1 PAT YoY growth (RHS) Source: Company data.175 1.6 15.494 35.5 1.9 14.714 8.4 5.704 8. Standard Chartered Research estimates Fig 20 – KNPL: Income statement (Rs m) Year end: March Net Sales Exports Domestic Raw Material cost Gross Profit Gross Margin (%) Other operating expenses EBITDA % growth % margin Depreciation & Amortisation Gross Interest Other Income Recurring PBT Add: Extraordinaries Less: Taxes Effective tax rate Net Income (Reported) Recurring Net Income % growth % margin FY09 13.5 14.655 1.005 31.6 3.637 67.4 9.6 4.5 376 18 222 1.4 5.2 3.745 42 13.372 3.567 7.346 37.386 9 740 30.5 13.0 2.5 Rs bn 2.7 585 22 268 3.6 9.122 18.709 2.122 18.950 18.1 FY10 17.575 -15.7 7.061 64 20.064 52 17.647 66.0 2.6 11.315 74 24.2 Source: Company.5 443 12 204 2.
950 501 -234 2.450 -600 -43 -378 428 334 762 FY10 1.067 539 8.100 -115 10. In Cash & Bank Add: beginning balance Closing balance Source: Company.100 -115 13.620 2.810 12.334 539 11.629 684 -281 3.236 4.882 -384 -767 731 -867 164 -378 -351 762 411 FY11E 1.334 Fig 22 – KNPL: Cash flow statement (Rs m) Year end: March Reported Net Income Depreciation & Amortisation Others Operating Cash flow Working Capital changes Capital Commitments Free Cash Flow Cash Flow Investing Activities Inc(Dec) in Borrowings Dividend paid Chg.543 9.515 4 4.281 1.706 2.474 2.081 881 -512 1.915 4 4. Net Current Assets Investments of which Strategic/Group of which Marketable Net Fixed Assets of which CWIP Total Assets Equity Share Capital Reserves & Surplus Net Worth Borrowings Deferred Tax Liability Capital Employed Source: Company.275 6.944 4 2.349 1.259 2.533 872 -128 -688 65 685 750 l Equity Research l 43 .941 2.277 3.627 460 11.713 269 7.678 4. Standard Chartered Research estimates FY09 762 1.731 356 7.939 103 1.162 608 7.640 4.112 3.058 164 8.630 1.459 7.522 103 1.096 417 4.115 4 4.099 4.India Paint Sector l 19 January 2011 Fig 21 – KNPL: Balance sheet (Rs m) Year end: March Cash & Bank balance Inventory Sundry Debtors Loans and Advances Other Current Assets Total Current Assets Sundry Creditors Other Current Liabilities Provisions Total Current Liab.891 404 10.217 -517 -1.100 527 6. & Prov.067 FY12E 685 3.012 3.100 -115 11.981 2.980 1.724 2.728 1.475 6.912 5.477 526 13.544 936 -106 7.700 2.731 3. Standard Chartered Research estimates FY09 986 318 -224 1.321 964 -132 -596 246 439 685 FY13E 2.713 FY11E 439 2.615 FY13E 750 3.375 FY10 411 2.512 4.719 3.091 10.236 585 -278 2.100 -115 8.324 411 5.375 269 6.784 3.082 1.942 4.300 142 838 3.334 365 125 -471 28 411 439 FY12E 2.655 440 -213 1.615 539 10.544 -258 -1.472 4.103 705 9.060 4.032 -627 -1.294 2.015 4 4.218 5.940 103 937 3.716 103 1.
5 41.0 16.7 47.3 65.7 FY10 30.5 229.0 0.5 0.4 45.6 1.8 31.6 18.0 56.5 168.1 67.4 10.4 45.7 30.0 15.2 22.6 12.1 20.1 16.5 31.4 28.1 -15. Standard Chartered Research estimates FY09 18.4 0.7 21.2 15.3 18.1 52.2 30.4 18.7 12.1 20.2 7.9 3.4 4.5 11.1 28.1 44.2 36.6 10.6 -17.6 64.1 FY12E 41.7 45.3 56.2 64.4 18.India Paint Sector l 19 January 2011 Fig 23 – KNPL: Ratios Year end: March Per Share Data (Rs) Recurring EPS Reported EPS Dividend per share (DPS) Book Value per share (BV) Growth Ratios (% YoY) Net Sales EBITDA Recurring EPS Valuation Ratios (x) P/E P/BV EV / EBITDA EV / Net Sales Operating Ratios (%) Raw Material / Sales SG&A / Sales Effective Tax Rate NWC / Total Assets Inventory (days) Receivables (days) Payable (days) D/E Ratio (x) Profitability Ratios (%) RoCE RoNW Dividend Payout Dividend yield Source: Company.0 121.6 10.8 48.0 47.3 14.0 0.1 20.1 45.4 24.2 9.0 56.9 29.8 1.1 21.7 30.6 l Equity Research l 44 .8 22.8 FY11E 36.0 0.9 64.5 3.8 38.9 10.6 14.5 143.0 16.0 197.4 66.6 29.5 6.3 2.4 10.9 14.4 24.6 2.0 0.7 1.0 47.9 23.5 14.0 47.8 10.7 4.1 14.5 23.2 FY13E 48.7 62.8 14.3 6.7 49.0 18.5 1.1 15.6 30.7 56.7 31.3 17.0 0.7 1.9 5.9 34.7 7.6 23.0 56.6 17.
Bharuka has been the MD of Kansai Nerolac Paints Ltd HM Bharuka Source: Company MD since April 2004 and has a varied experience of around 24 years in various facets of management in the Paints Industry. l Equity Research l 45 . which acquired entire stake of Tata Forbes group in 1999. Mr. powder coatings.3% Source: BSE Fig 25 – Management profile Name Designation Background Jamshed Jiji Irani is a Promoter of Tata Steel Limited and Dr. Its industrial range of products includes auto paints.7% Promoter 69. except Hyundai. It commands a market share of ~60% in auto paints and is a supplier to all leading auto companies.India Paint Sector l 19 January 2011 Company profile Kansai Nerolac is the second largest paints company in India and leader in industrial coatings. He has been Chairman since July 2003. which comprises ~40% of the sales Fig 24 – Shareholding pattern Others 19. In decorative paints. JJ Irani Chairman also serves as special director of HDFC Ltd.000 across India.7% DIIs 5. since January 2008. general industrial and high performance coatings.3% stake). It is a subsidiary of Kansai Paint Japan (69. It is strongest in the northern region. It sells its products under its brand of Nerolac through a dealer network of 12.3% FIIs 5. it is the third largest players (after Asian Paints and Berger Paints) and has a market share of 11%.
unless otherwise stated.600 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Source: FactSet prices / SCB ratings and price targets Company Kansai Nerolac Paints Limited As at the disclosure date. the following applies: Asian Paints Limited . the efficacy of recommendations is a factor in the performance appraisals of analysts.current rating is: UNDERPERFORM 1.current rating is: OUTPERFORM 3.100 1. this means the day prior to the report date.600 2. The research analysts responsible for the content of this research report certify that: The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate.800 2. Standard Chartered Securities (India) Limited and/or one or more of its affiliates (together with its group of companies. Standard Chartered Bank Singapore Branch.000 1. Disclosures Appendix Where “disclosure date” appears below. is or will be directly related to the specific recommendations or views contained in this research report.800 1. Company Asian Paints Limited As at the disclosure date. On a general basis. and No part of his or her compensation and other benefits was.India Paint Sector l 19 January 2011 Disclosures appendix Global disclaimer The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited. SCB makes no representation or warranty of any kind.000 2. express. the following applies: Kansai Nerolac Paints Limited .000 900 800 700 600 500 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Source: FactSet prices / SCB ratings and price targets l Equity Research l 46 . THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES AND MUST NOT BE SENT OR TAKEN OR TRANSMITTED INTO THE UNITED STATES OR DISTRIBUTED DIRECTLY OR INDIRECTLY IN THE UNITED STATES. implied or statutory regarding this document or any information contained or referred to in the document. Our ratings are under constant review. “SCB”) and the research analyst(s) named in this report.400 2. All share prices quoted are the closing price for the business day prior to the date of the report.200 2. Additional information with respect to any securities referred to herein will be available upon request.
0% 3. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.1% 8.497.000 units of call warrants (KRA741147086) as of 17 January 2011.5% 28. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.3% Research Recommendation Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market IN-LINE (IL) index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or UNDERPERFORM (UP) more over the next 12 months OUTPERFORM (OP) SCB uses an investment horizon of 12 months for its price targets.160 units of put warrants (KRA741278089) as of 17 January 2011. Terminology l Equity Research l 47 .940 units of call warrants (KRA741106074) as of 17 January 2011.500. Recommendation Distribution and Investment Banking Relationships % of covered companies currently assigned this rating % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months OUTPERFORM IN-LINE UNDERPERFORM 63.2% 11.499.4% 14. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.India Paint Sector l 19 January 2011 Company Hyundai As at the disclosure date.499.499. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.990 units of call warrants (KRA741145080) as of 17 January 2011. the following applies: SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.990 units of call warrants (KRA741177083) as of 17 January 2011.499.990 units of call warrants (KRA7411500A9) as of 17 January 2011. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.
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