Paint Industry Report

Paints Industry Report
June 15, 2011

SPA Securities Ltd.
C o n t e n t s
Executive Summary
01 - 01
Industry Description
02 - 05
Asian Paints
07 - 12
Akzo Nobel
14 - 19
Kansai Nerolac
21 - 26
Berger Paints
28 - 33
Executive Summary
Paint Industry
Indian paint industry is in the sweet spot. Rising income

and aspiration levels of young demography along with
changing lifestyle has catapulted the demand for both
repainting and fresh paints. Despite slowdown in FY09, paint
industry reported robust double digit growth in last two years
on back of higher demand. Going ahead, we believe demand
scenario to remain strong backed by higher discretionary
spend, increasing penetration, high construction activities
and robust growth in auto & consumer durables industries.
Paint industry has witnessed strong growth of 1.5-2x
GDP growth since liberalization. There has been
considerable reduction in average number of years required
for repainting from 10-11 years 5 years back to 4-5 years
now. This is the stark evidence of changing lifestyle with
rising income levels. Repainting the home is not just a
discretionary spend as it used to be as changing lifestyle
resulted in people aspiring for cleaner and beautiful looking
homes.
Robust construction activities on back of higher housing
demand has further boosted the growth of paint industry.
The share of fresh paints in total demand has increased
significantly in last decade on back of increasing urbanization
and higher demand for housing. The fresh demand for paints
is expected to remain strong in many years to come.
Demand in rural areas witnessed strong upsurge with

rising income levels backed by increasing employment
opportunities and government focus on rural prosperity. Higher
growth in rural areas and tremendous scope of increasing
penetration strengthen our belief of sustainability of long term
growth of the industry.
Industrial paint segment also piggybacked the robust
growth in auto, consumer durables segment and higher
infrastructural spend. Auto segment and consumer
durables segment reported more than 20% growth in last
few years. We expect growth momentum in auto and durables
segment to continue going forward. Higher infrastructure
spend targets by planning commission indicates strong builtup of infrastructure. This would lead to sustainable long term
demand for industrial paints.
Attracted by strong potential, foreign players like Nippon
paints, Jotun paints, National Paints and Sherwin Williams
to name a few have set their bases in India to share the
growth pie of Indian paint industry. However, to gain any
significant presence in the industry would require strong
distribution network and brand recognition which act as a
strong entry barrier for new players.
On back of aforementioned reasons, we believe Indian paint
industry to benefit significantly from high domestic
consumption demand. We therefore have positive outlook
for the sector. Our top picks in the sector are Akzo Nobel
and Berger Paints.
Companies under coverage

Company
CMP
(INR)
Reco.
Revenues (INR mn)

FY12E
FY13E
EBIDTA Margins
FY12E
FY13E
Asian Paints
3,070
Kansai Nerolac
Hold
92,073.3
108,827.0
16.7%
17.2%
104.8
126.7
29.2
24.2
19.5
16.0
875
Hold
25,753.2
30,470.2
13.2%
13.9%
38.8
46.3
22.4
18.8
14.0
11.3
Berger Paints
103
Buy
28,051.5
33,381.2
10.5%
10.9%
5.1
6.4
19.8
15.9
12.5
9.9
Akzo Nobel
907
Buy
13,456.8
15,928.3
12.7%
13.6%
53.4
61.5
17.0
14.8
13.3
10.6
Sumit Duseja
sumit.duseja@spagroupindia.com
Ph.No. +91-22-4289 5600 Ext. 630
Executive
Summary
Industry
Description
Asian
Paints
adj. EPS (INR)

FY12E
FY13E
Akzo
Nobel
P/E (x)
FY12E
FY13E
Kansai
Nerolac
EV/EBIDTA (x)
FY12E FY13E
Berger
Paints
Industry Description
Paint Industry
Currently estimated at ~INR 210bn, Indian paint industry has
grown at a CAGR of ~18.5% in last two years and expected to
grow at a CAGR of ~17.5% in next four years to become INR
396bn industry in FY15. Indian paint industry growth is closely
related with the GDP growth rate and has grown on an average
1.5-2x GDP growth rate since liberalization.
Decorative vs. Industrial
Industry Size (INR Bn)
Premier decorative paints are water based acrylic emulsions

used mostly in metros and other large cities and high end offices
The medium range consists of solvent based enamels which

are popular in smaller cities and towns
Distempers are economy products demanded in the semiurban and rural markets. This segment is dominated by
unorganized sector. Margins of distemper lie between
emulsions and enamels.
Indian paint industry can be classified into decorative and

industrial paints with the market share in the ratio 80:20.
Decorative Paints (INR ~170bn)

General product wise paint classification:
450
=1
7.5
%
CA
GR
350
300
200
170
208
148
50
= 14.7%
CAGR
137
150
100
396
250
120
(INR Bn)
400
FY07
FY08
FY09
FY10
0
FY11
FY15
Source: Industry, SPA Research
Industry vs GDP Growth
In decorative paints segment solvent based paints (enamels)

has a larger share of ~33% but there is a significant change in
trend towards adopting premium water based paints (emulsions)
which are growing at much faster rates of ~20% in volume
terms in last 4-5 years. In emulsions, exterior emulsions are
growing faster than interior emulsions.
Decorative Paints Breakup (%)
25%
20%
Enamels
15%
15%
10%
6%
5%
4%
0%
4%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Industry Grow th
Interior Emulsions
Exterior Emulsions
33%
Distemper
Cement Paint
13%
GDP Grow th
Wood Finishes
12%
14%
Putty
Primers, Thinners etc
Source: SPA Research
Industry Structure
Source: AC Neilson, SPA Research
Organized vs Unorganized
Traditionally repainting has dominated the demand for decorative

paints but higher construction activities on back of demand for
housing space has resulted in higher growth for new painting
demand. Share of fresh demand for paints has increased to
~30% currently from ~15% a decade ago.
Indian paint industry is dominated by organized sector which

currently captures ~67% market share. Organized sector has
grown at a higher rate vis--vis unorganized sector in last few
years. Unorganized sector mostly offers lower end products
like low end enamels, distempers, lime wash, cement paint
etc. Rising disposable income and created awareness from
marketing efforts by organized players resulted in consumers
preferring for better quality and higher end products like
emulsions.
Executive
Summary
Industry
Description
Asian
Paints
Region-wise classification:
Region-wise, West region market accounts for 32% of paint
industry revenues followed by South (28%), North (26%) and
East (14%) in order (Chart). Rural regions and smaller towns
contribute 40% of the paint industry sales. Growth in Tier II
and Tier III cities is higher than the growth in urban markets
due to higher construction activities and increasing rural income.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Industry Breakup
Regional Market Breakup
14%
32%
32%
80%
10%
20%
23%
26%
35%
28%
West
South
North
East
Decorative Paints
Automotive Paints
Protective Coatings & GI
Powder Coatings
Others (Marine, packaging etc)
Tinting systems a trend now: Color dispensing machine also

known as dealer tinting system (DTS), both computerized and
manual, have transformed the business, particularly on the
manufacturing and distribution sides. Earlier, paint companies
were required to manufacture all the shades in all the packs
(five to eight packs). A tinting machine helps mix small color
tubes with a white base paint to create a new shade instead of
keeping 3000+ SKUs which is challenge to even paint
companies. The machines altered the production pattern from
shades to producing bases thus providing economies of scale,
reduced inventory levels and eliminated redundancy of stocks.
It has cut down the new products introduction cycle
considerably. This has helped expand the range of shades for
each product category, offering a choice of shades to consumers
in the hundreds. For the retailers also, it eliminated the sales
loss for want of range/desired shade. The machines have
brought a total change in the way business is transacted and
revolutionized business processes as well.
The industrial paints segment has grown at a fast pace of more

than 15% in last 4-5 years on back of boom in auto and
consumer durables demand along with rising industrial spend.
DTS a trend
Per Capita Consumtion (Kg)
Opportunity
The economic growth in India has lead to higher disposable
income, increasing urbanization, easy availability of credit and
a concurrent growth in construction, automobiles and consumer
durables segment which have emerged as the driving force
behind the rise in current consumption of paints. Industry has
experienced dynamic changes in the last decade in terms of
changing environment and structure which propelled it to a high
growth trajectory. However, India per capita consumption of
paints is still abysmally low at 1.5Kg/annum compared to world
average of 15Kg and 25Kg for US. It is even lower than Sri
Lanka with per capita consumption of 3.5/Kg. This however
indicates tremendous opportunity for paint industry which is
currently highly under-penetrated.
30000
60
20000
Dealers w ith DTS
Qatar
Source: Colourworlds, SPA Research
Industrial Paints (INR ~40bn)

Market share of industrial paints in India of ~20% is low
compared to some developed countries where it is ~50%.
Industrial paints segment mostly offers products like automotive
coatings (35%), powder coatings (10%), and protective coatings
& general industrial coatings (32%).
Industry
Description
5.0
Dealers w ithout DTS
Source: Company, SPA Research
3.5
Singapore
Akzo Nobel
2.5
25.8
US
Berger Paints
1.5
15.0
Germany
Asian Paints
10
12.0
19.0 21.0
Sweden
Kansai
Nerolac
20
France
2500
4000
Japan
8000
Malaysia
12500
Sri Lanka
3000
17500
30
China
(kgs)
2000
5000
Executive
Summary
38.0
40
15000
10000
51.7
50
9500
India
25000
Asian
Paints
Demand for repainting: With change in lifestyle on back of

rising income levels, there has been considerable increase in
discretionary spend. Also, to keep up with status in the society,
people aspire for cleaner and better looking homes. There is
always a need for repainting during marriage, home shifting,
festivals and various other occasions. Repainting demand
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
therefore has been transforming from more of a discretionary

spend to somewhat need based spend. Significant up-trading
trend is visible in Tier II and Tier III cities with the shift from
lower and economy products like distempers and enamels to
high end emulsion paints. Increase in rural income is further
supporting the sustainability of paint industry growth rate.
Rising Income Level
100%
80%
11.6%
16.8%
17.4%
18.6%
High Income (> INR
200000)
60%
40%
71.1%
Middle Income (INR

100000-200000)
64.6%
20%
Low Income (<INR

100000)
0%
Year 2009
Year 2014E
Capacity Addition: To meet the strong ensuing demand, many

paint companies have planned huge capacity expansion in next
2 years. Top four domestic companies plan to expand
capacities from cumulative 1.16mn MT in FY11 to 1.68mn MT
by FY13.
Capacity (Lakh tonnes/annum)
1000000
Source: CRISIL, SPA Research
Fresh paint demand: Beside demand for new paints is also

very strong. Indian demography is quite young with 60% of
population below the age of 30 years which creates a high
demand for housing. Higher housing construction creates
demand for fresh paints in decorative segment. Based on the
findings of Ministry of Housing & Urban Poverty Alleviation,
India, there is a shortfall of 24.7mn dwelling units at the
beginning of 11th Five year Plan which will increase to 26.5mn
units by the end of it. This represents high demand for housing
construction in India.
No of Pakka Households-Urban (mn)
(INR mn)
50
57.5
51.0
41.2
45.3
40
30
20
10
0
2001
2005
2010
2015E
Source: Ministry of Housing & Urban Poverty Alleviation, SPA Research
Industrial Paints to see high growth: Robust demand for

auto (automotive coatings), consumer durables (powder
coatings) and infrastructure spend (performance/protective and
general industrial coatings) by private players and government
creates fresh demand for industrial paints.
Executive
Summary
Industry
Description
600000
400000
200000
0
Asian Paints
Berger Paints
FY11
Kansai
Nerolac
Akzo Nobel
FY13E
Threats
70
60
800000
Asian
Paints
Raw material cost inflation

Manufacturing of paints requires more than 300 different
ingredients. Key ingredients like titanium dioxide (TiO2) and
oil derivatives constitutes 15-20% and 20-40% of the of raw
material cost respectively. Cost of titanium dioxide is witnessing
huge rise due to supply side constraints which arose from the
lack of capacity addition and slow restarting of shut down plants
after 2008-09 recession. The Indian prices of titanium dioxide
have risen by ~29% in FY11 from 155/Kg to 200/Kg. The prices
are continuously rising and have increased by another ~10%
in two months since the beginning of FY12. Crude prices have
also witnessed strong upsurge with improvement in global
economic environment. Crude prices have risen by ~40% from
USD 83/barrel to USD 117/barrel in FY11.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Increasing Competition
TiO2 Dupont India Prices (INR per Kg)
Entry of new players: Distribution network a strong

deterrent
220
200
180
160
140
120
100
210508
210509
210510
210511
Source: Bloomberg, SPA Research
Threat from imports and unorganized sector is low
Brent Crude ($/barrel)

160
140
120
100
80
60
40
20
0
10/4/2007
Despite fall in import duty on paints from 40% to 10% in last

decade, imports have not been a threat to Indian paint
companies. Indian climatic conditions are not conducive for
foreign formulations and modification cost in product formulation
is quite high.
Unorganized Sector: To mitigate the competition from
unorganized sector many paint companies outsource the
manufacturing of low cost products like enamels, distempers,
primers etc.
10/4/2008 10/4/2009 10/4/2010
To mitigate the rising cost of raw materials and to protect

margins, paint companies hiked prices of their products by 812% but they were not sufficient to prevent erosion of EBIDTA
margins. However, prices are expected to stay stable and partly
cool off with addition of new capacities resulting better supply
of key raw materials in FY13.
Executive
Summary
Attracted by huge market opportunities many foreign players

like Sherwin Williams (USA), Nippon paints (Japan), National
Paints (Dubai) and Jotun paints (Europe) are planning to expand
in India by setting up/expanding their own manufacturing
facilities or by acquiring small paint companies. Strong
distribution network is a major deterrent for new entrants. Also,
among top paint companies in world, some like Akzo and
Kansai are already present in India and rest have either technical
collaboration or a joint venture with their Indian counterparts.
Industry
Description
Asian
Paints
Also, installation of DTS and offering of other value added

services like colour consultancy, home painting services and
colour experience in exclusive stores strengthen the grip of
the paint companies.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
This page has been intentionally left blank
June 15, 2011
Asian Paints
CMP: INR 3,070
Recommendation: HOLD
Target: INR 3,168
Paint Industry
Asian Paints, largest decorative paint company in India has a dominant market share of more than
50% in organized sector. The company has presence in 17 counties with 22 manufacturing facilities.
It is one of the fastest growing FMCG companies with 4 year revenue CAGR of 20.4%. .
Dominance to stay
International and Industrial business to gain traction
Despite increasing competition from domestic and major foreign

paint companies, Asian Paint has maintained its market
leadership and has increased its market share from ~48% in
FY04 to ~54% in FY11. We expect it to maintain its dominance
going forward with further increase in market share backed by
higher sales growth.
Industrial Segment: Asian Paints has signed a second equal

JV agreement with PPG Industries Inc for Non Decorative and
Non- Auto Paints in Jan 2011. The arrangement is subject to
regulatory approval and is expected to be completed during
H2FY12. We expect industrial segment business to perform
well on back of robust demand of automotives, consumer
durables and higher infrastructure investments.
International business: International business division reported
a meager 1.9% growth in FY11 revenues on the back of
slowdown in international economies and disruptions in
operations in MENA region which contributes more than 50%
to international business division. Going ahead, with
improvement in international economic environment and better
operational efficiencies, we expect international business to
grow at a 2 year CAGR of 10.2%.
Maximum beneficiary of high GDP growth rate

Asian Paints is having larger presence in South and West
markets which contribute ~60% to overall paint industry sales.
Company also has strong presence in fast growing rural
markets which contributes ~45% to its overall revenue. We
expect company to report revenue growth at a 2 year CAGR of
19.9% to INR 90,921.2mn in FY13 in its standalone business
backed by strong volume growth.
High competitive advantage and positioning

Asian Paints offers products across all the categories in terms
of types of products and customer segmentation. Emulsion
which is the fastest growing category at ~20% volume growth
contributes ~50% of Asian paints decorative paint segment.
Unmatched dealers network of ~27,000 dealers give Asian
paints high competitive advantage. With initiatives like Signature
stores, Colour Ideas, home painting solutions, company is
focusing on increasing services along with product offerings.
Company's ad spends (~INR 2931mn) are highest among its
peers giving it stronger brand recall and occupy larger mind
share.
Shareholding (%) Dec-10
Mar-11
Valuations
Asian paints having dominant position in paint industry is well
poised to take maximum benefit of high GDP growth rate. With
changing lifestyle needs, high disposable income and boom in
construction activities, we expect Asian paints to grow at a
revenue CAGR of 18.8% in the next two years. Based on high
RoNW, higher EBIDTA margins and strong growth rate, we value
the stock at 25x FY13E EPS of INR 126.7 which implies a
target price of INR 3,168. We therefore, initiate the coverage
with a Hold rating.
Key Data
Y/E Mar (INR mn)

Net Sales
Promoters
52.33
52.34
BSE Code
500820
FIIs
14.61
14.45
NSE Code
ASIANPAINT
DIIS
11.38
11.56
Bloomberg Code
Others
21.67
21.66
Relative share price performance
APNT IN
Reuters Code
ASPN.BO
Shares Outstanding (mn)
95.9
Face Value
10
Mcap (INR bn)

52 Week H/L
294.5
3,230/2,283
2W Avg. Qty, BSE
33,512
Apr11
May11
Jan11
Feb11
Mar11
Dec10
Oct10
Nov10
Sep10
Jul10
Aug10
Jun10
AsianPaints
18,132.2
FY11
77,062.4
FY12E
FY13E
92,073.3 108,827.0
24.0%
22.3%
15.3%
19.5%
18.2%
EBIDTAM (%)
12.3%
18.4%
17.0%
16.7%
17.2%
3,942.4
8,292.9
8,432.4
10,052.9
12,156.7
-4.1%
110.4%
1.7%
19.2%
20.9%
Adj. PATM (%)
7.2%
12.4%
10.9%
10.9%
11.2%
Adj. EPS (INR)
41.1
86.5
87.9
104.8
126.7
DPS
17.5
27.0
32.0
40.0
45.0
0.6%
0.9%
1.0%
1.3%
1.5%
P/E (x)
74.7
35.5
34.9
29.3
24.2
P/BV (x)
24.5
17.2
13.5
10.7
8.5
EV/EBIDTA
44.6
24.3
22.8
19.5
16.0
Adj. PAT
Growth (%)
Net Debt/Equity
Sensex
FY10
66,809.4
Growth (%)
Dividend Yield (%)
150
140
130
120
110
100
90
80
FY09
54,639.0
0.1
0.1
0.0
0.1
0.0
RoACE (%)
31.8%
52.3%
41.1%
39.4%
38.4%
RoANW (%)
36.1%
56.9%
43.3%
40.8%
39.2%
Sensex
Sumit Duseja
Ph.No. +91-22-4289 5600 Ext. 630
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Investment Rationale
1) Dominance to stay
Despite increasing competition from domestic and major
foreign paint companies, Asian paint has maintained its
market leadership and increased its market share and
dominance at the expense of other domestic players and
unorganized sector.Organized sector has been growing
faster vis--vis unorganized sector indicating increasing
penetration by organized sector and consumer preference
for better products with the rise in income levels.Based on
our analysis on a set of companies in organized sector with
market share of more than 5%, Asian Paints has been
consistently increasing its overall share in the total
cumulative revenue. The share of Asian Paints has increased
from ~48 % in FY04 to ~54% in FY11.
Standalone Business Trend

100000
24.9%
23.4%
20.0%
80000
30%
18.8%
21.1%
25%
20%
60000
15%
40000
10%
20000
5%
0%
FY09
FY10
FY11
Standalone Revenue (INR mn)
Gaining Market Share
FY12E
FY13E
Grow th (%)
56%
54%
Capacity addition: On back of higher demand Asian Paints

has planned to expand its capacity by ~0.3mn MT in next
two years to ~0.89mn MT from current capacity of 0.59mn
MT by setting up a greenfield plant for a capex of INR 10bn
in Khandala which is scalable to ~0.4mn MT. Total capex
is being funded through internal accruals. The plant is
expected to be commissioned by FY13. Presently the
company is operating at higher capacity utilization of ~80%.
Company commissioned a plant in Rohtak, Haryana of
capacity ~0.15mn MT thereby increasing its capacity from
~0.44mn MT in FY10 to ~0.59mn MT in FY11.
3) High competitive advantage and positioning
Product offerings: Asian Paints offers products across all
the categories in terms of types of products and customer
segmentation.
54.8%
54.7%
54.7%
50.4%
47.9%
46.8%
44%
46.3%
46%
48.3%
48%
54.3%
50%
54.8%
52%
42%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12EFY13E
Because of strong brand recall, consumers preference for

Asian paints product has been higher.Dominant position in
the industry helps Asian Paints to be able to extract higher
margins from its dealers and is able to maintain lower debtor
days at ~26 days which is lower compared to ~40 days for
the industry.
2) Maximum beneficiary of high GDP growth rate
The growth prospects of paint industry are highly correlated
with the growth of the economy and it has been growing at
1.5-2x GDP growth rate post liberalization. Higher GDP
growth rate puts more money in the hands of consumers
increasing their discretionary spending.
Geographical presence: Geographical presence of Asian
paints gives it a strong hold and edge over competitors.
Asian Paints is having larger presence in south and west
markets which contribute ~60% to overall paint industry
sales. However, company is seeing higher growth from north
and west regions and increasing its presence by penetration
through dealer's network. Company also has strong presence
in fast growing rural markets which contributes ~45% to its
overall revenue. According to the management, growth in
rural markets is ~150-200bps higher than the growth in urban
markets due to higher construction activities and increasing
rural income.
8
Asian Paints standalone (Indian) business has grown at a

2 year CAGR of 21.7%. We further expect it to report
revenue growth at a 2 year CAGR of 19.9% to INR
90,921.2mn in FY13 backed by strong volume growth.
Executive
Summary
Industry
Description
Asian
Paints
Product Offerings
Brands
Price (INR/Litre)
(Min-Max)
Exterior Emulsion
Apex, Duracast
150-290
Interior Emulsion
Royale, Tractor
120-400
Enamel
Apcolite, Utsav
150-190
Distempers
Tractor, Utsav
45-95
Source: SPA Research *prices are in Mumbai region as on 8 May, 2011
Emulsion which is the fastest growing category at ~20%

volume growth contributes ~50% of Asian paints decorative
paint segment. The margins in emulsion paints are higher
than the margins in distempers and enamels. The company
has introduced lower priced interior emulsions in order to
encourage users of distempers and enamels to upgrade
themselves to emulsion paints.
Unmatched Dealers network: Unmatched dealers
network give Asian paints high competitive advantage.
Company expects to add 1,500-2,000 new dealers every
year to its already enviable network of ~27,000 dealers.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Out of total dealers network ~17,500 dealers have Asian

Paints dealer tinting system installed known as Colour World
which enables the company to cut inventory, packaging
and space cost helping it aid margins. Dealers have to fork
out INR 0.2mn for installation of machine in their shop. In
this way, Asian Paint is able to strengthen its hold over its
dealership network further reducing any threats from
competitors.
Initiatives: With initiatives like Signature stores and
converting already existing dealers shop into similar model
as signature stores (known as Colour Ideas, 16 till now),
company is focusing on increasing services along with
product offerings. Through these stores company offers
colour consultancy, demonstration of colour application,
varied themes to decorate home and provides technical
assistance in choosing right colour suiting the home and
surroundings. It also offers home painting services in 13
cities at a fixed cost per square feet for a particular paint
type. Encouraged by the customer response for its signature
store, company is shortly opening another store in
Connaught Place, New Delhi. We believe that this strategy
to offer better value to customers would increase the
stickiness and loyalty for the company's product along with
brand enhancement.
Higher Ad Spends: Company's ad spends are highest
among its peers giving it stronger brand recall and occupy
larger mind share. Paint demand comes mostly from
customer pull rather than distributor push. Therefore, a strong
brand positioning is critical for higher sales in the industry.
coating to leading two-wheeler companies: Hero Honda

Motors Ltd., TVS Motor Company, and Bajaj Auto Ltd. With
the acquisition of the advanced refinish 2K business from
ICI India in March, 2007, Asian PPG became the leader in
the refinish segment.
Asian Paints has also signed a second 50:50 JV agreement
with PPG Industries Inc for Non Decorative and Non- Auto
Paints in Jan 2011. Industrial businesses of both Asian
Paints and PPG will be part of this second JV. Asian Paints
is to take lead in the second venture and PPG to take the
lead in APPG in order to utilize their respective strengths to
best capture the growth in infrastructure development and
globally driven markets in India. The arrangement is subject
to regulatory approval and is expected to be completed
during H2FY12.
APPG and Industrial paint segment (APICL) of Asian Paints
contributed 4.8% (INR 3.7bn) to consolidated revenues,
growing by 23.7% in FY11. We further expect this
momentum in sales growth to sustain on back of robust
demand of automotives, consumer durables and higher
infrastructure investments.
Revenue Trend: APPG* + APICL (INR mn)
4000
3500
3000
2500
2000
1500
1000
500
0
30.1%
18.6%
-1.4%
Ad & Publicity Exp. in FY10 (INR mn)

3000
FY08
2500
2000
1500
1000
4.6%
4.4%
2,442.5
500
0
865.0
770.2
4.0%
679.6
Akzo Nobel Berger Paints
6%
International business: International business division reported

a meager 1.9% growth in revenues of INR 9.9bn and contributed
12.8% in FY11 consolidated sales. The lower revenue growth
was on the back of slowdown in international economies and
disruptions in operations in MENA region which contributes
more than 50% to international business division.
4%
2%
Kansai
Nerolac
Ad & Publicity Exp. in FY10 (INR mn)
Value Sales (INR mn)
as a % of Net Sales
Caribbean
4) International and Industrial business to gain traction

Industrial Segment: Asian PPG Industries (APPG), a
50:50 JV of Asian Paints with PPG Industries (USA), is the
second-largest player in the automotive OEM paint segment
with a market share of ~24%. APPG is one of the largest
suppliers of paints to Hyundai Motor India, General Motors
India and it is the sole supplier to New Holland Tractors
India. Asian PPG is also the leading supplier of acrylic CED
Executive
Summary
Industry
Description
Asian
Paints
Grow th (%)
8%
0%
Asian Paints
FY10
Revenue from APPG* + APICL
10%
9.2%
FY09
35%
30%
23.7% 25%
20%
15%
10%
5%
0%
-5%
FY11
FY10
FY11
YoY (%)
1,612.0
1,568.0
-2.7%
Middle East
5,361.0
5,159.0
-3.8%
South Asia
2,008.0
2,403.0
19.7%
719.0
750.0
4.3%
9,700.0
9,880.0
1.9%
South Pacific
Total
The company has presence in 16 other countries except India

along with 13 manufacturing facilities. It is the largest paint
company in Caribbean region, top 3 in South Pacific Islands
and South Asian regions. Also the company is third largest in
the Middle East with ~15% market share in Egypt.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Company has exited loss making unit in Singapore in FY11 in

its international business portfolio. Going ahead, with
improvement in international economic environment and better
operational efficiencies, we expect international business to show
improved performance and grow at a two year CAGR of 10.2%.
Investment Concerns
1) Raw material cost inflation: Raw material (RM) which
accounts for ~60% of Net Sales witnessed strong inflation
of 13.9% in FY11 on back of rising prices of key raw material
like titanium-dioxide (which contributes 15-18% of RM cost)
and increasing prices of crude derivatives (contribution of
more than 20%).
RM breakup (FY10)
Financial Overview
1) Revenue and Profit growth: FY10 contains 15 month
consolidation of international subsidiaries to bring in line
with standalone reporting. On like to like basis revenues
grew by 19.5% in FY11. On the back of robust demand
scenario due to higher GDP growth rate and Asian paints
strong positioning in the industry, we expect its topline to
record a sales of INR 108.8bn in FY13 at 2 year CAGR of
18.8%. We expect PAT to grow at a 2 year CAGR of 20.1%
to INR 12.2bn in FY13.
Net Sales Trend
120000
100000
30%
24.0%
19.5%
22.3%
80000
11%
15%
36%
25%
15.3%
20%
18.2%
Pigments, extenders, minerals etc
60000
Additives
40000
10%
20000
5%
15%
Oils & Solvents

Monomers & Resins
21%
17%
Others
0%
FY09
FY10
FY11
Net Sales (Consol, INR mn)
FY12E
FY13E
Grow th (RHS)
APAT Trend
14000
Although company has affected cumulative price increases

of ~12%, they were not enough to protect the margins.
Company's gross margins declined from 43.8% in FY10 to
41.9% in FY11. In light of sustained raw material cost
pressure, company increased the prices of its products by
cumulative ~6.8% till 1st June, 2011. Though this would
help cushion the margins, continuous price increases could
pose a threat to demand scenario. On back of higher RM
cost inflation, we expect company's gross margins to reduce
by 64bps in FY12 to 41.3%. However, we expect margins
to improve by 45bps in FY13 to 41.8% on back of expected
benign raw material cost inflation.
2) Slowdown in GDP growth rate: Since growth of paint
industry has a strong positive correlation with GDP growth
rate, any drastic fall in economic growth prospects could
pose a serious risk to our growth projections.
3) Increasing competition: Entry of new foreign players like
Nippon, Jotun, Sherwin Williams and National Paints; and
aggressive capacity addition by existing players indicates
increasing competitive intensity. However, Asian Paints has
been able to not only defend its market share but
continuously increasing it with aggressive market strategies
and by anticipating early the next growing trend in the
industry (for e.g. company realized the potential for emulsion
paints much before its peers).
10
Executive
Summary
Industry
Description
Asian
Paints
110.4%
120%
12000
100%
10000
80%
8000
6000
60%
-4.1%
40%
4000
19.2%
1.7%
2000
20.9%
20%
0%
-20%
FY09
FY10
FY11
APAT (Consol; INR mn)
FY12E
FY13E
Grow th (RHS)
2) Due to continuous pressure from raw material cost and

un-equivalent price increases, we expect company's gross
margins to fall resulting in the erosion in EBIDTA and PAT
margins in FY12. We expect Asian paints margins to
reduce by 36bps to 16.7% in FY12. However, we expect
EBIDTA margins to rise to 17.2% on back of expected
lower raw material cost inflation in FY13.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Valuations
Margin Profile
50%
43.8%
41.9%
41.3%
41.8%
18.4%
17.0%
16.7%
17.2%
12.4%
10.9%
10.9%
11.2%
FY10
FY11
FY12E
FY13E
38.3%
40%
30%
20%
12.3%
10%
7.2%
0%
FY09
Gross Margins
EBIDTA Margins
APAT Margins
Asian paints having dominant position in paint industry is well

poised to take maximum benefit of high GDP growth rate. With
changing lifestyle needs, high disposable income and boom in
construction activities, we expect Asian paints to grow at a
revenue CAGR of 18.8% in the next two years. Based on high
RoNW, higher EBIDTA margins and strong growth rate, we
value the stock at 25x FY13E EPS of INR 126.7 which implies
a target price of INR 3,168. We therefore, initiate the coverage
with a Hold rating.
3500
30
3000
3) Going forward, we expect return on average capital

employed (RoACE) and return on average net-worth
(RoANW) to get in line with its long term average of above
35% after disproportionately high in FY10.
Return Profile
20
2000
1500
10
1000
500
43.3%
52.3%
45%
40.8%
40% 36.1%
39.4%
38.4%
FY12E
FY13E
31.8%
FY09
FY10
FY11
RoACE
Apr-11
Apr-10
Company Brief
41.1%
35%
30%
39.2%
Apr-09
50%
Apr-08
55%
Apr-07
56.9%
Apr-06
60%
25
2500
RoANW
Revenue Breakup (FY11)
Asian Paints is the largest decorative paint company in India

since last 4 decades and has a dominant market share of
more than 50% in organized sector. The company has presence
in 17 counties with 22 manufacturing facilities. It is one of the
fastest growing FMCG companies with a 4 year CAGR of
20.4%. It is also the third largest player in industrial paints
with a market share of ~ 13%. Chemical business which
contributed 1% to consolidated revenue of FY11 consists of
Phthalic Anhydride and Pentaerythritol, which are used in the
paint manufacturing process.
Decorative Manufacturing Facilities in India

Bhandup (Mumbai, Maharashtra)
13%
Ankleshwar (Gujarat)
5%
APL - Paints
1%
Patancheru (Andhra Pradesh)
Chemicals
Kasna (Uttar Pradesh)
APPG* + APICL
Sriperumbudur (Chennai, Tamil Nadu)
International
Rohtak (Haryana) - Commissioned in April 2010
81%
Kesurdi (Maharashtra) Will be ready by 2013

Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
11
Financials
Profit & Loss
Y/E March (INR mn)
Balance Sheetmn)
FY09
FY10
FY11
FY12E
FY13E
54,639.0
66,809.4
77,062.4
92,073.3
108,827.0
24.0%
22.3%
15.3%
19.5%
18.2%
Cost of Goods Sold
33,706.4
37,579.6
44,745.6
54,042.5
63,391.5
Gross Profit
20,932.6
29,229.8
32,316.8
38,030.8
45,435.5
38.3%
43.8%
41.9%
41.3%
41.8%
3,715.2
4,362.8
4,539.9
5,174.8
6,020.1
10,516.7
12,590.8
14,647.2
17,503.6
20,726.2
Net Sales
Growth (%)
Gross Profit Margin (%)

Employee Cost
Other Operating Exp.
EBIDTA
EBIDTA Margin (%)
Dep./Amortization
6,700.7
12,276.2
13,129.7
15,352.4
18,689.2
12.3%
18.4%
17.0%
16.7%
17.2%
743.8
835.6
1,131.3
1,307.7
1,678.8
5,956.9
11,440.6
11,998.4
14,044.7
17,010.4
263.2
284.7
222.3
254.3
232.4
Other Income
510.1
1,405.0
826.3
1,232.2
1,388.4
Exceptionals
(12.4)
11.5
EBT
6,168.7
12,570.2
12,602.4
15,022.6
18,166.4
Tax Expenses
1,973.9
3,731.1
3,788.9
4,515.8
5,460.8
PAT
4,194.8
8,839.1
8,813.5
10,506.8
12,705.6
EBIT
Interest Expense
Minority Interest
216.4
482.7
381.1
453.9
548.9
Adjustment to PAT
(36.0)
(63.5)
3,942.4
8,292.9
8,432.4
10,052.9
12,156.7
APAT
Growth (%)
APAT Margin (%)
Share Capital
FY09
FY10
FY11
FY12E
FY13E
959.2
959.2
959.2
959.2
959.2
Reserves and Surplus
11,072.5
16,140.6
20,915.0
26,478.9
33,585.4
Total Networth
12,031.7
17,099.8
21,874.2
27,438.1
34,544.6
755.7
944.5
1,098.9
1,253.3
1,407.7
3,086.2
2,292.3
2,347.0
2,575.2
2,404.8
10,146.8
13,796.5
16,403.7
19,034.0
23,086.6
1,774.5
3,150.4
3,365.3
3,662.8
4,057.3
Minority Interest Res.

Total Debt
Current Liabilities
Provisions
Deferred Tax Liability
533.1
562.3
851.8
1,109.7
1,374.0
Total Liabilities
28,328.0
37,845.8
45,940.9
55,073.0
66,874.9
Gross Block
15,119.6
15,371.2
20,205.3
23,625.5
30,582.2
Acc.Depreciation
6,483.8
6,275.7
7,407.0
8,714.7
10,393.5
Net Block
8,635.8
9,095.5
12,798.3
14,910.8
20,188.7
CWIP
921.1
4,072.3
733.6
5,813.4
3,356.7
Investments
784.0
6,241.1
9,219.5
8,506.2
11,853.6
- Cash
2,103.7
1,058.3
1,330.4
1,194.4
1,262.4
- Inventory
7,689.5
9,558.8
13,054.3
12,927.7
18,299.7
- Debtors
5,719.2
5,425.2
5,855.3
8,497.5
7,929.2
- Loans and Advances
-4.1%
110.4%
1.7%
19.2%
20.9%
Total Current Assets
7.2%
12.4%
10.9%
10.9%
11.2%
Total Assets
Key Ratiomn)
Y/E March (INR mn)
Per Share Data (INR)
Reported EPS
Adj. EPS
Growth (%)
CEPS
DPS
BVPS
Return Ratios (%)
RoACE
RoANW
RoIC
Liquidity Ratios
Net Debt/Equity
Interest Coverage Ratio
Current Ratio
Quick Ratio
Efficiency Ratios
Asset Turnover Ratio
Inventory Days
Debtor Days
Payable Days
Valuation Ratios
P/E (x)
P/BV (x)
MCap/Net Sales (x)
P/CEPS (x)
Dividend Yield (%)
EV/Net Sales (x)
EV/EBIDTA (x)
Y/E March (INR mn)
2,469.2
2,392.5
2,947.5
3,223.0
3,984.6
17,987.1
18,436.9
23,189.5
25,842.6
31,475.8
28,328.0
37,845.8
45,940.9
55,073.0
66,874.9
Cash Flowmn)
FY09
FY10
FY11 FY12E
FY13E
Y/E March (INR mn)
FY09
FY10
6,168.7
12,570.2
Less: Other Incm/Excp.
252.0
1,054.3
826.3
1,232.2
1,388.4
Add: Depreciation
743.8
835.6
1,131.3
1,307.7
1,678.8
222.3
EBT
41.6
41.1
-4.1%
49.2
17.5
125.4
87.0
86.5
110.4%
95.8
27.0
178.3
87.9
87.9
1.7%
99.7
32.0
228.0
104.8
104.8
19.2%
118.4
40.0
286.1
126.7
126.7
20.9%
144.2
45.0
360.1
31.8%
36.1%
40.5%
52.3%
56.9%
69.5%
41.1%
43.3%
49.3%
39.4%
40.8%
46.0%
38.4%
39.2%
44.3%
0.1
22.6
1.5
0.7
0.1
40.2
1.1
0.4
0.0
54.0
1.2
0.4
0.1
55.2
1.1
0.4
0.0
73.2
1.2
0.3
Add: Interest Paid
263.2
284.7
Taxes Paid
(1,919.2)
(3,169.4)
Change in WC
(1,431.1)
445.7
4,019.1
Others
CFO (a)
Capital Expenditure
2.0
92.9
34.5
125.5
74.7
24.5
5.4
62.4
0.6%
5.5
44.6
2.0
80.3
30.4
108.3
35.5
17.2
4.4
32.0
0.9%
4.5
24.3
1.8
83.8
26.7
116.3
34.9
13.5
3.8
30.8
1.0%
3.9
22.8
1.8
92.2
28.4
123.2
29.3
10.7
3.2
25.9
1.3%
3.3
19.5
1.8
87.7
27.5
119.7
24.2
8.5
2.7
21.3
1.5%
2.8
16.0
FY12E
FY13E
12,602.4 15,022.6
FY11
18,166.4
254.3
232.4
(3,507.4) (4,257.9)
(5,196.5)
1,337.7
(1,873.4)
(160.8)
(1,512.6)
(224.5)
10,580.0
7,748.9 10,933.6
11,980.0
(1,490.8) (8,500.0)
(4,500.0)
(3,100.5)
(3,953.1)
Asset Sales
217.5
120.6
Change in Investment
(10.6)
(4,814.3)
(2,978.4)
713.3
(3,347.4)
751.2
1,232.3
1,388.4
(3,718.0) (6,554.4)
(6,459.0)
Others
193.1
340.2
CFI (b)
(2,700.5)
(8,306.6)
Change in Equity
(41.2)
(675.2)
54.7
228.2
(170.4)
(1,999.3)
(2,358.9)
(3,591.2) (4,489.0)
(5,050.2)
(263.2)
(284.7)
(2,303.7)
(3,318.8)
Change in Cash (a+b+c)
(985.1)
(1,045.4)
272.1
(136.0)
68.0
Opening Cash
3,088.8
2,103.7
1,058.3
1,330.4
1,194.4
Closing Cash
2,103.7
1,058.3
1,330.4
1,194.4
1,262.4
Debt Raised/(Repaid)
Dividend paid (inc. tax)
Interest Paid
CFF (c)
(222.3)
(254.3)
(232.4)
(3,758.8) (4,515.2)
(5,453.0)
12
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
June 15, 2011
Akzo Nobel India

CMP: INR 907
Recommendation: Buy
Target: INR 1,157
Paint Industry
Akzo Nobel India (Akzo) known for its premium segment product Dulux has a market share of ~910%. Company's business can be broadly divided into decorative paints and refinish auto paints
where later contributes ~15% to its revenues. Erstwhile ICI, the companies name was changed to
Akzo Nobel in FY10 after it was acquired by largest paint company in the world in 2008.
Plans to fill the product gap; bid to renew market share
Akzo Nobel India (formerly ICI India) is known for its strong
brand Dulux in premium market segment and ICI in economy
market segment. Due to lack of product offerings for mid-market
and lower-market segment, company has been continuously
losing market share to competition. However, with the complete
revamp of top management team in last two years, company
is expecting to aggressively launch new products in mid market
segment to fill the product gaps and renew efforts to gain market
share. We believe that company would record revenue CAGR
of 20.5% in next two years on back of new product launches
and increased sales & marketing efforts.
EBIDTA margins to expand

Going ahead, we expect Akzo to benefit from higher operating
leverage on back of expanding revenue base. Therefore we
believe that company's EBIDTA margins to improve by 140bps
from 12.2% in FY11 to 13.6% in FY13. On the back of
improvement in margins and higher revenue growth, we expect
Akzo's operating PAT to grow at a two year CAGR of 29.8% to
INR 1244.0mn in FY13.
Strong balance sheet with investments of INR 10bn

As per FY2011 balance sheet, Akzo's cash and liquid
investments stood close to ~INR10.2bn transforming into INR
275.6 per share (30% of market capitalisation). Going ahead,
we expect the cash and liquid investments surplus to increase
to INR 10.8bn (INR 294.4 per share) in FY2013, despite
accounting for a capex of INR 2.2bn over next two years, driven
by strong operating cash flows, high treasury income and
improvement in margins.
Refinish paint business to ride the growth of auto

ownership
Refinish paint business which caters to refinish paint for
automotives contributes ~15% to Akzo's overall revenues.
Company has enhanced its focus to cater this business segment.
With increasing ownership of automotives and tough road
travelling conditions, we expect good demand for refinish paints.
Therefore, we expect the business to perform well going forward.
Renewed focus to grow

Company is backed by the parent company Akzo Nobel,
Netherlands which has consistently ranked as world's largest
paint company. Backed by the renewed efforts from parent
company with its bigger plans for Indian market, Akzo Nobel
management has guided to become Euro 1bn entity by 2015.
To achieve the target company is undergoing massive capacity
expansion plans. It plans to double its capacity from current
~80,000 MT to ~160,000 MT by FY13.
Valuations
Expect re-rating of valuation multiple: At CMP of INR 910,
Akzo is trading at a PEG of 0.6 compared to 1.2, 1.2 and 0.7 for
Asian Paints, Kansai Nerolac and Berger Paints respectively.
We expect company to trade atleast on a PEG of 0.85 (avg
growth of 29.8% in next two years), which is 30% discount to
market leader Asian Paints. We believe the valuations are justified
on back of higher growth in revenue and profits, improved margins
and return on networth, and lowest capital employed amongst
peers. This implies 25.4x FY13 EPS of INR 33.8 translating
into target price of INR 1,157 (25.4x FY13 core EPS + 300/
share from Investment surplus) giving an upside of 28%. We
initiate the coverage with BUY.
Y/E Mar (INR mn)
Mar-11
Key Data
56.40
56.40
BSE Code
500710
FIIs
1.17
1.24
NSE Code
AKZOINDIA
DIIS
19.60
18.30
Bloomberg Code
Others
22.83
23.98
Reuters Code
Promoters
ICI.BO

AKZO IN
Face Value
36.8
10
Mcap (INR bn)
33.4
Net Sales
52 Week H/L
970/616
2W Avg. Qty, BSE
7,689
Apr-11
Sensex
Sumit Duseja
Ph.No. +91-22-4289 5600 Ext. 630
Executive
Summary
Industry
Description
Asian
Paints
FY12E
FY13E
9,471.0
10,968.2
-3.6%
4.2%
15.8%
22.7%
18.4%
EBIDTAM (%)
12.9%
13.4%
12.2%
12.7%
13.6%
Adj. PAT
951.0
1,593.0
1,664.1
1,968.4
2,263.5
Growth (%)
20.5%
67.5%
4.5%
18.3%
15.0%
611.0
692.3
737.9
968.6
1,244.0
Growth (%)
9.2%
13.3%
6.6%
31.3%
28.4%
Optng. PATM (%)
6.7%
7.3%
6.7%
7.2%
7.8%
Adj. EPS (INR)
25.0
43.2
45.2
53.4
61.5
Operational EPS
16.0
18.8
20.0
26.3
33.8
Operating PAT
Dividend Yield (%)

P/E (x)
EV/EBIDTA
Net Debt/Equity
May-11
Mar-11
Jan-11
Feb-11
Dec-10
Oct-10
Nov-10
Sep-10
Jul-10
Aug-10
Jun-10
Akzo
18,132.2
FY11
9,087.0
P/BV (x)
Sensex
FY10
Growth (%)
DPS
150
140
130
120
110
100
90
80
FY09
13,456.8 15,928.3
16.0
16.0
18.0
18.0
20.0
1.8%
1.8%
2.0%
2.0%
2.2%
36.3
21.0
20.1
17.0
14.8
3.6
3.4
3.1
2.8
2.5
21.8
18.8
17.5
13.2
10.5
(1.0)
(1.0)
(0.9)
(0.9)
(0.8)
RoACE (%)
15.5%
15.7%
14.0%
16.9%
17.5%
RoANW (%)
11.0%
16.2%
16.0%
17.1%
17.7%
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
14
Net Sales Trend
1) Plans to fill the product gap: bid to renew market share

Akzo Nobel (formerly ICI) is known for its strong brand Dulux
in premium market segment and ICI in economy market
segment. Company has highest average realization per litre
of ~INR 157 compared to INR 110, INR 105 and INR 85 for
Kansai Nerolac, Asian Paints and Berger respectively
(Chart).
Avg. Realization FY11 (INR/Lt)
180
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
157
15.8%
110
105
100
20%
15%
10%
4.7%
4.2%
5%
-3.6%
0%
-5%
FY09
FY10
Net Sales (INR mn)
140
120
FY11
FY12E FY13E
Grow th (RHS)
We believe that company would maintain a CAGR of 20.5% in

next two years on back of new product launches and increased
sales & marketing efforts.
80
80
60
40
2) EBIDTA margins to expand
20
0
Berger
Asian Paints
Kansai
Akzo Nobel
Due to lack of product offerings for mid-market and lower-market

segment, company has been continuously losing market share
to competition. Akzo's market share fell to ~9% in FY11
compared to ~16% in FY04 (Chart).
Akzo's gross margins is highest compared to its peers due

to its presence largely in premium paints. However, despite
this, Akzo's OPM has been ~600bps lower vis--vis Asian
Paints owing to significantly higher overheads, particularly
A&P spends (~at 9% of revenue compared to ~3.5-4.5%
for its peers), due to lower revenue base.
Margins Comparison (FY11)
50%
Akzo Nobel (ICI) Market Share Trend
47.4%
42.3%
40%
18%
16%
14%
12%
18.4%
FY08
160
25%
22.7%
30%
16.6% 16.3% 16.1%

14.0%
10%
18.1%
20%
12.2%
12.8%
10%
10.9%
8%
9.5%
6%
4%
9.1%
0%
Gross Profit Margins
Akzo Nobel
2%
EBIDTA Margins
Asian Paints
0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
However, with the complete revamp of top management team in

last two years, company is expecting to aggressively launch
new products in mid market segment to fill the product gaps
and renew efforts to gain market share. Company reported a
much improved YoY growth of 15.9% in FY11 after flattish growth
in FY08 to FY10.
Executive
Summary
Industry
Description
Asian
Paints
Going ahead, we expect Akzo to benefit from higher operating

leverage as overheads get spread over a larger revenue base.
Therefore we believe that company's EBIDTA margins to improve
by 140bps from 12.2% in FY11 to 13.6% in FY13.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
15
Investment & Cash Surplus/Share
Margin Trend
350
60%
49.0%
47.3%
43.9%
50%
46.8%
47.2%
300
250
40%
244.3
205.4
200
30%
264.6
275.6
FY10
FY11
299.9
294.4
FY12E
FY13E
184.8
150
12.9%
20%
13.4%
12.7%
12.2%
13.6%
10%
100
50
0%
0
FY09
FY10
FY11
Gross Margins
FY12E
FY13E
FY07
FY08
FY09
EBIDTA Margins
On the back of improvement in margins and higher revenue

growth, we expect Akzo's operating PAT to grow at a two year
CAGR of 29.8% to INR 1244.0mn in FY13.
Operational PAT Trend
31.3%
1400
28.4%
1200
1000
13.3%
800
9.2%
600
400
200
6.6%
-2.2%
0
FY08
FY09
FY10
FY11
Operational PAT
35%
30%
25%
20%
15%
10%
5%
0%
-5%
FY12E FY13E
4) Refinish paint business to ride the growth of auto ownership

Refinish paint business which caters to refinish paint for
automotives contributes ~15% to Akzo's overall revenues.
Company has enhanced its focus to cater this business
segment and is focusing to revamp the brand strategy for
'Eterna' with clear market segmentation. The business
continued its focus on demand generation through
programmes like "The Great Finishers Club", colour
workshops and training in colour matching skills for painters.
Total Vehicles Ownership (mn)
350
300
250
Grow th (%)
102.4
125.2
100
3) Strong balance sheet with liquid investments of INR 10bn
50
Over the years, the company had divested several of its

businesses accumulating significant cash surplus on its
balance sheet. Hence, as per FY2011 balance sheet, Akzo's
cash and liquid investments stood close to ~INR10.2bn
transforming into INR 275.6 per share (30% of market
capitalisation). Going ahead, we expect the cash and liquid
investments surplus to increase to INR 10.8bn (INR 294.4
per share) in FY2013, despite accounting for a capex of INR
2.2bn over next two years, driven by strong operating cash
flows, high treasury income and improvement in margins.
Executive
Summary
168.4
200
150
16
372.2
400
Industry
Description
Asian
Paints
2001
2003
2006
2013E
With increasing ownership of automotives and tough road

travelling conditions, we expect good demand for refinish paints.
Therefore, we expect the business to perform well going forward.
5) Renewed focus to grow
Renewed focus to grow: Company is backed by the parent
company Akzo Nobel, Netherlands which has consistently
ranked as world's largest paint company for many years
and has strong global brands. Backed by the renewed
efforts from parent company with its strong plans for Indian
market, Akzo Nobel management has guided to become
Euro 1bn entity by 2015. Currently it's trading at MCap of
2.9x Net Sales. Assuming it maintains the same MCap to
Net Sales ratio in FY15, company needs to grow its revenue
at a CAGR of ~20% for next four years.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Doubling Capacity: To achieve the target company is

undergoing massive capacity expansion plans. It plans to
double its capacity from current ~80,000 MT to ~160,000
MT by FY13. It is quadrupling the capacity of its Hyderabad
plant to 40,000 MT per annum. The additional capacity is
slated to be available by Q2FY12 in this facility. Akzo plans
to set up a green-field manufacturing facility in Madhya
Pradesh or Karnataka with capacity between 0.05-0.1mn
MT at an investment of up to INR 2.5bn, to be commissioned
by FY13.
Capacity & Utilization
200000
89.5%
90.0%
100%
85.4%
76.5%
72.8%
ity
ac
ap
C
g
lin
ub
Do
150000
100000
58.0%
80%
60%
40%
50000
20%
2) Inability to successfully launch new product categories

Company's attempt to regain the market share by launching
mid-segment products would be failed if it's unable to launch
and market the products at the right price points and increase
its distribution reach to Tier II and Tier III cities with higher
growth rates.
Financial Overview
Net Sales Trend
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
22.7%
15.8%
10%
4.7%
4.2%
FY09
FY10
FY11
Capacity (MT)
FY12
0%
-5%
FY09
FY10
FY11
Net Sales (INR mn)
FY13
Utilization (RHS)
5%
-3.6%
0%
FY08
FY12E FY13E
Grow th (RHS)
Operational PAT Trend

31.3%
1400
28.4%
1200
Investment Risk
1000
13.3%
800
1) High raw material cost inflation
9.2%
600
Higher than expected increase in raw material cost inflation

along with inability to pass the same could pose a downside
risk to our profit projections. Akzo is at higher risk from
increase in prices of titanium dioxide compared to its peers.
This is because TiO2 has highest percentage of ~19% in
raw material cost (compared to ~14%-17% for others)
RM breakup (FY10)
400
200
6.6%
-2.2%
0
FY08
FY09
FY10
FY11
Operational PAT
35%
30%
25%
20%
15%
10%
5%
0%
-5%
FY12E FY13E
Grow th (%)
Margin Trend
60%
Pigments, Tinters, Extenders
16%
20%
15%
FY08
0
25%
18.4%
Latex, Monomers
16%
50%
49.0%
47.3%
46.8%
47.2%
13.4%
12.2%
12.7%
13.6%
43.9%
40%
30%
19%
17%
Resins
20%
Solvents
16%
12.9%
10%
16%
0%
Titanium Dioxide
6.7%
7.3%
FY09
FY10
Gross Margins
Others
6.7%
7.8%
7.2%
FY11
FY12E
EBIDTA Margins
FY13E
Operational PAT Margins

Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
17
Company Brief
Return profile
20%
16.2%
15.8%
15%
15.5%
15.7%
17.1%
17.7%
16.9%
17.5%
FY12E
FY13E
Akzo Nobel known for its premium segment product Dulux

has a market share of ~9-10%. Company's business can be
divided into decorative paints and refinish auto paints in the
ratio of 85:15. Erstwhile ICI, the companies name was changed
to Akzo Nobel in FY10 after it was acquired by largest paint
company in the world in 2008. Akzo has three manufacturing
facilities in Hyderabad (AP), Thane (Maharashtra) and Mohali
(Punjab). Company is planning to launch new products to cater
fast growing mid-market segment to regain its market share.
14.0%
10%
11.0%
5%
0%
FY09
FY10
RoACE
FY11
RoANW
Valuations
Expect re-rating of valuation multiple: At CMP of INR 910,
Akzo is trading at a PEG of 0.6 compared to 1.2, 1.2 and 0.7
for Asian Paints, Kansai Nerolac and Berger Paints respectively.
We expect company to trade atleast on a PEG of 0.85 (avg
growth of 29.8% in next two years), which is 30% discount to
market leader Asian Paints. We believe the valuations are
justified on back of higher growth in revenue and profits,
improved margins and return on networth, and lowest capital
employed amongst peers. This implies 25.4x FY13 EPS of
INR 33.8 translating into target price of INR 1,157 (25.4x FY13
core EPS + 300/share from Investment surplus) giving an upside
of 28%.We initiate the coverage with BUY.
Companies
CMP
(INR)
PAT Gr
FY12E
PAT Gr
FY13E
EPS (INR)
FY12
EPS (INR)
FY13
P/E (x)
FY12
P/E (x)
FY13
PEG (x)
Asian Paints
3,070
19.2%
20.9%
104.8
126.7
29.3
24.2
1.2
Kansai Nerolac
875
11.4%
19.4%
38.8
46.3
22.6
18.9
1.2
Berger Paints
103
21.4%
24.6%
5.1
6.4
20.2
16.1
0.7
Akzo Nobel
907
31.3%
28.4%
26.3
33.8
24.0
18.0
0.6
18
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Financials
Profit & Loss
Y/E March (INR mn)
Balance Sheetmn)
FY09
FY10
FY11
FY12E
FY13E
9,087.0
9,471.0
10,968.2
13,456.8
15,928.3
-3.6%
4.2%
15.8%
22.7%
18.4%
Cost of Goods Sold
5,099.0
4,826.0
5,775.3
7,161.5
8,415.3
Gross Profit
3,988.0
4,645.0
5,192.9
6,295.2
7,513.0
43.9%
49.0%
47.3%
46.8%
47.2%
Employee Cost
446.0
608.0
696.6
798.3
918.0
Net Sales
Growth (%)
Other Operating Exp
2,384.0
2,776.0
3,165.8
3,800.2
4,442.5
EBIDTA
1,158.0
1,261.0
1,330.5
1,696.7
2,152.5
EBIDTA Margin (%)
12.9%
13.4%
12.2%
12.7%
13.6%
Dep./Amortization
213.0
212.0
216.6
244.5
294.3
EBIT
945.0
1,049.0
1,113.9
1,452.2
1,858.2
29.0
11.0
7.6
17.2
15.3
876.0
962.0
967.8
1,113.0
1,105.5
Interest Expense
Other Income
Exceptionals
1,995.0
112.8
EBT
3,787.0
2,000.0
2,186.9
2,548.1
2,948.4
841.0
407.0
432.6
579.6
684.9
2,946.0
1,593.0
1,754.3
1,968.4
2,263.5
(1,995.0)
(112.8)
Tax Expenses
PAT
Adjustment to PAT
APAT
Y/E March (INR mn)
FY09
Share Capital
381.0
FY10
FY11 FY12E
368.0
368.0
368.0
FY13E
368.0
9,330.0
9,553.0 10,548.2 11,740.9 13,142.5
Total Networth
9,711.0
9,921.0 10,916.5 12,108.9 13,510.5
Total Debt
Current Liabilities
2,019.0
2,236.0 2,744.9 3,509.7 3,807.9
Provisions
1,537.0
1,552.0 1,696.8 1,528.0 1,228.0
Deferred Tax Liability (Net)
58.0
Total Liabilities
21.0
41.0
64.6
92.6
13,325.0 13,730.0 15,399.2 17,211.3 18,639.0
Gross Block
3,255.0
Acc. Depreciation
1,924.0
2,114.0 2,330.6 2,575.1 2,869.4
Net Block
1,331.0
1,381.0 1,394.4 1,849.9 2,515.6
CWIP
Investments
- Cash
- Inventory
3,495.0 3,725.0 4,425.0 5,385.0
16.0
23.0
9,152.0
9,602.0
147.0
143.0
1,008.0
169.1
300.0
240.0
9,849.9 10,900.4 10,696.2

303.1
147.4
147.6
972.0 1,531.8 1,489.9 2,106.3
951.0
1,593.0
1,641.5
1,968.4
2,263.5
Growth (%)
20.5%
67.5%
3.0%
19.9%
15.0%
- Debtors
757.0
808.0
APAT Margin (%)
10.5%
16.8%
15.0%
14.6%
14.2%
914.0
801.0 1,449.5 1,385.0 1,893.9
2,826.0
2,724.0 3,985.8 4,161.0 5,187.2
Operating PAT
611.0
692.3
737.9
968.6
1,244.0
Growth (%)
9.2%
13.3%
6.6%
31.3%
28.4%
Operating PAT Margin (%)
6.7%
7.3%
6.7%
7.2%
7.8%
Key Ratiomn)
Y/E March (INR mn)
Reported EPS
Adj. EPS
Growth (%)
Operational EPS
Growth (%)
CEPS
DPS
BVPS
Return Ratios (%)
RoACE
RoANW
RoIC
Liquidity Ratios
Net Debt/Equity
Current Ratio
Quick Ratio
Efficiency Ratios
Inventory Days
Debtor Days
Payable Days
Valuation Ratios
P/E (x)
P/BV (x)
MCap/Net Sales (x)
P/CEPS (x)
Dividend Yield (%)
EV/Net Sales (x)
EV/EBIDTA (x)
Executive
Summary

Total Assets
701.4 1,138.5 1,039.3
13,325.0 13,730.0 15,399.2 17,211.3 18,639.0
Cash Flowmn)
FY09
FY10
FY11 FY12E
FY13E
Y/E March (INR mn)
FY09
FY10
FY11
FY12E
FY13E
1,792.0
2,000.0
2,186.9
2,548.1
2,948.4
Less: Other Incm/Excp
965.0
959.0
1,080.6
1,113.0
1,105.5
Add: Depreciation
213.0
212.0
216.6
244.5
294.3
Add: Interest Paid
29.0
11.0
7.6
17.2
15.3
Taxes Paid
(858.0)
(456.0)
(412.6)
(556.0)
(657.0)
Change in WC
(210.0)
160.0
(592.8)
434.0
(727.9)
19.0
140.0
EBT
77.0
25.0
21.5%
16.0
9.2%
305.8
16.0
255.1
42.6
43.2
73.1%
18.8
13.3%
490.0
16.0
269.3
47.6
45.2
4.5%
20.0
6.6%
510.6
18.0
296.4
53.4
53.4
18.3%
26.3
31.3%
600.8
18.0
328.7
61.5
61.5
15.0%
33.8
28.4%
694.4
20.0
366.8
Others
15.5%
11.0%
38.6%
15.7%
16.2%
16.4%
14.0%
16.0%
17.7%
16.9%
17.1%
18.0%
17.5%
17.7%
18.7%
(1.0)
32.6
0.8
0.3
(1.0)
95.4
0.7
0.3
(0.9)
146.6
0.9
0.2
(0.9)
84.4
0.8
0.3
(0.8)
121.4
1.0
0.2
0.7
80.4
36.5
167.5
0.7
74.9
30.4
160.9
0.7
79.1
25.3
157.4
0.8
77.0
25.2
159.4
0.8
78.0
25.2
158.7
36.3
3.6
3.8
3.0
1.8%
2.8
21.8
21.0
3.4
3.6
1.9
1.8%
2.5
18.8
20.1
3.1
3.1
1.8
2.0%
2.1
17.5
17.0
2.8
2.5
1.5
2.0%
1.7
13.2
14.8
2.5
2.1
1.3
2.2%
1.4
10.5
CFO (a)
20.0
1,108.0
325.1
1,574.7
767.6
Capital Expenditure
(297.0)
(271.0)
(376.1)
(1,000.0)
(1,200.0)
Asset Sales
2,272.0
(7.0)
112.8
908.0
823.0
46.2
Others
(54.0)
210.0
1,080.6
1,113.0
1,105.5
CFI (b)
2,829.0
755.0
863.5
113.0
(94.5)
Change in Equity
(154.0)
(696.0)
(356.0)
(710.0)
(771.0)
(775.7)
(861.9)
(29.0)
(11.0)
(7.6)
(17.2)
(15.3)
CFF (c)
(539.0)
(1,417.0)
(778.6)
(792.9)
(877.2)
2,310.0
446.0
410.0
894.9
(204.1)
Opening Cash
6,987.0
9,297.0
9,743.0
10,153.0
11,047.9
Closing Cash
9,297.0
9,743.0
10,153.0
11,047.9
10,843.8

Interest Paid
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
19
June 15, 2011
Kansai Nerolac Paints

CMP: INR 875
Recommendation: HOLD
Target: INR 926
Paint Industry
Kansai Nerolac Paints (KNP), formerly known as Goodlass Nerolac became a wholly-owned
subsidiary of Kansai Paint Company (Japan) after it took over the entire stake of the company in
1999 and changed its name in 2006. The company has presence in both decorative and industrial
paints segment which contributes equally to its revenues. In India, it is third largest player in
decorative segment and largest player in Industrial paints segment with a market share of ~14% and
~42% respectively. It has the dominant share in auto paint segment of ~60%.
Dominant player in Industrial Paint Segment
KNP is the dominant player in industrial paints segment with
market share of more than 40% and contributes ~50% to its
overall revenue. It is a leader in automotive paints and powder
coatings with a market share of ~60% and ~27% respectively.
KNP has a strong technological backup from its parent company
Kansai (Japan) which is the largest paint company in Japan and
has been featured in top 10 paints companies in the world.
Growth momentum to moderate in FY12

KNP has registered robust revenue growth on the back of strong
demand for automotives, consumer durables and infrastructure
development. In line with expected slowdown in auto segment
and other industrial segments in the current year, we expect
KNP revenue growth to slow down to 20.3% in FY12 from 25.3%
in FY11 on back of lower volume growth.
Focus towards increasing decorative paints

contribution
Company has plans to increase sales in decorative segment
by launching aggressive nationwide campaign and increasing
distribution reach. KNP recently roped in Shahrukh Khan to
promote its product in decorative segment. Kansai has plans
to open 30 new exclusive Nerolac brand stores in South.
Promoters
Mar-11
Increasing capacity on higher demand

anticipation
In order to fulfill higher demand for paints both in industrial and
decorative segments, company plans to add ~0.1mn MT of
capacity to its current capacity of ~0.2mn MT/annum. In order
to increase the capacity company is setting up a greenfield
plant in Hosur (TN) at an estimated capex of ~INR 6bn. The
plant is expected to be fully commissioned by FY13.
Valuations
Kansai Nerolac is expected to maintain its dominant share in
industrial paints segment and benefit from strong growth of
automotive and consumer durables industry. Also, with
company's focus to increase contribution from decorative paint
segment will reduce RM cost pressure due to better ability to
pass cost through price increases. We expect KNP to grow at
revenue CAGR of 19.3% in the next two years. On back of
long term growth in industrial segment and dominant position
of KNP in industrial paints, we value the stock at 20x FY13E.
This works out to be a 1 year target price of INR 926 with an
upside of 6% from CMP of INR 875. We therefore, initiate the
coverage with a Hold rating.
Key Data
Y/E Mar (INR mn)

Net Sales
69.27
69.27
BSE Code
500165
FIIs
6.05
5.92
NSE Code
KANSAINER
DIIS
5.07
4.97
Bloomberg Code
19.61
19.84
Others
Reuters Code
KANE.BO

KNPL IN
Face Value
53.9
10
47.2
52 Week H/L
110
1,055/720
2W Avg. Qty, BSE
100
Sensex
90
1,207
18,132.2
Apr-11
May-11
Mar-11
Jan-11
Feb-11
Dec-10
Oct-10
Nov-10
Sep-10
Jul-10
Aug-10
Jun-10
80
KNP
FY09
FY11
21,398.8
Growth (%)
4.2%
24.1%
25.3%
FY12E
FY13E
25,753.2 30,519.8
20.3%
18.5%
EBIDTAM (%)
11.5%
15.5%
13.6%
13.2%
13.9%
Adj. PAT
954.3
1,621.2
1,853.0
2,090.0
2,504.3
Growth (%)
-20.3%
69.9%
14.3%
12.8%
19.8%
Adj. PATM (%)
6.9%
9.5%
8.7%
8.1%
8.2%
Adj. EPS (INR)
17.7
30.1
34.4
38.8
46.5
DPS
Mcap (INR bn)

130
120
FY10
13,756.3 17,074.1
Dividend Yield (%)

P/E (x)
P/BV (x)
6.0
7.5
10.0
10.0
12.0
0.7%
0.9%
1.1%
1.1%
1.4%
49.4
29.1
25.4
22.6
18.8
7.2
6.1
5.1
4.4
3.8
EV/EBIDTA
30.3
18.2
16.5
14.1
11.4
Net Debt/Equity
(0.4)
(0.4)
(0.4)
(0.2)
(0.2)
RoACE (%)
13.5%
20.0%
20.0%
19.5%
20.2%
RoANW (%)
15.3%
22.7%
21.9%
21.1%
21.8%
Sensex
Sumit Duseja
Ph.No. +91-22-4289 5600 Ext. 630
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
21
Segmentwise Revenue Breakup - Kansai Japan (FY09)
1) Dominant player in Industrial Paint Segment

KNP is the dominant player in industrial paints segment
with market share of more than 40% and contributes ~50%
to its overall revenue. It caters mainly to automotive
(automotive coatings) and consumer durables (powder
coatings) industry and also has presence in general
industrial coatings and high performance coatings.
9%
Automotive Coatings
7%
Industrial Coatings
45%
17%
Decorative Coatings
Marine and Protective Coatings
Others
22%
Industrial paints market share

KNP has a strong technological backup from its parent

company Kansai (Japan), the largest paint company in
Japan and has featured in top 10 paint companies in the
world since many years. It provides automotive paints to
major global auto companies in the likes of Suzuki, Toyota
and Honda. Automotive segment contributed ~45% to its
overall FY09 sales of USD 2.5bn.
Kansai Nerolac
24%
Berger Paints
42%
Asian Paints
5%
13%
Shalimar Paints
16%
Others
It is a leader in automotive paints and powder coatings with

a market share of ~60% and ~27% respectively. The list of
clients in automotive segment includes major auto players
like Maruti Suzuki, Toyota, Tata Motors, Mahindra and
Mahindra, Hero Honda and Bajaj Auto to name a few.
Auto Paints Market Share
2) Growth momentum to moderate in FY12

KNP has registered robust revenue growth on the back of
strong demand for automotives, consumer durables and
infrastructure development. Automotive segment has
witnessed a robust 2 year CAGR of 29.2% and 22.5% in 2
wheeler segments and passenger cars respectively (Chart).
Consumer durables industry has also grown at a CAGR of
22.7% in last 2 years (Source: CSO).
Passenger Cars Sales
25.0% 30%
300000
250000 20.5%
200000
25%
20.1%
19.1%
20%
15.6%
13.5%
15%
150000
24%
65%
35%
60%
6.9%
6.1%
100000
10%
5%
50000
7%
9%
0%
0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Other Industrial Paints
Kansai Nerolac
Asian Paints
Berger
Passenger Cars Volume
Grow th (RHS)
Others
2 Wheeler Sales
1400000
Backup of strong parent: KNP has a strong technological

backup from its parent company Kansai (Japan), the largest
paint company in Japan and has featured in top 10 paint
companies in the world since many years. It provides
automotive paints to major global auto companies in the likes
of Suzuki, Toyota and Honda. Automotive segment contributed
~45% to its overall FY09 sales of USD 2.5bn.
50%
40.6%
1200000 33.4%
40%
1000000
18.7% 30%
20%
16.1%18.2%
800000
600000
-1.2%
400000
3.0% 2.5%
10%
0%
200000
0
-10%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
2 Wheeler Volumes
Grow th (RHS)
22
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Based on estimates of SIAM, four wheeler segment is

expected to grow at ~16% and 2 Wheeler segment at ~12%
in volume terms in FY12 after reporting more than 20%
volume CAGR in last two years. In line with expected
slowdown in auto segment and other industrial segments
in the current year, we expect KNP revenue growth to slow
down to 20.3% in FY12 from 25.3% in FY11 on back of
lower volume growth. Further we expect volume growth to
pick up in FY13 but lower value growth component to result
revenue to grow at 18.5% in FY13 to INR 30,519.8mn.
Kansai (India) Revenue Breakup
25%
50%
35000
Industrial Paints
Emulsions
Enamles
Distempers
Others (primers, putty, fillers etc)
24.1%
20.3%
18.3%
25000
25%
20%
20000
15%
15000
10%
4.2%
5%
5000
0%
0
FY09
31%
30%
25.3%
30000
10000
50%
32%
Net Sales Trend
12%
FY10
FY11
FY12E
Net Sales (INR mn)
FY13E
Grow th (RHS)
3) Focus towards increasing Decorative Paints

contribution
Decorative segment has short cycle of payment which reduces

working capital needs and ability to pass higher raw material
cost inflation compared to industrial paints segment. Company
was able to pass 80% of raw material cost increases in
decorative segment while passing the cost increase in industrial
segment comes with a lag due to long term contracts with
institutions. Also, in industrial paints segment there is continuous
pressure from the companies to reduce cost of paints. Company
has plans to increase sales in decorative segment by launching
aggressive nationwide campaign and increasing distribution
reach. KNP recently roped in Shahrukh Khan to promote its
product in decorative segment.
Enamels
Impressions, Satin, Synthetic
Increasing reach: Traditionally it has higher presence in north

markets which contributes 26% to overall decorative paint
industry sales. Company however has aggressive plans to
increase its presence in south markets and increase its share
from decorative segment in its overall revenue. Kansai has
planned to open 30 new exclusive Nerolac brand stores in south
to increase awareness of products. It also setting up its
manufacturing facility is Hosur, Tamil Nadu to improve its
distribution reach in the south markets.
Distempers
Beauty, Pearls
4) Increasing capacity on higher demand anticipation
KNP has a market share of ~14% in decorative paints

segment and contributes another 50% to its overall revenue.
KNP offers products across all categories through some
renowned brands like Nerolac Impressions, Pearls, Beauty,
Suraksha and Excel (Chart).
Product Category
Brands
Interior Emulsions
Impression, Beauty
Exterior Emulsion
Suraksha, Excel
In decorative paint segment, emulsions contribute around 32%,

Enamels 25% and distemper 12%. Remaining is contributed
by primers, putty, fillers etc. Similar for the industry, emulsions
are growing at faster rate and have higher margins compared
to other paints.
Executive
Summary
Industry
Description
Asian
Paints
KNP is the second largest player in India and has an overall

market share of ~18% in the paint industry. In order to fulfill
higher demand for paints both in industrial and decorative
segments, company plans to add ~0.1mn MT of capacity
to its current capacity of ~0.2mn MT/annum. In order to
increase the capacity company is setting up a greenfield
plant in Hosur (TN) at an estimated capex of ~INR 6bn. The
plant is expected to be fully commissioned by FY13.
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
23
Capacity & Utilization

350000
300000
69.4%
78.4%
87.2%
84.8%
86.3%
clients which affect its margins. In decorative paints

segment, company was able to pass 80% of cost inflation
in FY11. Increase in cost of key raw material like titanium
dioxide and crude based derivatives by ~29% and ~40%
in FY11 resulted in gross profit margins falling by 267 bps
from 37.2% to 34.6%. Company however is intending to
take calibrated price hike in contracts in industrial segment.
100%
69.0%
80%
250000
200000
60%
150000
40%
100000
20%
50000
0
2) Rising competition
0%
FY08
FY09
FY10
FY11
Capacity
FY12
Utilization (RHS)
Financial Overview
Investment Concerns
1) Rising raw material cost
KNP is at higher margin erosion risk compared to other
players in the industry in the environment of high raw material
cost inflation. Company has highest raw material as a %
net sales among the paint companies under our coverage.
Raw material as a % of sales (FY11)
63.7%
70%
60%
Company's revenue has grown at a 2 year CAGR of 24.7% to

INR 21,398.8mn in FY11. Going forward, with expected slowdown
in automotive industry on back of rising fuel prices and interest
rate cost along with some slowdown in other industrial segment,
we expect company to witness a moderate growth in revenues
compared to last two years. We expect its revenue and profit
to grow at a 2 year CAGR of 19.4% and 16.3% in next two
years to INR 30,519.8mn and INR 2,504.3mn respectively.
Net Sales Trend
65.4%
57.7%
52.7%
With increasing competitive environment in the paint

industry, KNP like all other players is at risk of losing market
share to other competitors.
FY13
35000
24.1%
50%
25000
40%
20000
30%
25.3%
30000
20.3%
18.3%
20%
15%
15000
30%
10000
20%
10%
4.2%
5%
5000
10%
0%
0%
FY09
Akzo Nobel
Asian Paints
Berger
Kansai
Nerolac
FY10
FY11
Net Sales (INR mn)
RM breakup (FY10)
APAT Trend
3000
FY12E
FY13E
Grow th (RHS)
69.7%
80%
2500
60%
2000
7%
Pigments, Extenders and Resins

Organic Acids and Anhydrides
34%
53%
6%
Solvents, Oils and Fatty Acids
15.4%
1500
1000
11.4%
19.4%
40%
20%
0%
-20.0%
500
Others
25%
-20%
-40%
FY09
FY10
FY11
FY12E
APAT (INR mn)
FY13E
Grow th (RHS)
Due to 50% contribution from industrial paints segment and

long term nature of contracts, company is not able to
immediately pass the raw material cost to its institutional
24
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Due to continued pressure on raw material cost, we expect

company's EBIDTA margins to shrink by 38bps YoY in FY12,
cushioned partly by passing on raw material cost inflation but
regain 63bps in FY13 on back of expected improvement in
economic environment.
Margin Trend
40%
35%
30%
25%
20%
15%
10%
5%
0%
34.6%
37.2%
34.6%
34.0%
34.4%
13.6%
13.2%
13.9%
9.5%
8.8%
8.1%
8.2%
FY10
FY11
FY12E
FY13E
15.5%
11.5%
7.0%
FY09
Gross Margins
EBIDTA Margins
KNP has been able to maintain good return profile of more

than 20% in last two years. We expect company to continue
to maintain more than 20% return on average networth
(RoANW) in next 2 years.
Return Profile
22.8%
22.2%
20.0%
FY10
21.1%
21.7%
20.0%
19.5%
20.1%
FY11
FY12E
FY13E
20%
15.4%
15%
10%
13.5%
5%
FY09
RoACE
Executive
Summary
Industry
Description
Kansai Nerolac is expected to maintain its dominant share in

industrial paints segment and benefit from strong growth of
automotive and consumer durables industry. Also, with
company's focus to increase contribution from decorative paint
segment will reduce RM cost pressure due to better ability to
pass cost through price increases. We expect KNP to grow at
revenue CAGR of 19.3% in the next two years. On back of
long term growth in industrial segment and dominant position
of KNP in industrial paints, we value the stock at 20x FY13E.
This works out to be a 1 year target price of INR 926 with an
upside of 6% from CMP of INR 875. We therefore, initiate the
coverage with a Hold rating.
1200
1000
25
800
20
600
15
400
10
APAT

25%
Valuations
200
0
04Apr07 04Apr08 04Apr09 04Apr10 04Apr11
Company Brief
Kansai Nerolac Paints was formerly known as Goodlass
Nerolac Paints. Goodlass Nerolac Paints became a whollyowned subsidiary of Kansai Paint Company (Japan) after the
latter took over the entire stake of the company in 1999 and
changed its name in 2006. It has current shareholding of 70%
in the company.
The company has presence in both decorative and industrial
paints segment which contributes equally to its revenues. In
India, it is third largest player in decorative segment and largest
player in Industrial paints segment with a market share of ~14%
and ~42% respectively. Company has overall market share of
~18% in paint industry. It has five strategically-located
manufacturing units in India and a strong dealer network of
over 11,000 dealers across the country.
RoANW
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
25
Financials
Profit & Lossn)
Y/E March (INR mn)
Balance Sheetmn)
FY09
FY10
FY11
FY12E
FY13E
13,756.3
17,074.1
21,398.8
25,753.2
30,519.8
4.2%
24.1%
25.3%
20.3%
18.5%
Cost of Goods Sold
8,995.8
10,718.2
14,002.5
16,984.6
20,031.9
Gross Profit
4,760.5
6,355.9
7,396.3
8,768.6
10,487.9
34.6%
37.2%
34.6%
34.0%
34.4%
Net Sales
Growth (%)

Employee Cost
EBIDTA
Y/E March (INR mn)
FY09
FY10
FY11
FY12E
Share Capital
269.5
269.5
538.9
538.9
538.9
6,275.0
7,458.7
8,622.8
10,082.3
11,830.0
Total Networth
6,544.5
7,728.2
9,161.7
10,621.2
12,368.9
936.3
1,099.8
824.8
953.6
959.4
2,442.3
3,043.2
3,635.4
4,357.4
5,136.4
Total Debt
Current Liabilities
733.0
750.5
916.4
1,107.4
1,312.4
2,442.0
2,958.3
3,563.4
4,249.5
4,941.1
Provisions
Total Liabilities
FY13E
838.5
936.7
1,091.1
607.3
863.0
10,761.6
12,808.0
14,713.0
16,539.5
19,327.8
1,585.5
2,647.1
2,916.5
3,411.7
4,234.5
EBIDTA Margin (%)
11.5%
15.5%
13.6%
13.2%
13.9%
Gross Block
5,419.8
6,376.7
7,021.4
9,671.4
11,821.4
Dep./Amortization
376.1
442.6
493.6
615.1
792.0
Acc. Depreciation
3,033.6
3,473.5
3,967.1
4,582.3
5,374.3
1,209.4
2,204.5
2,422.9
2,796.6
3,442.5
Net Block
2,386.2
2,903.2
3,054.2
5,089.1
6,447.1
18.4
12.0
8.4
10.5
8.3
309.4
97.0
763.6
241.8
295.5
210.9
193.5
223.1
191.0
164.5
2,944.3
4,015.4
3,718.2
2,865.6
2,731.9
EBIT
Interest Expense
Other Income
Exceptionals
EBT
253.7
1,401.9
2,386.1
2,891.3
2,977.1
3,598.6
Tax Expenses
416.0
731.1
831.5
887.1
1,094.3
PAT
985.9
1,655.0
2,059.8
2,090.0
2,504.3
Adjustment to PAT
(31.6)
(33.7)
(206.8)
APAT
954.3
1,621.2
1,853.0
2,090.0
2,504.3
-20.3%
69.9%
14.3%
12.8%
19.8%
6.9%
9.5%
8.7%
8.1%
8.2%
Growth (%)
APAT Margin (%)
Key Ratio)
Y/E March (INR mn)
Adj. EPS
Investments
- Cash
761.6
410.8
396.9
380.5
400.4
- Inventory
1,706.3
2,474.4
3,541.0
4,007.7
5,309.4
- Debtors
2,095.7
2,323.7
2,602.6
3,116.9
3,783.9
417.1
410.9
502.3
665.7
111.5
4,980.8
5,619.9
7,042.8
8,170.9
9,605.2

Deferred Tax Asset (Net)
106.0
115.2
134.2
172.1
248.0
10,761.6
12,808.0
14,713.0
16,539.5
19,327.8
FY09
FY10
FY11
FY12E
FY13E
1,401.9
2,386.1
2,891.3
2,977.1
3,598.6
Less: Other Inc./Excep.
210.9
193.5
476.8
191.0
164.5
Add: Depreciation
376.1
442.6
493.6
615.1
792.0
Add: Interest Paid
18.4
12.0
8.4
10.5
8.3
(418.5)
(770.3)
(831.5)
(887.1)
(1,094.3)
861.3
(366.2)
(907.0)
(422.5)
(635.4)
Total Assets
Cash Flow)
FY09
FY10
FY11
FY12E
FY13E
18.3
30.7
38.2
38.8
46.5

Reported EPS
CWIP
Y/E March (INR mn)

EBT
17.7
30.1
34.4
38.8
46.5
-20.3%
69.9%
14.3%
12.8%
19.8%
24.7
38.3
43.5
50.2
61.2
6.0
7.5
10.0
10.0
12.0
121.4
143.4
170.0
197.1
229.5
RoACE
13.5%
20.0%
20.0%
19.5%
20.2%
RoANW
15.3%
22.7%
21.9%
21.1%
21.8%
Others
17.8
(6.0)
11.5
RoIC
16.1%
24.8%
24.0%
22.8%
23.6%
CFO (a)
2,046.1
1,504.6
1,189.5
2,102.2
2,504.8
Net Debt/Equity
(0.4)
(0.4)
(0.4)
(0.2)
(0.2)
Capital Expenditure
(747.0)
(757.0)
(1,243.9)
(2,650.0)
(2,150.0)
0.3
0.1
21.3
Growth (%)
CEPS
DPS
BVPS
Return Ratios (%)
Taxes Paid
Change in WC
Liquidity Ratios
65.8
183.7
288.4
266.5
413.7
Current Ratio
1.5
1.4
1.5
1.6
1.6
Quick Ratio
0.9
0.7
0.6
0.7
0.7
Efficiency Ratios
Asset Sales
(586.3)
(1,029.2)
297.2
852.6
133.7
Others
155.4
157.2
476.8
191.0
164.5
CFI (b)
(1,177.5)
(1,628.9)
(448.7)
(1,606.4)
(1,851.9)
(43.3)
163.6
(275.0)
128.8
5.8
(379.0)
(378.0)
(471.3)
(630.5)
(630.5)
1.4
1.4
1.6
1.6
1.7
Inventory Days
69.8
71.2
78.4
81.1
84.9
Debtor Days
56.1
47.2
42.0
40.6
41.3
Payable Days
83.8
93.4
87.0
85.9
86.5
49.4
29.1
25.4
22.6
18.8
7.2
6.1
5.1
4.4
3.8
Valuation Ratios
P/E (x)
P/BV (x)
MCap/Net Sales (x)
P/CEPS (x)
Dividend Yield (%)
EV/Net Sales (x)
EV/EBIDTA (x)
3.4
2.8
2.2
1.8
1.5
35.4
22.8
20.1
17.4
14.3
0.7%
0.9%
1.1%
1.1%
1.4%
3.1
2.4
1.9
1.6
1.4
30.3
18.2
16.5
14.1
11.4
Interest Paid
(18.4)
(12.0)
(8.4)
(10.5)
(8.3)
(440.7)
(226.5)
(754.8)
(512.2)
(633.1)
427.9
(350.8)
(13.9)
(16.4)
19.9
Opening Cash
333.8
761.6
410.8
396.9
380.5
Closing Cash
761.6
410.8
396.9
380.5
400.4
CFF (c)
26
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
June 15, 2011
Berger Paints India

CMP: INR 103
Recommendation: BUY
Target: INR 128
Paint Industry
Berger Paints India (Berger) is the second largest decorative paint company in India. Company has
an overall paint industry market share of ~17%. The company's decorative business is further
classified into retail and pro-links. In the latter, the company deals directly with major projects both
in public and private sector. It has seven manufacturing facilities spread across India and more than
82 depots besides four overseas manufacturing facilities. Company has second highest distribution
network of ~14,500 dealers spread across the country
Margins expansion to boost profits
Berger is aggressively focusing towards premium emulsion paints
category and cost cutting measure in terms of raw material
procurement the effect of which would be visible from FY12
onwards. We therefore believe that standalone EBIDTA margins
to improve by 52bps in next two years to 10.9% on the back of
gross margins expansion. Company also plan to expand in
South region where it has weaker presence. We expect Berger's
standalone net sales to grow at a 2 year CAGR of 20.0% to
30,274.7mn in FY13.
Subsidiaries to be EPS accretive going forward

Other businesses have grown at a 2 year CAGR of 41.6% in
revenue terms to INR 2319.0mn in FY11. After reporting loss
at PAT level in FY09, company has reported improvement in
its net profit to 17.8mn in FY11. Major portion of revenue comes
from Bolix (~7% of consolitated revenues). With expected
improvement in economic environment going forward, we expect
Bolix business to add to the growth of consolidated profits.
Industrial paints segment to benefit from high

industrial growth
Berger is the leading player in protective coating for over 45
years. The segment contributes ~15% to its standalone
revenues and has a market share of more than 25%. This
Promoters
Mar-11
segment is highly correlated with growth in industrial segment

and found its application in all types of industries. We expect
industrial division to report good growth going forward on back
of high GDP growth rate and infrastructure spend.
Capacity addition plans

In a bid to increase its sales of emulsion paints, company is
augmenting capacity by constructing a green-field water based
paints facility in Hindupur, AP with a capacity of 0.1mn MT/
annum (scalable to 0.15mn MT/annum), is expected to
commence operations by H1FY14. Apart from expansion in
Hindupur, company is also augmenting its capacity in its
manufacturing facilities at Goa and Rishra in FY12. This would
result in cumulative capacity of 0.43mn MT/annum by FY14
against 0.26mn MT/annum in FY11.
Valuations
Berger has been growing at a 2 year CAGR of 19.7% in revenue
terms. Going forward, we expect Berger to maintain the good
growth momentum on the back of new product offerings in
premium segment and its expansion plans in south region.
Increased contribution from high end products along with
backward integration will help company to improve its overall
margins resulting in higher profitability. We therefore initiate
the coverage on the company with a BUY and a target price of
128 (20x FY13E EPS of 6.4), giving an upside of 24% from the
CMP of INR 103.
Key Data
Y/E Mar (INR mn)

Net Sales
75.59
75.59
BSE Code
509480
FIIs
7.08
7.43
NSE Code
BERGEPAINT
DIIS
4.43
4.00
Bloomberg Code
12.89
12.98
Others
Reuters Code
BRGR.BO

BRGR IN
Face Value
346.1
2
35.6
180
52 Week H/L
140
123.0/69.4
2W Avg. Qty, BSE (mn)
120
Sensex
100
FY10
FY11
18,958.1
23,327.2
16.3%
16.4%
23.0%
0.16
18,132.2
Apr-11
May-11
Mar-11
Jan-11
Feb-11
Dec-10
Oct-10
Nov-10
Sep-10
Jul-10
Aug-10
Jun-10
Berger
FY13E
20.3%
19.0%
8.4%
10.8%
10.4%
10.5%
10.9%
Adj. PAT
792.0
1,202.5
1,466.1
1,779.9
2,217.9
-14.4%
51.8%
21.9%
21.4%
24.6%
4.9%
6.3%
6.3%
6.3%
6.6%
2.5
3.5
4.2
5.1
6.4
Growth (%)
Adj. PATM (%)
Adj. EPS (INR)
0.6
1.1
1.3
1.5
1.7
Dividend Yield (%)
0.6%
1.1%
1.3%
1.5%
1.7%
P/E (x)
41.5
29.6
24.3
20.0
16.1
8.4
6.0
5.2
4.4
3.7
26.4
18.1
15.4
12.6
10.0
0.8
0.2
0.2
0.2
0.0
RoACE (%)
15.6%
16.3%
18.0%
18.8%
20.4%
RoANW (%)
24.6%
16.1%
18.7%
19.6%
20.2%
P/BV (x)
EV/EBIDTA
Net Debt/Equity
80
FY12E
28,051.5 33,381.2
EBIDTAM (%)
DPS
Mcap (INR bn)

160
Growth (%)
FY09
16,281.1
Sensex
Sumit Duseja
Ph.No. +91-22-4289 5600 Ext. 630
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
28
Investment Rationale:
1) Margins expansion to boost profits
Berger is the second largest player in decorative paint
segment with an overall market share of ~17%. Berger is
known for its products offering in economy segment (Avg
price/lt is lowest compared to peers at ~INR 80 for FY11).
Product Category
Brands
Interior Emulsions
Silk, Breathe Easy, Rangoli, Illusions
Exterior Emulsion
Weather Coat, Walmasta
Enamels
Luxol, Butterfly, Jadoo
Distempers
Bison, Jadoo
However, having realized potential and growth of emulsion

paints, company is now aggressively marketing its higher
margin premium products (Silk, Breathe Easy, Weather Coat
etc) through new product launches and higher advertisement
and promotional spend. Emulsion paints are the fastest
growing category in decorative paints segment. Among
emulsion paints, exterior emulsions are growing faster than
interior emulsions. Emulsion paints also have higher
realization and margins compared to enamels and
distempers. Company reported an increase of 7bps in its
gross margin in FY11 despite tough raw material cost
environment on back of improved sales mix towards
premium emulsions, improvement in distribution network
and some cost reduction initiatives in way of raw material
procurement. However, EBIDTA margins declined by 36bps
due to higher ad and promotional spend.
We expect full benefits of aggressive focus towards premium

emulsion paints category and cost cutting measure in terms
of raw material procurement would be visible from FY12
onwards. We therefore believe that EBIDTA margins to
improve by 52bps in next two years to 10.9% on the back
of gross margins expansion.
Expanding Reach: Company traditionally has higher
presence in north and east market which accounts for 40%
of overall paint industry market. In a bid to balance its
geographical presence through focused penetration in
western and southern Indian markets, Berger is planning to
open exclusive brand outlets (250-300 in the next couple of
years) through franchise routes. Presently company has 40
franchise stores spread across major cities of Tamil Nadu.
On the back of aggressive stance of the company to
promote fast growing emulsions and along with expansion
in other regions, we expect Berger's standalone net sales
to grow at a 2 year CAGR of 20.0% to 30,274.7mn in FY13.
Standalone business on strong footing
35000
20000
36.2%
11.6%
15%
15000
10%
10000
5%
5000
0
0%
FY09
36.5%
36.3%
36.8%
25%
20%
12.6%
FY10
FY11
Net Sales (INR mn)
33.4%
30%
19.3%
20.8%
25000
Standalone business margins

40%
35%
30%
25%
20%
15%
10%
5%
0%
24.4%
30000
FY12E
FY13E
Grow th (%)
2) Subsidiaries to be EPS accretive going forward
8.7%
FY09
10.7%
10.4%
10.5%
10.9%
FY10
FY11
FY12E
FY13E
Gross Margins
Berger operates through its four direct subsidiaries, two

indirect subsidiaries and two joint ventures which accounts
for ~11% (INR 2071mn in FY10) of its consolidated revenues.
EBIDTA Margins

Particulars
Direct Subsidiaries
Beepee Coatings Private Ltd
Berger Jenson & Nicholson (Nepal)
Berger Paints (Cyprus) Ltd
Lusako Trading Ltd
Indirect Subsidiaries
Bolix S.A.
Berger Paints Overseas Ltd
Joint Ventures
Berger Becker Coatings Pvt Ltd
BNB Coatings India Ltd
Pnb Principal Advisory Company
Business
FY10 Revenue (INR mn)
Processing of company's products

For business in Nepal
SPV for the purpose of making investments in companies interest abroad
SPV for the purpose of making investments in companies interest abroad
102
305
NA
NA
External Insulation finishing System

For operations in Russia
1326
24
(49:51) with Becker Coatings for manufacturing coil coatings for steel surfaces
(49:51) with Nippon Bee Chemicals Co. of Japan, for manufacturing of coatings for plastic substrates of automobiles
232
23
Direct Broking (Insurance )
NA
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
29
Other businesses have grown at a 2 year CAGR of 41.6% in

revenue terms to INR 2319.0mn in FY11. Major portion of
revenue comes from Bolix (~7%), one of the technology leaders
in External Insulation Finishing Systems (EIFS) in Europe
which Berger acquired in 2008. Bolixs' EIFS products provide
significant insulation solutions while at the same time offering
a decorative finish suitable for traditional brick or concrete
structures. External Insulation business reported slight fall in
its revenue by 2.9% to INR 1237.2mn in FY11 on the back of
tough economic environment in Poland in last two years as a
result of the slowdown. The businesses however have shown a
turnaround in the last quarter with a double digit growth as
conveyed by the management. With expected improvement in
economic environment going forward, we expect Bolix business
to add to the growth of consolidated profits.
Second major contribution in other business segment comes from
BJN - Nepal. The business in Nepal has been performing well and
is expected to sustain the growth momentum. To cater to increasing
demand in Nepal, company built its second manufacturing facility
with annual capacity of 18,000 MT during FY10.
PAT of Other Businesses (mn)
3000%
2000%
1000%
0%
-1000%
-2000%
-3000%
-4000%
-5000%
-6000%
-7000%
17.8
2.5
FY09
FY10
FY11
IIP Growth (%)

14%
12%
11.9%
11.7%
10.5%
10%
8%
8.7%
8.0%
7.7%
6%
4%
3.2%
2%
0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Source: CSO, SPA Research
Beside protective coatings segment, Berger also caters to

automotive industry and has a market share of ~7% in this
segment. Berger has a technological collaboration with
DuPont, USA for automotive coatings. It also has a JV (BNB
Coatings India Lt.) with Nippon Bee Chemicals Co., Japan
for manufacturing of coatings for plastic substrates of
automobiles.
The Indian government has earmarked about INR 50,000
billion according to the XII Five Year plan (2012-17) against
INR 25,000 billion in the XI Five year Plan (2007-12) for
infrastructure investment. We expect industrial division to
report good growth going forward on back of high GDP growth
rate and infrastructure spend.
4) Capacity addition plans
In a bid to increase its sales of emulsion paints, company
is augmenting capacity by constructing a green-field water
based paints facility in Hindupur, AP with a capacity of
0.1mn MT/annum (scalable to 0.15mn MT/annum), is
expected to commence operations by H1FY14.
(59.2)
Capacity (MT/annum).
3) Industrial paints segment to benefit from high

industrial growth
Berger is the leading player in protective coating for over 45
years. The segment contributes ~15% to its standalone
revenues and has a market share of more than 25%.
Company has a technical tie-up with Orica Australia Pty for
protective coatings. This segment is highly correlated with
growth in industrial segment and found its application in all
types of industries. Index of Industrial Production (IIP) has
reported an avg. growth of 8.8% in last 7 years and expected
to grow above 9% on back of higher GDP growth rate.
500,000
400,000
300,000
200,000
100,000
FY08
FY09
FY10
FY11 FY12E FY13E FY14E
30
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Apart from expansion in Hindupur, company is also augmenting

its capacity in its manufacturing facilities at Goa and Rishra
(West Bengal) by 65,000 MT/annum (42,000 MT/annum in Goa
and 23,000 MT/annum in Rishra) in FY12. This would result in
cumulative capacity of 0.43mn MT/annum by FY14 against
0.26mn MT/annum in FY11.
Company has set up a resin manufacturing facility at their
existing Goa plant in order to improve their margins by backward
integration. The current capacity of plant is ~6,000 KL/annum
- to be shored up to ~12,000 KL/annum. Company has also
set up a resin manufacturing facility in Gujarat with capacity of
2,000 MT/month. The resin manufactured through these
facilities would serve 50% requirement of the company. With
setting up of plant, management expects improvement in gross
profit margins by ~30-40bps.
Financial Overview
Company's revenue and APAT has grown at a 2 year CAGR
of 19.9% and 36.1% to INR 23,327.2mn and INR 1,466.1mn
respectively in FY11. Going forward, we expect company's
revenue and APAT to grow at a 2 year CAGR of 19.6% and
23.0% to INR 33,381.2 and INR 2,217.9mn in FY13.
Net Sales Trend
35000
30000
25000
20000
15000
10000
20.8%
12.6%
0%
Acids & Chemicals
16%
Resins
23%
Oils
Extenders
Others
2) Further slowdown in Europe to impact External

Insulation business
FY12E
Industry
Description
FY13E
Grow th (%)
APAT Trend
2500
51.8%
2000
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
21.4%
21.9%
1500
1000
24.6%
500
-14.4%
0
FY09
FY10
FY11
FY12E
FY13E
Grow th (RHS)
On the back of improved sales mix and backward integration,

we expect company's consolidated margins to improve by
49bps in next two years.
40%
35%
30%
25%
20%
15%
10%
5%
0%
Asian
Paints
34.0%
8.4%
4.9%
FY09
With re-emergence of fear of debt crisis impacting the

European economy and with regulatory issues could
negatively impact the performance of its subsidiary Bolix
operations.
Executive
Summary
FY11
Margin Trend
Pigments
Solvents
24%
FY10
APAT (INR mn)
14%
15%
5%
RM breakup (FY10)
8%
19.3%
Net Sales (INR mn)
1) Raw Material Cost inflation
9%
20%
11.6%
5000
0
Investment Concerns
6%
25%
10%
FY09
Berger is lesser impacted due to the rise in titanium dioxide

because the company currently has lesser contribution from
emulsions. However, other raw material like crude derivatives
has also shown strong up move in FY11. Company has
increased prices of its products in decorative segment by
~6.8% in decorative segment and is in the process of taking
some price hikes in industrial paints segment. We believe
company will be able to pass the increase in raw material
cost to the consumers (though with a lag). However, sharper
than expected increase in raw material cost inflation could
impact the profitability of the company.
30%
24.4%
37.1%
37.0%
37.2%
37.4%
10.8%
10.4%
10.5%
10.9%
6.3%
FY10
Gross Margins
Akzo
Nobel
6.3%
FY11
EBIDTA Margins
Kansai
Nerolac
6.6%
6.3%
FY12E
FY13E
APAT Margins
Berger
Paints
31
We expect returns on networth and capital employed to improve

going forward with higher profit growth.
Return Profile
30%
24.6%
25%
20%
15%
10%
18.7%
19.6%
18.0%
18.8%
FY11
FY12E
20.2%
16.1%
15.6%
16.3%
FY09
FY10
20.4%
5%
0%
Company Brief
Berger is second largest decorative paint company with an
overall paint industry market share of ~17%. The company's
decorative business is further classified into retail and pro-links.
In the latter, the company deals directly with major projects
both in public and private sector. It has seven manufacturing
facilities spread across India and more than 82 depots besides
four overseas manufacturing facilities. Company has second
highest distribution network of ~14,500 dealers spread across
the country with ~12,000 dealer shops having installed DTS
(Colour Bank). Berger has four direct subsidiaries, two indirect
subsidiaries and two JV.
FY13E
Revenue Breakup (FY10)

RoACE
RoANW
2%
3%
7%
4%
Valuations
Berger has been growing at a 2 year CAGR of 19.7% in revenue
terms. Going forward, we expect Berger to maintain the good
growth momentum on the back of new product offerings in
premium segment and its expansion plans in south region.
Increased contribution from high end products along with
backward integration will help company to improve its overall
margins resulting in higher profitability. We therefore initiate
the coverage on the company with a BUY and a target price of
128 (20x FY13E EPS of 6.4), giving an upside of 24% from the
CMP of INR 103.
140
Decorative (India)
Protective Coatings (India)
Other Industrial (India)
13%
71%
External Insulation Finishing

Berger Nepal
Others
25
120
20
100
80
15
60
10
40
20
0
05-Apr-07
05-Apr-08
05-Apr-09
05-Apr-10
05-Apr-11
32
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
Financials
Profit & Loss
Y/E March (INR mn)
Net Sales
Growth (%)
Cost of Goods Sold
Gross Profit
Employee Cost
EBIDTA
Balance Sheetmn)
FY09
FY10
FY11
FY12E
FY13E
16,281.1
18,958.1
23,327.2
28,051.5
33,381.2
16.3%
16.4%
23.0%
20.3%
19.0%
10,739.4
11,931.0
14,686.4
17,615.0
20,884.4
5,541.7
7,027.1
8,640.8
10,436.5
12,496.8
34.0%
37.1%
37.0%
37.2%
37.4%
960.0
1,245.9
1,447.4
1,686.5
1,995.0
3,210.6
3,744.8
4,774.8
5,807.0
6,878.2
1,371.1
2,036.5
2,418.6
2,943.0
3,623.6
FY09
FY10
FY11
FY12E
Share Capital
637.7
692.1
692.1
692.1
692.1
3,163.8
5,272.5
6,194.3
7,375.6
8,905.2
9,597.4
3,900.6
5,964.7
6,895.2
8,067.8
Total Debt
3,502.2
2,673.7
3,022.2
2,880.9
2,984.4
Current Liabilities
2,496.3
3,031.1
4,068.2
4,524.5
5,420.5
Provisions
281.5
535.0
451.9
451.9
451.9
Deferred Tax Liability
234.1
264.4
263.3
306.2
358.0
10,414.6
12,468.9
14,700.8
16,231.2
18,812.2
Gross Block
6,196.5
6,756.6
7,246.7
8,573.2
8,655.8
Acc.Depreciation
2,129.7
2,461.9
2,863.3
3,316.5
3,810.2
4,066.8
4,294.7
4,383.4
5,256.7
4,845.7
Total Liabilities
8.4%
10.8%
10.4%
10.5%
Dep./Amortization
250.7
358.2
401.4
453.2
493.6
1,120.4
1,678.3
2,017.2
2,489.8
3,130.0
Interest Expense
186.6
151.5
237.8
268.6
263.9
Net Block
Other Income
191.1
193.3
381.7
341.7
327.5
CWIP
1,124.8
1,720.1
2,161.1
2,562.8
3,193.6
296.4
516.2
660.2
782.9
975.6
Exceptionals
EBT
Tax Expenses
PAT
828.4
1,203.9
1,500.9
1,779.9
Adjustment to PAT
(36.4)
(1.4)
(34.8)
APAT
792.0
1,202.5
1,466.1
1,779.9
2,217.9
-14.4%
51.8%
21.9%
21.4%
24.6%
4.9%
6.3%
6.3%
6.3%
6.6%
Growth (%)
APAT Margin (%)
2,217.9
Key Ratiomn)
Y/E March (INR mn)
FY13E
Total Networth
EBIDTA Margin (%)

EBIT
10.9%
Y/E March (INR mn)
Investments
- Cash
275.3
326.0
776.0
429.4
449.8
45.1
1,286.4
526.1
808.1
1,879.5
363.8
412.6
1,265.1
838.9
1,052.0
- Inventory
2,944.5
3,298.6
4,437.1
4,809.6
5,632.6
- Debtors
2,196.4
2,423.2
2,753.3
3,432.6
3,888.8
518.4
432.3
559.9
655.9
1,063.8
6,023.2
6,566.7
9,015.4
9,737.0
11,637.2
10,414.6
12,468.9
14,700.8
16,231.2
18,812.2

Total Assets
Cash Flowmn)
FY09
FY10
FY11 FY12E
FY13E
Y/E March (INR mn)

EBT
Reported EPS
2.6
3.7
4.3
5.1
6.4
Adj. EPS
2.5
3.5
4.2
5.1
6.4
Less: Other Inc./Excp.
FY09
FY10
FY11
FY12E
FY13E
1,124.8
1,720.1
2,161.1
2,562.8
3,193.6
81.8
42.4
381.7
341.7
327.5
-14.4%
39.9%
21.9%
21.4%
24.6%
Add: Depreciation
250.7
358.2
401.4
453.2
493.6
CEPS
3.4
4.5
5.5
6.5
7.8
Add: Interest Paid
216.9
172.0
237.8
268.6
263.9
DPS
0.6
1.1
1.3
1.5
1.7
BVPS
12.2
17.2
19.9
23.3
27.7
Taxes Paid
(267.8)
(502.4)
(626.3)
(740.0)
(923.8)
Change in WC
(286.9)
34.7
(559.2)
(691.5)
(791.1)
Others
(276.5)
66.5
679.4
1,806.6
1,233.2
1,511.4
1,908.7
(2,741.2)
(715.8)
(975.0)
(980.0)
(103.0)
Growth (%)
Return Ratios (%)

RoACE
15.6%
16.3%
18.0%
18.8%
20.4%
RoANW
24.6%
16.1%
18.7%
19.6%
20.2%
RoIC
21.9%
30.8%
24.6%
25.8%
27.5%
Liquidity Ratios
Net Debt/Equity
CFO (a)
Capital Expenditure
0.8
0.2
0.2
0.2
0.0
10.8
7.0
12.4
10.1
10.5
Asset Sales
93.3
93.5
(32.0)
(1,236.6)
755.5
(282.0)
(1,071.3)
Current Ratio
2.3
2.2
1.8
2.0
2.0
Quick Ratio
0.9
0.9
0.8
0.9
0.9
Others
32.0
39.8
245.7
341.7
327.5
CFI (b)
(2,647.9)
(1,819.2)
26.2
(920.4)
(846.9)
99.0
1,254.6
8.8
Efficiency Ratios
1.8
1.7
1.7
1.8
1.9
Inventory Days
98.7
95.5
96.1
95.8
91.3
Change in Equity
Debtor Days
43.7
44.6
40.6
40.3
40.1
2,172.9
(828.4)
348.5
(141.3)
103.6
Payable Days
79.4
84.5
88.2
89.0
86.9
(159.5)
(191.0)
(526.4)
(607.4)
(688.3)
Interest Paid
(216.2)
(173.7)
(237.8)
(268.6)
(263.9)
CFF (c)
1,896.2
61.4
(406.9)
(1,017.3)
(848.7)
(72.2)
48.8
852.5
(426.2)
213.1
Opening Cash
436.0
363.8
412.6
1,265.1
838.9
Closing Cash
363.8
412.6
1,265.1
838.9
1,052.0
Valuation Ratios
P/E (x)
41.5
29.6
24.3
20.0
16.1
P/BV (x)
8.4
6.0
5.2
4.4
3.7
MCap/Net Sales (x)
2.0
1.9
1.5
1.3
1.1
P/CEPS (x)
Dividend Yield (%)
EV/Net Sales (x)
EV/EBIDTA (x)
30.4
22.8
18.7
16.0
13.1
0.6%
1.1%
1.3%
1.5%
1.7%
2.2
1.9
1.6
1.3
1.1
26.4
18.1
15.4
12.6
10.0
Executive
Summary
Industry
Description
Asian
Paints
Akzo
Nobel
Kansai
Nerolac
Berger
Paints
33
Engineering
Girish Bhutra
Head of Equity
girish.bhutra@spagroupindia.com
Tel.: +91-22-4289 5600 Ext.634
Srinivas Reddy
Head of Research
srinivas.reddy@spagroupindia.com
Tel.: +91-22-4289 5600 Ext. 633
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(hereinafter referred as SPA) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should
not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis
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Paints Industry Report

June 15, 2011

Indian paint industry is in the sweet spot. Rising income

Demand in rural areas witnessed strong upsurge with

Companies under coverage

Revenues (INR mn)

adj. EPS (INR)

Decorative vs. Industrial

Industry Size (INR Bn)

Premier decorative paints are water based acrylic emulsions

The medium range consists of solvent based enamels which

Indian paint industry can be classified into decorative and

Decorative Paints (INR ~170bn)

Source: Industry, SPA Research

Industry vs GDP Growth

In decorative paints segment solvent based paints (enamels)

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: SPA Research

Source: AC Neilson, SPA Research

Traditionally repainting has dominated the demand for decorative

Indian paint industry is dominated by organized sector which

Regional Market Breakup

Protective Coatings & GI

Others (Marine, packaging etc)

Source: AC Neilson, SPA Research

Source: AC Neilson, SPA Research

Tinting systems a trend now: Color dispensing machine also

The industrial paints segment has grown at a fast pace of more

Per Capita Consumtion (Kg)

Dealers w ith DTS

Source: Colourworlds, SPA Research

Industrial Paints (INR ~40bn)

Dealers w ithout DTS

Source: Company, SPA Research

Demand for repainting: With change in lifestyle on back of

therefore has been transforming from more of a discretionary

Middle Income (INR

Low Income (<INR

Capacity Addition: To meet the strong ensuing demand, many

Source: CRISIL, SPA Research

Fresh paint demand: Beside demand for new paints is also

Source: Ministry of Housing & Urban Poverty Alleviation, SPA Research

Industrial Paints to see high growth: Robust demand for

Source: Company, SPA Research

Raw material cost inflation

TiO2 Dupont India Prices (INR per Kg)

Entry of new players: Distribution network a strong

Source: Bloomberg, SPA Research

Threat from imports and unorganized sector is low

Brent Crude ($/barrel)

Despite fall in import duty on paints from 40% to 10% in last

Source: Bloomberg, SPA Research

To mitigate the rising cost of raw materials and to protect

Attracted by huge market opportunities many foreign players

Also, installation of DTS and offering of other value added

This page has been intentionally left blank

June 15, 2011

Target: INR 3,168

International and Industrial business to gain traction

Despite increasing competition from domestic and major foreign

Industrial Segment: Asian Paints has signed a second equal

Maximum beneficiary of high GDP growth rate

High competitive advantage and positioning

Shareholding (%) Dec-10