August 25, 2014

Akzo Nobel India Limited

“Beneficiary of uptick in capex cycle”
Initiating Coverage Akzo Nobel India Limited
Recommendation BUY Snapshot
CMP (Rs.) Rs.1110 Akzo Nobel - the largest coatings company in the world holds ~73 per
cent stake in Akzo Nobel India. One of the undervalued stocks in the
Rs.1380(Upside paints segment with a dealer network of 10000, six strategically located
Target Price (Rs.)
24%) plants across the country, debt-free cash surplus Balance Sheet and
Stock Details excellent dividend payment track record.
BSE Code 500710 Investment Rationale
Bloomberg Code AKZO IN
Key beneficiary of the upturn in capex cycle: Akzo Nobel is the
Market Cap (Rs. cr) 5372 largest coatings company in the world. Coatings mainly find their
Free Float (%) 27 application for new plants or maintenance of existing plants.
52- wk HI/Lo (Rs) 1170/750
The overall improvement in the economy should lead to improving
Avg. Volume (Monthly in lakh) 0.24 demand in the coatings segment.
Face Value (Rs) 10.0
Dividend(%) (FY 14) 750
 Traction seen in the earnings (after a duration of more than two
years) to continue further: The company has been witnessing a
Shares o/s (Crs) 4.6 decent improvement in EBITDA margins (100 bps in Q4 and 190 bps
Relative Performance 1Mth 6Mth 1Yr in Q1). With the recently commissioned Gwalior plant operating at
AKZO IN(%) (3.6) 48.8 33.4 around one-third of the installed capacity, we expect the
improvement to continue going forward on the back of better
NIFTY(%) 2.2 28.4 45.5 asset-utilisation ratios due to expected surge in demand.
160
150  One of the best balance sheets in the sector: The company has
140 one of the best balance sheets in the sector with cash and
130 investments aggregating to around 14 per cent of the market-cap.
120
110  Impressive dividends, expected to continue in future as well: An
100 investor in Akzo Nobel has received a dividend of Rs.155 per
90 share over the last 14 months. Considering the fact that major
80 portion of capex is behind with the setting up of Gwalior plant and
70 strong operational cashflows accruing going forward, in addition to
60 the robust Balance Sheet, we expect the same trend to continue in
Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 future as well.
AKZO NOBEL INDIA NSE CNX NIFTY INDEX
Valuation & Recommendation
Shareholding Pattern as on 30 June 2014 We are betting on the fact that overall improvement in the corporate
capex cycle should augur well for the company’s coatings business. We
Promoters Holding 73.0%
expect the company to post net sales of Rs.2760 crore, an increase of
Institutional (Incl. FII) 12.1% 14.1 per cent y-o-y. We expect the operating profit margins to improve
Corporate Bodies 6.9% by minimum 100 bps leading to an overall PAT of Rs.214 crore, an
increase of 18.5 per cent y-o-y. EPS for the year is expected to be at
Public & others 8.0% Rs.45.9.

Considering the global leadership status in coatings business, strong

Vishal Jajoo – Sr. Research Analyst promoter holding (~73 per cent), debt-free balance sheet and generous
(+91 22 3926-8136) dividend payments, we value the share at 30x FY’15E earnings to arrive
Email id: vishal.jajoo@nirmalbang.com at a price target of Rs.1380, an upside of 24 per cent from the present
levels over the next 9 months.

Particulars (Rs Cr) Net Sales Growth EBITDA PAT EPS (Rs) P/E (x)
FY'12 1987.8 91.6% 286.5 130.3 28.0 39.7
FY'13 2232.0 12.3% 327.5 116.5 25.0 44.4
FY'14 2417.9 8.3% 279.2 180.9 38.8 28.6
FY'15E 2760.0 14.1% 344.5 214.3 46.0 24.1

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Initiating Coverage Akzo Nobel India Limited

INVESTMENT RATIONALE
Beneficiary of the upturn in capex cycle
Akzo Nobel India(Akzo Nobel) is expected to be the key beneficiary of the upturn in the capex
cycle. The company is a key subsidiary(~73 per cent) of the Akzo Nobel Group based out of the UK.

Globally, Akzo Nobel is the largest paints and coatings company and makers of Dulux Paints in
India. Coatings business finds its application in the overall capex as well as maintenance. Due to
subdued industrial activity and lack of capital formation in the economy, this segment was
subdued. Akzo Nobel is showing signs of an improvement in-line with the overall improvement in
Worst seems to be
behind…improvement economy. The company has registered a blended 13.2 per cent increase in topline on a y-o-y basis
in operating margins over the last two quarters. This aided by margin improvement (~190 bps during Q1FY’15 and
after a gap of more
than two years… ~100 bps during Q4FY’14) should lead to a further improvement in PAT with benefits of operating
leverage coming into play. Akzo Nobel’s latest facility in Gwalior is operating at 33 per cent
utilization levels and the same is expected to improve further on the back of a surge in overall
demand.

One of the best balance sheets in the sector

Akzo Nobel has one of the best balance sheets in the sector. The cash and cash equivalent is
~Rs.700 crore, equal to 14 per cent of the present market-cap of the company. This figure is after
incurring capex for a new facility in Gwalior. With hardly any new capex in the near future and
strong operating cashflows, we expect the Balance Sheet to remain strong in future as well.

Liberal dividend pay-out ratio, should continue further

Akzo Nobel has been paying liberal dividends over the past two years. The same has been
tabulated below.

Financial Year Amount per share distributed as dividend

FY12-13 Rs.20 final dividend + Rs.60 special dividend, totaling Rs.80
FY13-14 Rs.15 dividend + Rs.60 special dividend, totaling Rs.75
Total dividend over the last 2 years Rs.155
(Source: Nirmal Bang Research)

With hardly any significant capex requirement in future and strong operating cashflows, we expect
the same trend to continue in the near future.

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Initiating Coverage Akzo Nobel India Limited

The operating cashflows of the company have been tabulated below :

Financial Year Particulars

FY12-13 Rs.208 crore
FY13-14 Rs.171 crore
FY14-15 Rs.230 crore
(Source: Nirmal Bang Research)

Restructuring exercise over

Akzo Nobel, as a part of the restructuring exercise, had merged a number of subsidiaries with
itself.

In July 2012, the company completed the buyback exercise at a price of Rs.920 per share, leading
to an increase in promoter holding to 70.8 per cent.

Year Event Increase in parent holding

April-June 2012 Merger of three parent-owned entities with itself from 59.6 per cent to 68.9 per cent
July 2012 Buyback of shares at Rs.920 to 70.8 per cent
August 2012 Additional purchase of 10 lakh shares to 72.9 per cent
(Source: Nirmal Bang Research)

With the restructuring exercise over, coupled with the overall improvement in the economy, the
coatings business is set to improve further leading to an overall PAT surge of 18.5 per cent on the
back of 14 per cent surge in topline and minimum 100 bps improvement in overall margins.

Diversified product profile…

The products from the stable of Akzo Nobel find application in diverse areas. The same have been
tabulated below:

Segment Area of application

New Build Projects
Buildings and Infrastructure Maintenance, Renovation and repair
Buiulding products and components
Automotive repair
Transportation Automotive OEM, parts and assembly
Marine and air airport
Consumer durables
Consumer goods
Consumer packaged goods
Natural resource and energy industries
Industrial
Process Industries
(Source: Nirmal Bang Research)

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Initiating Coverage Akzo Nobel India Limited

….backed by strategically located plants

The company’s plants are strategically located across the country. Last year, Akzo Group which is
the largest coatings company in the world, as a part of it’s strategy to emerge as the no.2 player in
India in the decorative paints category commenced a new plant in Gwalior.

Set up over a time period of 1.5 years and at a cost of Rs.140 crore and over an area of 9000
square meters, the plant has an installed capacity of 55 million litres. The plant would be catering
to the key markets of the northern and central regions of the country.

Location Year of set up Product range

Water-borne and solvent-based paints
Set up in the year 1971 and expanded
Hyderabad for the decorative and automotive
in the year 2011
refurbish business
Organic peroxides. This facility serves
Mahad Set up in the year 1991
as a re-filling station for metal alkyls

Marine and protective coatings, power

Commenced operations in the year coatings, industrial coil coatings,
Bengaluru
1996 and expanded in the year 2011 specialty finishes and automotive
plastic coatings

Waterborne decorative paints Waterborne decorative paints

Thane
including emulsions and primers including emulsions and primers
Decorative enamels and primers,
Commenced operations in the year
Mohali colourants, woodcare products and
1998
automotive refinishes
Latest facility at Commenced operations in the year
Waterborne decorative paints
Gwalior 2013
(Source: Nirmal Bang Research)

RISKS & CONCERNS

Increase in raw material prices
The present correction in crude oil prices augurs well for the sector as well as the company since
they are co-related to crude oil. Any significant increase in raw material prices, if not passed on to
the customers can negatively impact the margins.

Overall weakness in the economy

Painting, whether decorative or in the coatings segment is the last thing in the budgeting exercise.
We assume an overall pick up in the economy backed by surge in the corporate capex to augur
well for the company.

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Initiating Coverage Akzo Nobel India Limited

COMPANY BACKGROUND
Akzo Nobel India is present in India for over 100 years and a significant player in the paints
industry. Over the years, the company witnessed sustained expansion, growth and
transformation. In the year 2008, Akzo N. V. became owner of the entire equity share capital of
Imperial Chemical Industries, by which the company became a member of the Akzo Nobel Group.
Akzo Nobel India manufactures and markets paints, coatings and specialty chemicals. In 2012,
three AkzoNobel Group companies in India, namely, Akzo Nobel Car Refinishes India Private
Limited, Akzo Nobel Chemicals (India) Limited, Akzo Nobel Coatings India Private Limited got
merged with Akzo Nobel India Limited, thereby expanding the Company’s presence in a wide array
of coatings covering decorative, powder, marine & protective, automotive & aerospace, among
others.

Dulux is its most popular brand of its decorative coatings business while the performance coatings
business provides solutions to many industries and sectors including automotive, consumer
electronics, power, aviation, shipping & leisure craft, construction, oil & gas, water & waste water,
food & beverages, etc. Its chemicals business in India sells more than 30 products grouped under
organic peroxides, metal alkyls and Polymer additives to pharmaceutical companies, polymer
producers, composite & rubber industry.

INDUSTRY BACKGROUND
The Indian coatings industry has been growing at a rate ahead higher than the GDP over the last
several years. The industry has two main segments: 1. Decorative pains and 2. Performance
coatings.

Decorative paints account for 70 per cent of the industry. The main drivers for growth of this
business has been the consumer’s shift to premum products, shortening of repayment cycle and
better demand from Tier II and Tier III cities. Another important driver for demand for decorative
paints is the new homes underpinned by rising income levels, easy availability of finance for
housing, shift from joint familities to nuclear families and rapid urbanization.

Performance coatings business, which constitutes nearly 30 per cent of the coatings market in
India, is essentially a B2B market in contrast to the decorative paints, which is largely B2C market.
The coatings business is technology-intensive with a diverse set of growth drivers, which include
key customer relationships, sustained focus on R&D and Innovation and strong emphasis on
selling a solution rather than a product.

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Initiating Coverage Akzo Nobel India Limited

VALUATION AND RECOMMENDATION

Akzo Nobel reported net sales of Rs.2371.7 crore in FY’14, an increase of 8.8 y-o-y increase.
Adjusted PAT for the year stood at Rs.150.2 crore.

We are betting on the fact that overall improvement in the corporate capex cycle should augur
well for the company’s coatings business. We expect the company to post net sales of Rs.2760
crore, an increase of 14.1 per cent y-o-y. We expect the operating profit margins to improve by
minimum 100 bps leading to an overall PAT of Rs.214 crore, an increase of 18.5 per cent y-o-y. EPS
for the year is expected to be at Rs.45.9.

Considering the global leadership status in coatings business, strong promoter holding (~73 per
cent), debt-free balance sheet and generous dividend payments, we value the share at 30x FY’15E
earnings to arrive at a price target of Rs.1380, an upside of 24 per cent from the present levels
over the next 9 months.

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Initiating Coverage Akzo Nobel India Limited

Profit & Loss Account FY'12 FY'13 FY'14 FY'15E Balance Sheet ( Rs. Cr.) FY'12 FY'13 FY'14 FY'15E
Net Sales 1,987.8 2,232.0 2,417.9 2,760.0 Equity Capital 36.8 46.7 46.7 46.7
Other Income 112.3 138.1 56.7 70.0 Reserves & Surplus 1,393.1 1,058.6 801.1 829.4
Total Income 2,100.1 2,370.1 2,474.6 2,830.0 Networth 1,429.9 1,105.3 847.8 876.1
Raw material expenses 1,199.4 1,283.5 1,392.6 1,465.0 Secured loans - - - -
Employee Expenses 147.3 175.3 193.9 210.5 Unsecured loans - - - -
Other expenses 466.9 614.0 639.1 810.0 Total loan funds - - - -
Total Expenses 1,813.6 2,042.6 2,195.4 2,485.5 Total Liabilities 1,429.9 1,105.3 847.8 876.1
PBIDT 286.5 327.5 279.2 344.5 Net Block 356.3 354.8 502.5 440.5
Depreciation 36.6 38.6 43.7 60.0 Inventories 333.4 314.9 324.2 356.0
Interest 3.2 8.9 1.5 2.5 Sundry Debtors 226.0 251.6 307.6 324.0
Profit before tax 246.7 280.0 234.0 282.0 Cash & Bank 73.9 85.7 72.2 70.0
Taxes 44.6 60.3 53.1 67.7 Loans & Advances 80.9 153.6 68.2 70.0
Extra-ordinary item 71.8 103.2 - - Current Assets 714.2 805.8 772.2 820.0
Net Profit 130.3 116.5 180.9 214.3 Less: Provisions & liabilities 507.0 596.0 610.0 680.0
Quarterly results
(Standalone) Sep.13 Dec.13 Apr.14 Jun.14
Net Sales 575.5 656.3 611.6 641.0 Total Assets 1,429.9 1,105.3 847.8 876.1
Other Income 19.7 4.3 22.5 31.8 Cash flow (Rs. Cr.) FY'12 FY'13 FY'14 FY'15E
Total Income 595.2 660.6 634.1 672.8 Profit before tax 246.7 280.0 234.0 282.0
Total Expenses 538.0 614.4 548.3 574.6 Net cash from operations 137.1 208.0 170.8 230.0
PBIDT 57.2 46.2 85.8 98.2 Net cash from investments (26.7) 33.1 250.5 (20.0)
Interest 0.5 0.4 0.2 0.6 Net cash from financing activities (72.0) (230.9) (438.2) (184.0)
Depreciation 10.3 11.8 11.7 13.3 Net change in cash 38.4 10.2 (16.9) 26.0
Taxes 12.6 6.9 19.4 29.2
Extra-ordinary item - - - 1.8
PAT 33.7 27.1 54.6 53.3
Profitability Ratios FY'12 FY'13 FY'14 FY'15E Valuation Ratios FY'12 FY'13 FY'14 FY'15E
EBITDA margin 14.4% 14.7% 11.5% 12.5% Marketcap/Sales 2.6 2.3 2.1 1.9
PAT margin 6.6% 5.2% 7.5% 7.8% EPS 28.0 25.0 38.8 46.0
Growth Ratios FY'12 FY'13 FY'14 FY'15E P/E 39.7 44.4 28.6 24.1
Net Sales growth 91.6% 12.3% 8.3% 14.1%
EBITDA growth 17.9% 14.3% -14.7% 23.4%
PAT growth -22.4% -10.6% 55.3% 18.5%

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Initiating Coverage Akzo Nobel India Limited

Disclaimer
This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The
information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have
been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient
only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only.
Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents
stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information,
errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation
to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold
positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from
or perform investment banking or other services for any company mentioned in this document.

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