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We expect India’s paint sector to maintain its growth trajectory given favourable macroeconomic factors and
evolving consumer preferences.
India’s paint industry is likely to report volume growth of 13-15%, the fastest in Asia Pacific, driven mainly by
repainting demand, change in consumer perception and resumption in the capex cycle.
We expect incumbents to maintain their positions given high entry barriers – a tough to create direct-to-retail
distribution model, low consumer involvement making brand building difficult, negligible contract manufacturing
and high logistics costs that require plants near markets.
We initiate coverage on Asian Paints (APL) with an OUTPERFORM rating given its faster-than-industry growth,
high margins, quality management and strong balance sheet. Given this, we believe its above-median forward P/E
of 24x is justified.
We initiate coverage on Kansai Nerolac (KNPL) with an UNDERPERFORM rating as we believe its current
valuation – at a 25% premium to its five-year median P/E – is high given lack of pricing power and margin
sensitivity to input cost fluctuations. We value it at a 25% discount to APL.
BB Mkt cap Price PT Up/Down* Impl. PE EPS (Rs) EPS CAGR PE (x)
code Rec (US$bn) (Rs) (Rs) (%) FY12E 2012E 2013E FY10-13E (%) FY12E FY13E
Asian Paints APNT IN OP 5.8 2,726 3,077 14.1 28.0 109.8 132.8 18.6 24.8 20.5
Kansai Nerolac KNPL IN UP 1.1 900 852 -4.3 20.5 41.5 48.8 16.9 21.7 18.4
Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 14 January 2011; *includes dividend yield
Source: Company, Bloomberg, Standard Chartered Research estimates
Contents
Investment summary 3
Stock summary & valuation 4
A structural growth story 7
Decorative paints to grow faster 8
Uptrading in decoratives happening at a fast pace 10
Growth in Industrial paints steady 11
l Equity Research l 2
India Paint Sector l 19 January 2011
Investment summary
We expect India’s paint sector to maintain its growth trajectory given favourable
macroeconomic factors and evolving consumer preferences. We initiate on Asian Paints
(APL) with an OUTPERFORM rating given its faster-than-industry growth, high margins,
quality management and strong balance sheet. Given this, we believe its above median
forward P/E of 24x is justified. We initiate on Kansai Nerolac (KNPL) with an
UNDERPERFORM rating as we believe its current valuation – at a 25% premium to its five-
year median P/E – is expensive given lack of pricing power and margin sensitivity to input
cost fluctuations.
A structural growth story – India’s paint industry has reported consistent growth over FY05-10
− volume and revenue CAGRs of 13.6% and 17.8%, respectively. Given volume growth is
typically 1.5-2.0x GDP growth and our economist forecasts GDP growth of 8-9% in the medium
term, we expect the paint industry to maintain volume growth of 13-15%. The industry growth
drivers would likely be:
Repainting demand fuelled by the real estate boom over the past few years
High entry barriers favour incumbents – Unlike in the FMCG sector, where many new entrants
(eg, Perfetti, L’Oreal) have been successful, there is not even one such instance in the paint
industry. This is because of the high entry barriers – a tough to create direct-to-retail distribution
channel, low consumer involvement making brand building difficult, negligible contract
manufacturing and high logistics costs implying plants need be close to markets. In addition, with
APL commanding above 50% market share without making ‘abnormal’ margins makes it the price
setter and reduces the relative pricing power of competitors.
Margins steady and improving – Being an oligopolistic industry, margins have been resilient in
the past, but suffered in FY09 due to the increase in crude prices and demand slowdown.
Nevertheless, softening input prices in FY10 and sharp demand recovery saw margins not just
recover but rise to higher-than-historical levels. In 1H FY11, the industry has maintained margins
at these levels despite the sharp rise in input costs. Going forward, we expect margins to remain
steady or improve as up trading happens at a faster pace. In addition, strong volume growth is
likely to lead to operating leverage. However, note that the industry is in capacity expansion
mode and any demand slow down could hurt margins.
Paint companies have consistently outperformed the broader market – All the paints
companies have benefited from the strong fundamental growth in the sector and have
significantly outperformed the Sensex in the past 10 years.
Fig 1 – Paint companies have outperformed the broader market in the past 10 years
Asian Paints Kansai Nerolac Berger Paints BSE Sensex
10-yr volume CAGR (FY00-10) 14.1 11.1 12.6 -
10-yr sales CAGR (FY00-10) 16.7 12.2 14.7 -
10-yr PAT CAGR (FY00-10) 17.7 14.5 14.1 -
5-yr stock return CAGR w/o dividend 36.0 17.3 16.7 15.0
10-yr stock return CAGR w/o dividend 31.5 37.0 29.4 16.7
Source: Bloomberg
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India Paint Sector l 19 January 2011
Supported by the rapid shift to premium products and strong operating leverage, we expect
APL to maintain higher-than-historical margins in the medium term, leading to strong
consolidated EPS CAGR of 18.6% over FY10-13E.
At FY12E P/E of 24.8x, APL trades at a premium of 27% to its historical five-year median,
which we feel is rational especially given the sharp improvement in return ratios (RoE has
improved from 32.1% in FY05 to 52.5% in FY10). We initiate coverage with an
OUTPERFORM rating and price target of Rs3,077 (valuing it at a forward P/E of 24x).
We note that as per our Standard Chartered Category Attractiveness model (Refer to our India
Consumer Sector report), decorative paints stands among the top-5 categories (when
weighed against top-25 FMCG categories) indicating high growth and stable profitability even
when compared with FMCG categories. In our relative valuation model, APL rates as the third
best company in our consumer universe on the back of high growth, sustainable margins,
good RoE and dividend payout. Hence, it deserves to trade in line with peers like ITC & HUL
and thus we value it at forward P/E of 24x.
16x
1,500
1,000
500
0
Mar-06
Mar-07
Apr-05
Aug-07
Aug-08
Aug-09
Jan-10
Jul-10
Jan-11
Sep-05
Sep-06
Feb-08
Feb-09
20
15
10
5
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
l Equity Research l 4
India Paint Sector l 19 January 2011
80
60
% 40
20
-20
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
Premium to sensex Five-year median
Source: Company data, Standard Chartered Research
KNPL has delivered stable EBITDA margins at ~14-15% in FY04-08 except in FY09, when it
declined to 11.5% due to a rapid increase in crude prices and a demand slowdown. We
expect KNPL to maintain EBITDA margin at ~15% over FY11-13E, however, note that
margins are vulnerable to any sharp increase in input prices or a demand slowdown. Our EPS
CAGR estimate over FY10-13E is 16.9%.
We value KNPL at a forward P/E of 18x, a discount of 25% to APL’s target multiple, compared
with its 18% five-year median discount to APL due to growth moderation. At FY12 P/E of
21.7x, valuations are dear, and hence we initiate with UNDERPERFORM and price target of
Rs852.
16x
600
12x
400
200
0
Mar-06
Mar-07
Apr-05
Aug-07
Aug-08
Aug-09
Jan-10
Jul-10
Jan-11
Sep-05
Sep-06
Feb-08
Feb-09
l Equity Research l 5
India Paint Sector l 19 January 2011
25
20
PE (x)
15
10
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
One year forward P/E Median P/E
Source: Company data, Standard Chartered Research
40
20
%
-20
-40
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
Discount to APL Five-year median
Source: Company data, Standard Chartered Research
Risks
Paint demand is highly correlated to economic growth; hence a slowdown from current levels
of GDP growth could be detrimental to the sector. In addition, companies’ plans to raise
capacity could create supply-side pressure and impact margins.
Deferral or delays from government/ private companies in infrastructure capex could reduce
uptake for industrial coatings.
In the near-term, possible withdrawal of excise stimulus and continued increase in raw
material costs will make it difficult for paint companies to transfer the entire increase to
consumers immediately, as they have already taken ~10-11% price hike since May ’10. Hence,
margins might be impacted.
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India Paint Sector l 19 January 2011
Fig 8 – Paints growth in various countries Fig 9 – Per capita paints consumption
25 25
15
15
10
10
5
5
0 1.5
0
-5
Malaysia
Japan
Australia
Indonesia
India
Vietnam
Korea
China
Thailand
India
Indonesia
Malaysia
Japan
Vietnam
China
Thailand
Korea
Australia
Source: PPG Presentation 2009, Standard Chartered Research Source: PPG Presentation 2009, Standard Chartered Research
Paint volume growth India’s paint industry size is estimated to be Rs190bn (~2m kilolitre by volume), nearly double the
likely to be 13-15% size of the largest FMCG category (at Rs113bn, biscuits is the largest FMCG category). Despite
over FY11-13E the large size, the paint industry has posted strong sales CAGR of 17.8% over FY05-10. Volume
growth of the top-five organised players stood at 13.6% during the same period. There is a high
correlation between GDP growth and paint volume growth – paint volume has increased 1.6x (on
an average) real GDP growth. Given estimated GDP growth of 8.5-9.0% over FY11E-13E, we
expect industry volume to post CAGR of 13-15% over the same period. This makes paints one of
the fastest-growing categories, even when compared with other large high-growth FMCG
categories. In addition, India’s low per-capita consumption compared with Asian peers implies
ample scope for growth and, hence, this robust volume increase is structural in nature.
Fig 10 – Paints market size by value Fig 11 – Volume growth 1.5-2x GDP growth
200 18
180 16
14
160 12
CAGR 04-10: 17.8%
140 10
%
8
Rs bn
120
6
100 4
80 2
0
60
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
40
FY05
FY06
FY07
FY08
FY09
FY10
l Equity Research l 7
India Paint Sector l 19 January 2011
Fig 12 – Growth in paints versus top 10 FMCG categories in the past five years
Paint category 40 35
33
Packaged
Hair Oils
Edible
Detergent
Biscuits
Creams
Paints
Pastes
Soaps
Washing
Toilet
Tooth
Powder
Oils
Skin
cakes
Tea
Value Volume
Source: Industry, Company data, Standard Chartered Research
Share of unorganised According to the India Paints Association (IPA), ~65% of the paint market is organised. The
players to decline organised market is highly concentrated and a classic example of an oligopoly, where entry
further from the barriers are high and the ‘top-5’ players capture most of the market, while the unorganised
current 35% market is highly fragmented with over 2,000 players. While organised players have a nationwide
manufacturing presence, their unorganised peers are mainly regional and deal in low-value
products. Introduction of VAT, decline in excise duty and preference for better quality products
have resulted in slower growth for the unorganised players, resulting in increasing share for their
organised counterparts. Introduction of goods and service tax (GST), high growth in emulsion and
premium products, volatility in raw material prices and increasing brand awareness should result
in a further decrease in the share of unorganised players.
Fig 13 – Product segmentation – Decorative paints form the bulk of the market
Industrial Industrial
33% 24%
Decorative
67%
Decorative
76%
Repainting accounts Demand for decorative paints is derived from two sources – repainting and new construction.
for ~70% of Repainting accounts for ~70% of demand, while the remaining is from new civil construction with
decoratives demand a lag of 12-18 months between construction and painting.
We expect the paint industry to register 13-15% volume CAGR through FY11-13E, with
decorative paints growing at a higher rate than industrial paints. Decorative paints are set for
higher growth, given in-place demand drivers, which are 1) robust economic growth resulting in
higher disposable income, 2) real estate boom in the past few years, translating into increase in
demand for repainting, 3) continued growth in real estate, 4) launch of ‘affordable housing’, 5)
change in perception towards painting, 6) shift in demographic profile resulting in increase in
number of households and 7) various innovations by large players. In addition, apart from overall
volume growth, we expect significant up-trading – from distemper to interior emulsions, cement
paints to exterior emulsions and low-end emulsions to premium emulsions.
l Equity Research l 8
India Paint Sector l 19 January 2011
Real estate boom in the past few years, with focus on affordable housing
Real estate boom in Notwithstanding temporary hitches, the real estate sector is likely to play a significant role in the
the past few years country’s economic growth. Rapid urbanisation leading to strong demand for new residential units
should lead to strong (current space shortage is close to 19.4m units, largely in the middle and low-income groups) and
demand for re-
painting repainting of existing stock built in the housing boom of the past five years will increase usage of
decorative paints. To address the shortage, the government and the developers are focusing on
affordable housing projects. Availability of low ticket-size home loans at cheaper rates is also
increasing demand for affordable housing. This will increase consumption of low-cost emulsions
going forward.
Growth in IT and ITES and financial services will require additional commercial space. With
organised retail growing steadily and discussions on FDI relaxation taking place, it is estimated
that need for retail space will grow multi-fold. These factors will be direct demand boosters for the
paint industry.
Painting was considered to be a messy affair involving a lot of pre-planning. However, hassle-
free painting services with other colour selection-related help offered by players like APL and
Berger are increasingly making the painting experience convenient
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India Paint Sector l 19 January 2011
Royale Play brand of APL is positioned as a lifestyle brand to be used in creating various
special effects & texture on walls
Nerolac tying up with Walt Disney to target children by painting cartoon characters on the wall
Launch of various metallic colour shades such as gold and silver by APL and Nerolac
Launch of ‘Surprise your Spouse’ initiative by APL whereby the company helps to re-design a
particular wall in the house in a day.
Premium & luxury While the trend of higher growth in emulsions continue, our industry interactions point towards a
emulsions growing at new trend – higher-end emulsions like Royale & Apex Ultima have been growing at a much faster
a rapid pace pace than the overall category. This trend could be attributed to marketing attention being
focussed on premium emulsions. In the past five years, market leader Asian Paints has heavily
advertised its luxury emulsion brands Royale and Apex Ultima with minimal ad-campaigns for its
other brands. Also, improving affordability, increasing awareness about the protective nature of
paints and the fact that the cost of painting has not increased in proportion to the asset value
could have added to this trend. We note that material cost for painting an apartment of 1000 sq ft
carpet area with the most premium paint is ~Rs16,500, which works out to 0.1-0.5% of the asset
value. According to industry experts, premium products (>Rs200 per litre) contribute only ~20%
to industry volumes indicating that there is a significant scope for up trading.
Wood Primers,
thinners East
finishes
11% 14%
Cement 5% West
paint Enamels 32%
4% 33%
Putty North
4% 26%
Distemper
13% Emulsions
(interior) South
Emulsions
17% 28%
(exterior)
14%
Source: Indian Small Scale Paints Association, IPA, Standard Source: Industry data, Standard Chartered Research
Chartered Research
l Equity Research l 10
India Paint Sector l 19 January 2011
As demand for industrial paints is mainly derived in nature, the segment’s growth is dependent on
various industries such as automobiles and consumer durables as well as infrastructure spending
on roads, power plants, marine development, etc. With robust growth in domestic sales of
automobiles, increasing auto exports and rising investments in infrastructure projects, demand for
industrial paints is expected to grow at a healthy pace.
However, on a high base, growth rates for the automotive sector are expected to moderate. Our
auto analyst expects PVs to grow at 16% and 14% in FY12E and FY13E, respectively.
40
Other
industrial 30
coatings 20
15%
10
Powder Auto
%
coatings paints 0
15% 45%
-10
-20
-30
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Protective
coatings
25% PV CV Two-wheeler
Source: Industry, Standard Chartered Research Source: SIAM, Standard Chartered Research estimates
l Equity Research l 11
India Paint Sector l 19 January 2011
Fig 21 – Growth expected in white goods Fig 22 – Consumer durable ind. growth
50
Product Value growth
40
FY03-08 FY08-13E
TV 3 7-9 30
Refrigerator 8 9-11 20
%
Washing m/c 12 10-12 10
AC 16 14-16 0
-10
-20
Apr'05
Apr'06
Apr'07
Apr'08
Apr'09
Apr'10
Oct'05
Oct'06
Oct'07
Oct'08
Oct'09
Oct'10
Source: Industry, Standard Chartered Research Source: CSO, Standard Chartered Research
l Equity Research l 12
India Paint Sector l 19 January 2011
APL has established APL has established itself as a ‘price setter’ in the industry; hence, it has not only passed-on raw
itself as a ‘price setter’ material cost hikes to the consumer, but has also taken judicious price cuts when input costs
have reduced. Thus, despite sharp increase in input costs, industry margins have not only been
stable, but have also risen marginally. The margin improvement has been better for APL because
of the sharp improvement in its product mix (due to up trading as discussed earlier) and ability to
derive significant benefits from economies of scale. Also, APL has ensured that on a ‘like-to-like’
basis it does not make ‘abnormal’ margins; hence, other large players have not attempted to gain
market share via price cuts. Thus, the industry works as a cosy oligopoly.
l Equity Research l 13
India Paint Sector l 19 January 2011
Unlike FMCG, paint retailers are not inclined to introduce new products; hence,
distribution for a new paint company is difficult
Distribution in paints High consumer involvement in FMCG categories leads to consumers demanding for new brands/
extremely difficult products from retailers after being exposed to advertising for these brands/ products in the media.
Also, because of low space & capital requirement retailers are not hesitant to stock new FMCG
brands/ products. Provided there is sufficient brand pull, the presence of a passive distribution
network through third-party wholesale dealers enables distribution of FMCG products even if a
company is not able to create an active distribution network. However, in paints, despite
increased advertising spends by various companies to increase brand awareness, consumer
decisions of buying paints continues to be highly influenced by painters, contractors and
dealers/retailers signifying higher involvement of influencers. Also, paint being a bulky product
tends to occupy significant shelf space, thereby discouraging retailers to introduce new brands.
Thus, low consumer involvement and high retailer involvement and non-existence of third-party
wholesale channel makes distribution in paints extremely difficult.
l Equity Research l 14
India Paint Sector l 19 January 2011
Fig 25 – Why many new companies have been successful in establishing themselves in
FMCG but there has been no such success story in Paints?
In the past 10-15 years many new companies have been able to establish themselves firmly
in various FMCG categories. While distribution in FMCG is difficult, many companies have
been able to build a distribution network from scratch. This was possible mainly on the back
of launch of superior & differentiated brands/ products. For example, Perfetti entered India in
the ‘90’s and very quickly became the undisputed leader in the highly competitive
confectionary category – while it had no distribution to begin with, it achieved its leadership
status through unconventional advertising and superior products. Similarly, L’Oreal was
successful in achieving leadership position in the hair colour market and significant shares in
other categories through superior & differentiated brands/ products. While there are many
such success stories in FMCG, we do not find a parallel example in paints.
The key reason that describes this anomaly is the fact that while most FMCG categories tend
to have high consumer and low retailer involvement, decorative paints tend to have low
consumer and high retailer involvement. Due to high consumer involvement in FMCG,
consumers tend to seek superior/ differntiated offerings and lap up new brand/ product
offerings if they find it to be relevant (most recent examples being Fair & Handsome and
Bingo!). Low space and capital requirement backed by sufficent consumer demand makes
the retailer stock up new FMCG brand/ products, signifying low retailer involvement. In
contrast, consumer involvment is limited in decorative paints and mainly restricted to overall
cost the consumer is willing to incur and the corporate brand the consumer prefers while
significant influence is wielded by painters, contractors and dealers. Significant outlay of
space (due to many SKUs and need for tinting machine) and capital requirement makes
decorative paints a high involvement category for retailers and hence they are reluctant to
keep many brands of paints. Also, they tend to lose out on volume discounts offered by
companies, hence in most cases they tend to stock just one or two brands.
Lower consumer involvement makes it difficult for paint companies to come up with a
differentiated or ‘niche’ offering. However, we see this changing especially at the premium
end – this is also reflected in the advertising of companies where there has been a shift from
corporate advertising to specific premium brands (For example, while earlier most APL
advertising used to be on the ‘har ghar kuch kehta hai’ theme, the company is now focussing
on specific premium products like Royale and Apex Ultima).
Auto
High
Personal care
Paints
Low
Homecare
Staples
Low High
Retailer involvement
Source: Standard Chartered Research
l Equity Research l 15
India Paint Sector l 19 January 2011
The margin correction in FY09 was not only due to the sharp rise in crude prices but also due to a
Margins higher than
historical combination of factors like sharp drop in demand, passing of excise benefits to inventory carried
by retailers, etc. With demand recovery and softening input prices, margins have not only
recovered but have also increased compared to historical levels mainly because 1) Strong
volume growth has led to economies of scale and 2) Uptrading has led to a better product mix.
Our Paints RM index The recession experienced in 2008-09 resulted in the closure of various titanium dioxide and
has increased 18% monomoer manufacturing units in Europe. Due to this global demand supply imbalance, prices
from Jan’10 to Nov’10 shot up and availability has become an issue. However, these capacities might come up again
once the situation in these global economies improve. Our Paints RM index has increased 18%
from Jan ’10 to Nov ’10. Strong pricing power has enabled the industry to pass on these costs to
consumers - the industry has hiked prices four times in a staggered manner by a cumulative
~11% in FY11 – this should enable the industry to maintain margins. We might witness another
round of price hikes in the next quarter on the back of rising crude prices and possibility of
withdrawal of stimulus package. Hence, while we are cautious, we are not overly concerned by
raw material inflation. However, we note that it would be difficult for the industry to pass on the
input cost increases to industrial consumers in general and automotive companies in particular.
17.1
170 18
14.5
14.5
14.2
160
14.0
14.0
16
13.7
13.1
13.2
150 14
11.8
140 12
130 10
%
120
8
110
6
100
4
90
2
80
0
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: Industry data, Standard Chartered Research Source: Company data, Standard Chartered Research
l Equity Research l 17
India Paint Sector l 19 January 2011
Significant ramp up in Capacities of the top four organised players have increased at a CAGR of 9% over FY05-10.
capacities of major However, strong demand in the sector has resulted in ambitious expansion plans for various paint
paint companies companies. As per announced plans, the capacity of the top four companies is expected to nearly
double in the next four years. This implies a capacity CAGR of ~20%. We believe if economic
growth is robust and resultant demand remains strong then this capacity can be absorbed easily.
A demand shock can However, any global shocks or slowdown in the Indian economy can create serious supply-side
create supply side pressure. In this event, companies will be more focussed on pushing volume rather than sitting
pressure on idle capacity or very poor utilisation. This can seriously impact margins for the industry.
Manufacturing
capacity expected to 2,500
double in the next
three to four years 2,000
Thousand tonnes
1,500
1,000
500
0
FY05 FY06 FY07 FY08 FY09 FY10 FY13-14E
Source: Company data, Standard Chartered Research
Note: Capacity of top four paint companies including Asian Paints, Kansai Nerolac, Akzo Nobel India, Berger Paints
l Equity Research l 18
India Paint Sector l 19 January 2011
l Equity Research l 19
India Paint Sector l 19 January 2011
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India Paint Sector l 19 January 2011
Company Section
l Equity Research l 21
India Paint Sector l 19 January 2011
l Equity Research l 22
India Paint Sector l 19 January 2011
Fig 1 – APL vs. Industry volume growth Fig 2 – APL − Standalone sales & growth
17.8
17.5
19 110 30
16.4
16.6
15.6
15.6
14.4
16 90 25
13.2
13.8
13.4
13.1
11.4
13 70 20
Rs bn
11.0
%
%
9.1
10 50 15
8.7
8.3
7 30 10
4 10 FY04 5
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
45.5
3.6
%
%
44.9
44.7
3.3
44.0
46 3.5
44 3.0
42 2.5
40 2.0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
l Equity Research l 23
India Paint Sector l 19 January 2011
Advertising focus in Its premium emulsion brands Royale (interior) and Apex Ultima (exterior) are growing at a much
past five years on faster pace than other emulsions, enamels or distempers. A strong advertising push for premium
premium emulsions
brands might have urged consumers to up trade – in the past five years Royale and Apex Ultima
were the most advertised APL brands on television, while only a couple of campaigns were run
for its economy brands Tractor (emulsion) and Utsav (distemper). This is also a departure from its
marketing campaigns in the past – earlier the company used to focus on the “corporate umbrella
brand” with its highly memorable ‘Har ghar kuch kehta hai’ campaign.
8,000 10,000
5,000
4,000
0
APL
KNPL
Nobel
Akzo
Berger
India
0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11*
Source: Company data, Standard Chartered Research Source: Company data, Standard Chartered Research
* Tinting machines installed till Nov’10
In FY08, APL made shade selection easier by introducing small 200ml ‘samplers’ that made
colour visualisation convenient – now one could paint a wall to check the shade rather than
look at a shade card
It has been highly successful in marketing its premium brand Royale and has regularly
introduced paints with a variety of special effects and textures in the premium segment
Small but useful services on its website such as a calculator to estimate cost of painting,
online consultations with experts to select paints, shades, etc
It launched a retail signature store ‘Colour with Asian Paints’ in 2009 which doesn’t sell paints,
but where consumers can view and experience the finish of different paints
It runs the highly successful ‘Home Solutions’ service where it takes care of the whole painting
process and in effect takes the ‘pain’ out of painting.
l Equity Research l 24
India Paint Sector l 19 January 2011
We expect APL to maintain EBITDA margin above 19% (higher than historical level of 15-16%) in
EBITDA margin likely the medium term given 1) management’s intent to maintain margins at these levels reflected in
to remain above 19% recent price increases, 2) improving product mix, 3) operating leverage from strong volume
growth and 4) economies of scale benefits. This also helps APL to command higher margins than
competitors.
19.7
19.4
19.4
19.3
61.5
64
20
62
59.1
58.9
58.2
57.8
57.6
57.6
16.2
18
57.3
60
56.8
15.5
15.2
15.2
55.7
15.0
58
%
%
16
56
13.1
54 14
52
12
50
48 10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY11E
FY12E
FY13E
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
21.9
5.0 24
21.3
4.6
20.7
19.8
4.5 22
4.0 19.1
4.0 4.0
18.8
18.3
4.0 3.6 20
%
3.5 18
3.0 16
2.5 14
2.0 12
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY11E
FY12E
FY13E
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
l Equity Research l 25
India Paint Sector l 19 January 2011
47.7
16.3
50
15.5
20 14.1
12.5
13.2
33.0
11.5
11.9
40
10.5
10.1
10.4
15
21.1
20.6
%
20.3
8.4
30
16.3
16.2
10
14.1
20
5
10
0 0
Nobel
Nerolac
Akzo
Berger
Paints
Asian
Paints
India
Kansai
Nobel
Nerolac
Akzo
Berger
Paints
Asian
Paints
Kansai
India
FY08 FY09 FY10 FY09 FY10
Source: Company data, Standard Chartered Research Source: Company data, Standard Chartered Research
8.4
%
9 7.7
%
8
15
6 6
3 10 4 2.9
0 5 2 0.4
FY04
FY05
FY06
FY07
FY08
FY09
FY11E
FY12E
FY13E
FY10*
0
FY06
FY07
FY08
FY09
FY11E
FY12E
FY13E
FY10*
l Equity Research l 26
India Paint Sector l 19 January 2011
Fig 15 – International sales breakup FY10* Fig 16 – International EBIT breakup FY10*
South
South
Pacific
South Pacific
7% Middle South
East Asia 7% Middle
East East Asia
8% East
54% 8% 66%
Caribbean
6%
Caribbean
16%
Source: Company data, Standard Chartered Research Source: Company data, Standard Chartered Research
* FY10 results for overseas business includes result for 15 months * FY10 results for overseas business includes result for 15 months
Conditions in APL’s largest international markets, the Middle East and the Caribbean, continue to
remain uncertain and challenging. Sales in the Caribbean region declined 11% yoy in 1H FY11,
where as in the Middle East it was flat. Growth in Asian markets was strong at 21.9% yoy, while
the South Pacific region posted a modest 7.7% yoy in 1H FY11. Overall, international sales grew
3.2% in 1H FY11.
We expect international market conditions to improve and estimate growth of 7.2% in FY11E
followed by mid-double digit growth in FY12-13E. We expect international margins to be in the
range of 14-15% going forward.
3 15
Kansai
2 10 Nerolac
5 Berger 48%
1 13%
0
0 -5
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
APL +
PPG
20%
Net Sales (LHS) YoY growth (RHS)
Source: Company data, Standard Chartered Research estimates
Source: Company data, Standard Chartered Research
APICL: Asian Paints Industrial Coatings Ltd.
APL is currently trading at FY12E P/E of 24.8x, 27% premium to its five-year median P/E of 19.6x.
While valuations may appear expensive compared with the historical median, we note that over
FY05-10, APL has consistently seen earnings upgrades and hence the historical median might
l Equity Research l 27
India Paint Sector l 19 January 2011
not give the true picture. Also, increasing EBITDA margin and improving return ratios (RoE
increased from 32.1% in FY05 to 52.5% in FY10) enable APL to trade at higher valuations. We
believe APL will continue to command premium valuations on the back of strong growth, superior
margins, stable cash flows and excellent return ratios. Our one-year price target of Rs3,077 is
based on forward P/E of 24x.
16x
1,500
1,000
500
0
Mar-06
Mar-07
Apr-05
Aug-07
Aug-08
Aug-09
Jan-10
Jul-10
Jan-11
Sep-05
Sep-06
Feb-08
Feb-09
Source: Company data, Bloomberg, Standard Chartered Research
20
15
10
5
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
One year forward P/E Median P/E
Source: Company data, Standard Chartered Research
80
60
%
40
20
-20
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
APL stock performance has been strong since the last market peak
APL has outperformed the broader indices on a consistent basis. Since the market peaked in
Jan ’08, APL stock has jumped 140% versus a flat BSE Sensex. Given the sharp outperformance
over the past few years, we expect stock returns to be moderate from a one-year perspective.
l Equity Research l 28
India Paint Sector l 19 January 2011
Risks
Further increase in prices of raw materials like titanium dioxide or crude combined with
complete withdrawal of stimulus benefits could force APL to absorb some of the costs as it
has already increased prices four times in FY11. This could lead to short term margin squeeze.
APL plans to more than double its manufacturing capacity in the next three to four years,
implying a capacity increase CAGR of ~19% over the next four years. Any economic
slowdown (due to global shocks or otherwise) which can potentially disrupt domestic demand
can cause margins to slide as APL will be more focussed on volume growth.
l Equity Research l 29
India Paint Sector l 19 January 2011
Financials
We estimate consolidated sales, EBITDA & EPS CAGR for APL to be at 17.8%, 18.0% & 18.6%
respectively over FY10-13E.
APL’s cash flows are strong and similar to any FMCG company. Its average operating cash flow
in the past five years have been at 95% of reported net profit. Relatively high capex results in
FCF post capex as proportion of reported net profit to be lower at 55-60%. Dividend payout is at
40-50% and its RoE is a healthy >40%.
Fig 23 – APL: Sales & sales growth Fig 24 – APL: RM cost to sales
120 35 65
62.5
60.8
100 30 63
60.3
59.2
80 25 61
58.7
58.1
58.0
57.8
57.7
Rs bn
56.9
59
%
60 20
%
40 15 57
20 10 55
0 5 53
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
51
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Net sales (LHS) YoY growth (RHS)
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
5.0 30
4.6
24.5
4.5
4.5
4.5
4.5
4.4
22.7
22.6
21.3
20.8
4.5 25
20.2
19.4
19.2
18.7
4.0
4.0 20
3.6
3.6
3.6
%
3.5 15
3.0 10
2.5 5
2.0 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY11E
FY12E
FY13E
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
Fig 27 – APL: EBITDA margin Fig 28 – APL: PAT & PAT growth
22 14 100
18.5
18.4
18.3
18.3
20 12 80
18
14.9
10
16 60
13.1
13.2
13.0
13.0
Rs bn
%
12.3
8
14 40
%
6
12
20
10 4
8 2 0
6 0 -20
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
4
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
l Equity Research l 30
India Paint Sector l 19 January 2011
130 50
100 40
%
%
70 30
40 20
10 10
-20 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Operating Cash Flow FCF post capex RoE RoCE
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
l Equity Research l 31
India Paint Sector l 19 January 2011
l Equity Research l 32
India Paint Sector l 19 January 2011
l Equity Research l 33
India Paint Sector l 19 January 2011
Company profile
Asian Paints is the world’s 10th largest decorative paints company and India’s largest with a 52%
market share. Decorative paints contribute >95% of standalone sales and command a market
share of 60% share, nearly three times the nearest competitor. It has a comprehensive product
portfolio ranging from mass-end distempers to premium emulsions at varied price points and a
strong distribution network of 26,000 dealers (with nearly 17,000 having tinting machines). It
plans to double its manufacturing capacity in the next three to four years from 440,000 tonnes in
FY10.
It has a market share of 20% in industrial coatings and offers auto paint products through its
50:50 JV with PPG Industries. Non-auto industrial paints are offered through its wholly-owned
subsidiary Asian Paints Industrial Coatings Ltd. (APICL). International operations contribute ~15-
20% to its consolidated sales and it has a presence in various Middle East, Asian and Caribbean
countries.
Others
21.7%
Promoter
DIIs
52.3%
11.4%
FIIs
14.6%
Source: BSE
Source: Company
l Equity Research l 34
India Paint Sector l 19 January 2011
Volume growth likely to slow – In the past 18 months, Year end: March 2010 2011E 2012E 2013E
Sales (Rs m) 17,064 21,061 24,315 28,207
KNPL’s volume has grown at a strong 20%, driven mainly by EBIT (Rs m) 2,398 2,846 3,262 3,833
robust auto demand and stable growth in decoratives. EBITDA (Rs m) 2,637 3,122 3,579 4,245
Nevertheless, we expect volume growth to moderate to Pretax profit (Rs m) 2,386 2,826 3,241 3,811
Earnings (Rs m) adjusted 1,647 1,950 2,236 2,629
14%/15% in FY12/FY13 given a high base and a likely Diluted EPS (Rs ) adjusted 30.6 36.2 41.5 48.8
moderation in auto sales growth. Diluted EPS growth (%) adj. 66.9 18.4 14.7 17.6
DPS (Rs ) 7.5 9.5 11.0 14.5
DPS growth (%) 25.0 26.4 15.5 32.3
Margins likely to remain stable, but prone to risks – EBITDA margin (%) 15.5 14.8 14.7 15.0
Despite gross margin dipping 580bps in the past five years, EBIT margin (%) 14.1 13.5 13.4 13.6
Net margin (%) 9.5 9.2 9.1 9.2
strong volume growth and resultant operating leverage led Div payout (%) 28.5 30.5 30.8 34.6
to operating margin remaining stable at 14-15% over FY05- Book value/share (Rs ) 143 169 197 229
10 (except in FY09 when a sharp and rapid increase in input Net gearing (%) -43 -38 -39 -37
ROE (%) 23.1 23.2 22.7 22.9
prices combined with a demand slowdown reduced it to ROCE (%) 20.6 20.9 20.8 21.2
11.5%). We expect KNPL to broadly maintain margins over FCF (Rs m) 731 365 964 872
EV/Sales (x) 2.7 2.2 1.9 1.6
FY10-13E (with a marginal drop in FY11E). However, we
EV/EBITDA (x) 17.3 14.6 12.7 10.7
note margins can face downward pressure if demand slows PBR (x) 6.3 5.3 4.6 3.9
and/or input prices increase sharply. PER (x) 29.5 24.9 21.7 18.5
Dividend yield (%) 0.8 1.1 1.2 1.6
Source: Company, Standard Chartered Research estimates
Valuations expensive, initiate with UNDERPERFORM –
Strong performances in FY10 and 1H FY11 saw the stock Share price performance
outperform the Sensex by ~50% in CY10. At FY12E P/E of 1,100
21.7x, KNPL trades at a 25% premium to its five-year 1,000
900
median, which we believe is high given a likely slowdown in 800
volume growth. We value it at a forward P/E of 18x leading 700
600
to 12-month price target of Rs852 (implying ~5% downside). 500
Initiate with UNDERPFERFORM. Jan‐10 Apr‐10 Jul‐10 Oct‐10 Jan‐11
Kansai Nerolac Paints Limited
Risks – Continued momentum in auto sales with volume
growth of >20% can impact topline growth & consequently BSE SENSEX 30 INDEX (rebased)
improve earnings. Also, any sharp crude price decline can Share price (%) -1 mth -3 mth -12 mth
Ordinary shares -1 -10 67
expand margins in near-term, but will not be sustainable in Relative to Index 3 -4 56
the longer run. Relative to Sector - - -
Major shareholder Promoter (69.3%)
Free float -
Average turnover (US$) 177,751
Source: Company, Bloomberg
l Equity Research l 35
India Paint Sector l 19 January 2011
Auto paints contribute The company has a dominant 60% market share in the auto paint category, which accounts for
70% to KNPL’s 70% of its industrial paint revenue. Given this, auto demand growth plays a major role in KNPL’s
industrial paint sales
industrial paint growth. Currently, KNPL is enjoying the upswing in auto demand – KNPL’s net
sales grew 24.1% in FY10 and 22.8% yoy in 1H FY11 (PV volume rose 29.4% yoy in FY10 and
27% in 1H FY11). We expect 20% volume growth in FY11. But our auto analyst expects auto
volume growth to cool to 16%/14% in FY12/FY13 from 29.4% in FY10 and 25% in FY11.
KNPL is also dominant in the auto-refinish market, where OEMs have a major say in which
company’s products are used for repainting, though the actual decision depends on the
authorised service station. KNPL’s strong relationship with OEMs has made it dominant in this
segment.
The flip side of this auto sector dominance is that KNPL is prone to cyclicality in sales/earnings
given its high dependence on the sector (~35% of total sales). Other paint companies are not as
cyclical given most of their sales come from the stable decoratives segment.
34 30
Others
29 25
24 20
Rs bn
Powder 19 15
%
coating 14 10
9 5
4 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Auto
l Equity Research l 36
India Paint Sector l 19 January 2011
nature of the business, this is a low margin business that can easily be impacted when there are
steep fluctuations in raw material prices.
Differentiates itself through better service quality – KNPL has around 40 of its 200 technical
support personnel on customers’ shop floors helping them manage their paint lines. An efficient
supply chain that reduces inventory at the customers’ end, quick response to client needs, cutting
painting cycle time and overcoming myriad material and finish-related issues on the spot are
critical in adding value to the customer. Despite auto manufacturers’ high bargaining power,
KNPL’s competence in addressing these critical issues gives it a competitive advantage over
other players.
Automotive paints Technological edge – Continuously changing painting trends in the automotive industry
require a high level of necessitate the development of compatible paint formulations and paint processes. KNPL has
technological forged strong technological collaborations to deliver superior products to its customers which, we
intervention
believe, will keep the company at the edge of innovation. Through its various strategic
collaborations, KNPL offers a total painting system to auto makers in India with a range of
products such as Pretreatment Chemicals, Electro Deposition Primers, Intermediate Coats/primer
Surfacers, Solid & Metallic Top Coats and Clear Coats Touch-up Paints.
KNPL’s initiatives:
KNPL has taken many Leveraging its technology expertise in the decorative segment by introducing innovative
initiatives to bolster its products – Impressions tile guard, Impressions marble finish, Impressions texture coating and
decoratives portfolio Suraksha Plus
Positioning its paints as environmental friendly. KNPL is the only company to have launched a
campaign to educate consumers about its ‘lead free’ range of paints
Setting up experience centres where consumers can experience the paints through
application on walls
Organising meetings with paint influencers – contractors and painters. KNPL introduced
‘Nerolac Style Icon’ awards for architects and interior designers in ’07
l Equity Research l 37
India Paint Sector l 19 January 2011
21.5
20.9
20.9
20.9
20.6
20.5
22 25,000
19.2
18.1
20 20,000
17.2
18 15,000
%
16 10,000
14 5,000
12 0
APL
KNPL
Nobel
Akzo
Berger
India
10
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Tinting m/c Dealers
Source: Industry data, Standard Chartered Research Source: Company data, Standard Chartered Research
Margins likely to be The institutional nature of buyers in auto paints result in relatively lower pricing power, hence
maintained at ~15% making it difficult for KNPL to completely transfer sharp and adverse increases in raw material
prices. Furthermore, as most of KNPL’s raw materials are crude linked, its margins tend to
depend on the movement of crude prices, especially when crude price movements are rapid.
However, a gradual increase in input prices can be partly passed through. Hence, part transfer of
increase in raw material prices and stable volume growth expected in auto sales is likely to
enable KNPL to maintain margins at ~15% in FY12-13E, in our view. We expect recurring EPS
growth to be healthy at 14.7% and 17.6% in FY12E and FY13E, respectively.
Margins vulnerable to Fig 6 – Adverse price increase in raw materials impacted margins in FY09
rapid movement in 20
crude prices 150
18 130
110
(US$/bl)
16
90
%
14 70
50
12
30
10 10
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Sep-04
Dec-04
Mar-05
Sep-05
Dec-05
Mar-06
Sep-06
Dec-06
Mar-07
Sep-07
Dec-07
Mar-08
Sep-08
Dec-08
Mar-09
Sep-09
Dec-09
Mar-10
Sep-10
Dec-10
Source: Company data, Standard Chartered Research; Margins for Dec-10 are our estimates
l Equity Research l 38
India Paint Sector l 19 January 2011
We value KNPL at a However, given the expected slowdown in growth, inherent cyclicality in auto sales and higher
forward P/E of 18x, vulnerability of margins to crude prices, we believe current valuations are expensive and expect
25% discount to our the discount to APL to increase. Hence, we initiate with an UNDERPERFORM rating and a 12-
target multiple for APL
month price target of Rs852 based on a forward P/E of 18x (25% discount to our target multiple
of 24x for APL).
Intrinsic value of land and cash per share provide strong support
KNPL has significant landbank in various parts of the country. While some land tracts are no
longer used for manufacturing, there are other valuable land tracts where production continues.
We value the total ready-for-sale land (Thane, Lower Parel and Vatva) at Rs4bn and the value of
land at the Chennai plant at Rs3bn. Net cash and cash equivalent per share amounts to Rs62.
Hence, the total intrinsic value of land (ready-for-sale) and cash stands at Rs136/share. However,
the company has no plans to sell/ develop the existing land at present and hence, we do not
factor in the land value in our price target. Any move to appropriate value from its landbank can
be a positive trigger for the stock.
16x
600
12x
400
200
0
Mar-06
Mar-07
Apr-05
Aug-07
Aug-08
Aug-09
Jan-10
Jul-10
Jan-11
Sep-05
Sep-06
Feb-08
Feb-09
25
20
PE (x)
15
10
5
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
l Equity Research l 39
India Paint Sector l 19 January 2011
40
20
%
0
-20
-40
May-07
May-08
May-09
Nov-07
Nov-08
Apr-05
Apr-06
Jun-10
Oct-05
Oct-06
Dec-09
Dec-10
Discount to APL Five-year median
Source: Company data, Standard Chartered Research
Risks
Continued momentum in auto sales for a longer period and volume growth surprises >20%
compared to our auto analyst’s estimate of 14-16% in FY12/13, can result in higher-than-
expected paint volume growth for KNPL.
Erratic movement in crude. For example, a sharp and rapid decline in crude can increase
near-term margins for a few quarters and can create a spurt in stock prices. However, high
margins will not be sustainable in the long run as KNPL will have to pass on any input cost
benefits to its institutional auto buyers.
l Equity Research l 40
India Paint Sector l 19 January 2011
Financials
We estimate net sales, EBITDA & EPS CAGR for KNPL to be at 18.2%, 17.2% & 16.9%
respectively over FY10-13E.
KNPL’s cash flow has been relatively more volatile compared to APL, but has been strong with
operating cash flow at 97% of reported net profit in the past five years. Low dividend payout at
30-35% has resulted in swelling reserves. KNPL’s reserve as a proportion of share capital is at
26 times compared to 17 times for APL in FY10. As a result, return ratios RoE and RoCE are
lower compared to APL at 23.1% and 20.6%, respectively, in FY10.
20.0
22.9
17.9
20
14.5
14.5
12.7
12.5
11.6
15
%
10
5.6
4.1
5
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Source: Company data
Fig 12 – KNPL: Sales & Sales growth Fig 13 – KNPL: RM cost to sales
34 30 67
65.4
64.6
64.6
64.4
29 25
63.7
65 63.4
62.8
24 20
63
Rs bn
60.9
%
60.5
19 15
60.1
61
14 10
59
9 5
57
4 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
55
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
20.3
20.3
5 22
4.4
19.7
19.3
19.2
4.0
3.9
3.9
3.9
3.9
20
3.6
17.8
4
3.4
3.2
16.9
3.1
16.8
16.5
%
18
3
16
%
2
14
1 12
0 10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY11E
FY12E
FY13E
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
l Equity Research l 41
India Paint Sector l 19 January 2011
Fig 16 – KNPL: EBITDA margin Fig 17 – KNPL: PAT & PAT growth
15.6
15.5
16 3.0 80
15.0
14.9
14.8
14.7
15 2.5 60
14.1
14.0
2.0 40
13.5
14
Rs bn
%
1.5 20
13
%
1.0 0
11.5
12
0.5 -20
11
0.0 -40
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
10
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
PAT YoY growth (RHS)
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
150 25
%
20
100
%
15
50
10
0
5
-50 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Operating Cash Flow FCF post capex RoE RoCE
Source: Company data, Standard Chartered Research estimates Source: Company data, Standard Chartered Research estimates
l Equity Research l 42
India Paint Sector l 19 January 2011
l Equity Research l 43
India Paint Sector l 19 January 2011
l Equity Research l 44
India Paint Sector l 19 January 2011
Company profile
Kansai Nerolac is the second largest paints company in India and leader in industrial coatings. It
is a subsidiary of Kansai Paint Japan (69.3% stake), which acquired entire stake of Tata Forbes
group in 1999.
Its industrial range of products includes auto paints, powder coatings, general industrial and high
performance coatings. It commands a market share of ~60% in auto paints and is a supplier to all
leading auto companies, except Hyundai.
In decorative paints, it is the third largest players (after Asian Paints and Berger Paints) and has
a market share of 11%. It sells its products under its brand of Nerolac through a dealer network
of 12,000 across India. It is strongest in the northern region, which comprises ~40% of the sales
Others
19.7%
DIIs
5.3%
FIIs
5.7%
Promoter
69.3%
Source: BSE
l Equity Research l 45
India Paint Sector l 19 January 2011
Disclosures appendix
Global disclaimer
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch,
Standard Chartered Securities (India) Limited and/or one or more of its affiliates (together with its group of companies, “SCB”) and the research analyst(s)
named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained
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The research analysts responsible for the content of this research report certify that:
The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personal
opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and
No part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or views
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of analysts.
Our ratings are under constant review.
Additional information with respect to any securities referred to herein will be available upon request.
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Disclosures Appendix
Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to
the date of the report, unless otherwise stated.
3,000
2,800
2,600
2,400
2,200
2,000
1,800
1,600
Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11
1,100
1,000
900
800
700
600
500
Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11
l Equity Research l 46
India Paint Sector l 19 January 2011
Company Hyundai
SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3,499,940 units of call warrants (KRA741106074) as of 17
January 2011.
SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3,499,990 units of call warrants (KRA741145080) as of 17
January 2011.
SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3,500,000 units of call warrants (KRA741147086) as of 17
January 2011.
SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3,499,990 units of call warrants (KRA741177083) as of 17
January 2011.
SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3,497,160 units of put warrants (KRA741278089) as of 17
January 2011.
SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3,499,990 units of call warrants (KRA7411500A9) as of 17
January 2011.
% of covered companies currently assigned % of companies assigned this rating with which
this rating SCB has provided investment banking services over
the past 12 months
OUTPERFORM 63.5% 14.2%
IN-LINE 28.1% 11.0%
UNDERPERFORM 8.4% 3.3%
Research Recommendation
Terminology Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more
OUTPERFORM (OP)
over the next 12 months
The total return on the security is not expected to outperform or underperform the relevant market
IN-LINE (IL)
index by 5% or more over the next 12 months
The total return on the security is expected to underperform the relevant market index by 5% or
UNDERPERFORM (UP)
more over the next 12 months
l Equity Research l 47
India Paint Sector l 19 January 2011
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l Equity Research l 48