This action might not be possible to undo. Are you sure you want to continue?
India | Consumer
19 January 2011
India Paint Sector
We expect India’s paint sector to maintain its growth trajectory given favourable macroeconomic factors and evolving consumer preferences. India’s paint industry is likely to report volume growth of 13-15%, the fastest in Asia Pacific, driven mainly by repainting demand, change in consumer perception and resumption in the capex cycle. We expect incumbents to maintain their positions given high entry barriers – a tough to create direct-to-retail distribution model, low consumer involvement making brand building difficult, negligible contract manufacturing and high logistics costs that require plants near markets. We initiate coverage on Asian Paints (APL) with an OUTPERFORM rating given its faster-than-industry growth, high margins, quality management and strong balance sheet. Given this, we believe its above-median forward P/E of 24x is justified. We initiate coverage on Kansai Nerolac (KNPL) with an UNDERPERFORM rating as we believe its current valuation – at a 25% premium to its five-year median P/E – is high given lack of pricing power and margin sensitivity to input cost fluctuations. We value it at a 25% discount to APL.
BB code Rec OP UP Mkt cap Price (US$bn) (Rs) 5.8 2,726 1.1 900 PT Up/Down* Impl. PE EPS (Rs) EPS CAGR (Rs) (%) FY12E 2012E 2013E FY10-13E (%) 3,077 852 14.1 -4.3 28.0 20.5 109.8 41.5 132.8 48.8 18.6 16.9 PE (x) FY12E FY13E 24.8 21.7 20.5 18.4
Asian Paints Kansai Nerolac
APNT IN KNPL IN
Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 14 January 2011; *includes dividend yield Source: Company, Bloomberg, Standard Chartered Research estimates
email@example.com +91 22 6755 9898
firstname.lastname@example.org +91 22 6755 9851
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2011 http://research.standardchartered.com
THIS REPORT MAY NOT BE DISTRIBUTED INTO THE UNITED STATES
India Paint Sector l 19 January 2011
Investment summary Stock summary & valuation A structural growth story
Decorative paints to grow faster Uptrading in decoratives happening at a fast pace Growth in Industrial paints steady
3 4 7
8 10 11
Industry structure − A cosy oligopoly
Distribution − Highly challenging as compared to FMCG Brand building relatively more difficult vis-à-vis FMCG Manufacturing – Key barrier, unlike most FMCG categories Different entry different barriers for industrial paints
14 14 16 16
Margins – Steady and improving
Volatile raw material costs, but not a major concern Any demand slowdown in a scenario of sharp capacity expansion can hurt margins
Annexure − Comparison with international peers Company updates
Asian Paints Kansai Nerolac
l Equity Research l
India Paint Sector l 19 January 2011
We expect India’s paint sector to maintain its growth trajectory given favourable macroeconomic factors and evolving consumer preferences. We initiate on Asian Paints (APL) with an OUTPERFORM rating given its faster-than-industry growth, high margins, quality management and strong balance sheet. Given this, we believe its above median forward P/E of 24x is justified. We initiate on Kansai Nerolac (KNPL) with an UNDERPERFORM rating as we believe its current valuation – at a 25% premium to its fiveyear median P/E – is expensive given lack of pricing power and margin sensitivity to input cost fluctuations. A structural growth story – India’s paint industry has reported consistent growth over FY05-10 − volume and revenue CAGRs of 13.6% and 17.8%, respectively. Given volume growth is typically 1.5-2.0x GDP growth and our economist forecasts GDP growth of 8-9% in the medium term, we expect the paint industry to maintain volume growth of 13-15%. The industry growth drivers would likely be:
Repainting demand fuelled by the real estate boom over the past few years Changing consumer preferences, from pure aesthetics to value added features Resumption in the capex cycle raising demand for industrial paints
High entry barriers favour incumbents – Unlike in the FMCG sector, where many new entrants (eg, Perfetti, L’Oreal) have been successful, there is not even one such instance in the paint industry. This is because of the high entry barriers – a tough to create direct-to-retail distribution channel, low consumer involvement making brand building difficult, negligible contract manufacturing and high logistics costs implying plants need be close to markets. In addition, with APL commanding above 50% market share without making ‘abnormal’ margins makes it the price setter and reduces the relative pricing power of competitors. Margins steady and improving – Being an oligopolistic industry, margins have been resilient in the past, but suffered in FY09 due to the increase in crude prices and demand slowdown. Nevertheless, softening input prices in FY10 and sharp demand recovery saw margins not just recover but rise to higher-than-historical levels. In 1H FY11, the industry has maintained margins at these levels despite the sharp rise in input costs. Going forward, we expect margins to remain steady or improve as up trading happens at a faster pace. In addition, strong volume growth is likely to lead to operating leverage. However, note that the industry is in capacity expansion mode and any demand slow down could hurt margins. Paint companies have consistently outperformed the broader market – All the paints companies have benefited from the strong fundamental growth in the sector and have significantly outperformed the Sensex in the past 10 years. Fig 1 – Paint companies have outperformed the broader market in the past 10 years
Asian Paints 10-yr volume CAGR (FY00-10) 10-yr sales CAGR (FY00-10) 10-yr PAT CAGR (FY00-10) 5-yr stock return CAGR w/o dividend 10-yr stock return CAGR w/o dividend
Kansai Nerolac 11.1 12.2 14.5 17.3 37.0
Berger Paints BSE Sensex 12.6 14.7 14.1 16.7 29.4 15.0 16.7
14.1 16.7 17.7 36.0 31.5
l Equity Research l
India Paint Sector l 19 January 2011
Stock summary and valuation
APL is our preferred pick (OUTPERFORM; Price target: Rs3,077) APL is best-placed to ride on the structural growth of the paints sector in India. We expect its market leadership, comprehensive product portfolio, nation-wide dealer network and continuous launch of innovative products/services to support higher-than-industry growth. We estimate 17.8% consolidated sales CAGR over FY10-13E.
Supported by the rapid shift to premium products and strong operating leverage, we expect APL to maintain higher-than-historical margins in the medium term, leading to strong consolidated EPS CAGR of 18.6% over FY10-13E. At FY12E P/E of 24.8x, APL trades at a premium of 27% to its historical five-year median, which we feel is rational especially given the sharp improvement in return ratios (RoE has improved from 32.1% in FY05 to 52.5% in FY10). We initiate coverage with an OUTPERFORM rating and price target of Rs3,077 (valuing it at a forward P/E of 24x). We note that as per our Standard Chartered Category Attractiveness model (Refer to our India Consumer Sector report), decorative paints stands among the top-5 categories (when weighed against top-25 FMCG categories) indicating high growth and stable profitability even when compared with FMCG categories. In our relative valuation model, APL rates as the third best company in our consumer universe on the back of high growth, sustainable margins, good RoE and dividend payout. Hence, it deserves to trade in line with peers like ITC & HUL and thus we value it at forward P/E of 24x.
Fig 2 – APL: P/E bands
3,500 3,000 2,500 Rs 2,000 1,500 1,000 500 0 Mar-06 Mar-07 Apr-05 Aug-07 Aug-08 Aug-09 Jan-10 Jul-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 32x 28x 24x 20x 16x
Source: Company data, Bloomberg, Standard Chartered Research
Fig 3 – APL: One-year forward P/E chart
35 30 PE (x) 25 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10
One year forward P/E
Source: Company data, Standard Chartered Research
l Equity Research l
a discount of 25% to APL’s target multiple. Nevertheless. valuations are dear. Price target: Rs852) Strong growth in auto sales enabled KNPL to post over 20% volume growth in the past 18 months. KNPL has delivered stable EBITDA margins at ~14-15% in FY04-08 except in FY09. we expect FY11E volume growth to be equally strong at 20%.India Paint Sector l 19 January 2011 Fig 4 – APL: Premium over Sensex 100 80 60 % 40 20 0 -20 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Premium to sensex Source: Company data. Our EPS CAGR estimate over FY10-13E is 16.000 800 Rs 600 400 200 0 Mar-06 Mar-07 Aug-07 Aug-08 Aug-09 Jan-10 Jul-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 Apr-05 28x 24x 20x 16x 12x Source: Company data. and hence we initiate with UNDERPERFORM and price target of Rs852. however. Bloomberg.5% in FY12 and FY13E. we expect volume growth to slow to 14. due to a high base and likely moderation in auto sales. We value KNPL at a forward P/E of 18x. At FY12 P/E of 21.7x.9%. We expect KNPL to maintain EBITDA margin at ~15% over FY11-13E. Standard Chartered Research l Equity Research l 5 . note that margins are vulnerable to any sharp increase in input prices or a demand slowdown.2% sales CAGR over FY10-13E.200 1. Standard Chartered Research Five-year median KNPL − Valuations expensive (UNDERPERFORM. when it declined to 11. We estimate KNPL would post 18. compared with its 18% five-year median discount to APL due to growth moderation.5% due to a rapid increase in crude prices and a demand slowdown. Fig 5 – KNPL: P/E bands 1.
India Paint Sector l 19 January 2011 Fig 6 – KNPL: One-year forward P/E chart 30 25 PE (x) 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 One year forward P/E Source: Company data. Standard Chartered Research Five-year median Risks Paint demand is highly correlated to economic growth. as they have already taken ~10-11% price hike since May ’10. 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. In the near-term. 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. Hence. hence a slowdown from current levels of GDP growth could be detrimental to the sector. In addition. margins might be impacted. l Equity Research l 6 . Standard Chartered Research Median P/E Fig 7 – KNPL: Discount to Asian Paints 60 40 20 % 0 -20 -40 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Discount to APL Source: Company data.
the paint industry has posted strong sales CAGR of 17. nearly double the size of the largest FMCG category (at Rs113bn. we expect industry volume to post CAGR of 13-15% over the same period.5kg and 7. Standard Chartered Research Paint volume growth likely to be 13-15% over FY11-13E India’s paint industry size is estimated to be Rs190bn (~2m kilolitre by volume). Given estimated GDP growth of 8.6% during the same period. World Source: PPG Presentation 2009.8% Fig 11 – Volume growth 1. Despite fast growth. this robust volume increase is structural in nature. This makes paints one of the fastest-growing categories. In addition. There is a high correlation between GDP growth and paint volume growth – paint volume has increased 1. India’s low per-capita consumption compared with Asian peers implies ample scope for growth and. Despite the large size. Fig 10 – Paints market size by value 200 180 160 140 Rs bn 120 100 80 60 40 FY05 FY06 FY07 FY08 FY09 FY10 CAGR 04-10: 17. even when compared with other large high-growth FMCG categories. behind leader China.0kg for Asia Pacific and the World. India’s per capita paint consumption is still abysmally low at 1. biscuits is the largest FMCG category). Fig 8 – Paints growth in various countries 25 20 CAGR 04-08 (%) 15 10 5 0 -5 India Indonesia Malaysia Vietnam Australia Thailand Japan Korea China Fig 9 – Per capita paints consumption 25 kg consumed per person 20 15 10 5 Malaysia 0 Australia Japan Korea 1.5-9.5kg/year compared with 4.6x (on an average) real GDP growth.India Paint Sector l 19 January 2011 A structural growth story India is the fastest growing paint market in Asia Pacific India’s strong economic growth has propelled the paint industry to double-digit growth over the past few years and has made it Asia Pacific’s fastest growing paint market. Asian Paints Annual Reports Source: Company data. Asia Pacific Thailand Avg. Standard Chartered Research Source: PPG Presentation 2009. hence. Volume growth of the top-five organised players stood at 13.5-2x GDP growth 18 16 14 12 10 8 6 4 2 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY13E % Real GDP growth Paint volume growth Source: Industry. India is also the second largest coatings market in Asia-Pacific ex-Japan (16% share).5 Indonesia FY12E Avg.8% over FY05-10. Standard Chartered Research estimates Note: Total volume growth of top-five paint companies in organised sector l Equity Research l Vietnam China India 7 . respectively.0% over FY11E-13E.
with decorative paints growing at a higher rate than industrial paints. translating into increase in demand for repainting. where entry barriers are high and the ‘top-5’ players capture most of the market. which are 1) robust economic growth resulting in higher disposable income. 5) change in perception towards painting. while the unorganised market is highly fragmented with over 2. Unlike in most developed countries. In addition. volatility in raw material prices and increasing brand awareness should result in a further decrease in the share of unorganised players. The organised market is highly concentrated and a classic example of an oligopoly. Fig 13 – Product segmentation – Decorative paints form the bulk of the market Industrial 33% Decorative 67% Source: Industry data. Standard Chartered Research Repainting accounts for ~70% of decoratives demand Demand for decorative paints is derived from two sources – repainting and new construction. while the remaining is from new civil construction with a lag of 12-18 months between construction and painting. we expect significant up-trading – from distemper to interior emulsions. Decorative paints to grow faster The paint market can be divided into two broad product segments – decorative and industrial. Introduction of goods and service tax (GST). where the decorative paints to industrial paints ratio is 50:50. Standard Chartered Research Volume Share of unorganised players to decline further from the current 35% According to the India Paints Association (IPA). 4) launch of ‘affordable housing’. 2) real estate boom in the past few years. Decorative paints are set for higher growth. l Equity Research l Washing Powder Industrial 24% Toilet Soaps 8 . cement paints to exterior emulsions and low-end emulsions to premium emulsions. Company data. ~65% of the paint market is organised.India Paint Sector l 19 January 2011 Fig 12 – Growth in paints versus top 10 FMCG categories in the past five years CAGR FY05-10 (%) Paint category growing faster than many FMCG categories 40 30 20 10 0 35 33 24 20 23 18 22 15 21 14 18 14 15 4 14 0 Detergent cakes 14 4 Packaged Tea 12 9 11 5 Namkins Hair Oils Edible Oils Biscuits Skin Creams Tooth Pastes Decorative 76% Paints Value Source: Industry. high growth in emulsion and premium products. in India decorative paints form the bulk of the market.000 players. resulting in increasing share for their organised counterparts. Introduction of VAT. We expect the paint industry to register 13-15% volume CAGR through FY11-13E. apart from overall volume growth. their unorganised peers are mainly regional and deal in low-value products. Repainting accounts for ~70% of demand. While organised players have a nationwide manufacturing presence. 3) continued growth in real estate. 6) shift in demographic profile resulting in increase in number of households and 7) various innovations by large players. given in-place demand drivers. both in value and volume terms. decline in excise duty and preference for better quality products have resulted in slower growth for the unorganised players.
To address the shortage. the government and the developers are focusing on affordable housing projects. These factors will be direct demand boosters for the paint industry. This will further boost housing demand. Favourable demographic profile Increase in number of households owing to urbanisation and nuclearisation of Indian families is driving demand for housing.5 in 1991 to 4. low-cost cans (Rs60/200ml) – by APL to help consumers visualise the real look of the wall 9 l Equity Research l . Also. Average household size in urban areas has decreased from 5. driven by strong growth in private consumption. Rise in advertising by paint companies for protective exterior coatings with long durability has led to increasing consumption of exterior emulsions and made it one the fastest growing paint categories. from being perceived as an aesthetic product to being aware about the protective nature of paints. In Dec’10 it launched another value homes project in Vasind near Mumbai. Real estate boom in the past few years.5 in 1991 to 4.India Paint Sector l 19 January 2011 Robust economic growth will continue to be the macro driver Our economist estimates strong GDP growth of 8.3 in 2007.0% in FY12E and FY13E. hasslefree painting services with other colour selection-related help offered by players like APL and Berger are increasingly making the painting experience convenient Introduction of ‘samplers’ – small-size. largely in the middle and low-income groups) and repainting of existing stock built in the housing boom of the past five years will increase usage of decorative paints. we expect decorative paints to grow on the back of strong economic momentum. Growth in IT and ITES and financial services will require additional commercial space. is likely to soften gradually to 6. Inflation. respectively. It plans to invest Rs25bn in value homes segment by 2011. Availability of low ticket-size home loans at cheaper rates is also increasing demand for affordable housing. Standard Chartered Research Real estate boom in the past few years should lead to strong demand for repainting Exterior emulsions fastest-growing subsegment within decorative paints Perception change from aesthetic to protective coating Perception about paints is changing rapidly – from being the most delayed decision in the household to being a core part of home décor. This will increase consumption of low-cost emulsions going forward.2% in FY11E. the real estate sector is likely to play a significant role in the country’s economic growth.4m units. the proportion of the population in the earning age bracket (20–59 years) is expected to increase 200-300bps by 2015E. Given the high correlation between GDP and paint volume growth. it is estimated that need for retail space will grow multi-fold. Some examples of various innovative offerings are: Average household size in urban area has decreased from 5.3 in 2007 Painting was considered to be a messy affair involving a lot of pre-planning. However.5% and 5. Launch of various innovative offerings Various paint companies are creating new avenues of demand for paints by launching innovative products and services. Fig 14 – Tata’s affordable housing projects Tata Housing’s Value Homes project in Boisar. With organised retail growing steadily and discussions on FDI relaxation taking place. though likely to be high at 8. Rapid urbanisation leading to strong demand for new residential units (current space shortage is close to 19. Mumbai was over subscribed 7x the flats available for sale.5-9% over FY11-13E. They are not only changing perception toward paints but also making it convenient for the consumers. This rapid change in perception is likely to help drive demand in semi-urban households. Source: Company data. This is probably one of the key reasons for the significantly higher growth in tier 2 and 3 towns. with focus on affordable housing Notwithstanding temporary hitches.
Fig 15 – Decorative paints segmentation Wood finishes Cement 5% paint 4% Putty 4% Distemper 13% Emulsions (exterior) 14% Primers. Standard Chartered Research Source: Asian Paints. growth in emulsions has been significantly higher than that of other paints. Standard Chartered Research Fig 17 – Price segmentation Price range (Rs/lt) > 200 100 . According to industry experts. which works out to 0.7 2.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.200 <100 Vol. Also. High durability. water-based emulsions.6 Source: Industry data.500. comprising nearly one-third of the market.5 1.1-0. IPA. 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. Uptrading in decoratives happening at a fast pace Emulsions increasingly substituting lower-end paints In the past few years. Standard Chartered Research Source: Industry data. market leader Asian Paints has heavily advertised its luxury emulsion brands Royale and Apex Ultima with minimal ad-campaigns for its other brands. improving affordability. Standard Chartered Research l Equity Research l 10 . our industry interactions point towards a new trend – higher-end emulsions like Royale & Apex Ultima have been growing at a much faster pace than the overall category. have been increasingly substituting lower-end paints such as distempers. more environmental-friendly and increasing affordability due to availability of economy emulsions at a relatively lower cost have been driving the shift to emulsions. This trend could be attributed to marketing attention being focussed on premium emulsions. We note that material cost for painting an apartment of 1000 sq ft carpet area with the most premium paint is ~Rs16. cement paints and enamels. In the past five years.5% of the asset value. thinners 11% Enamels 33% North 26% Emulsions (interior) 17% Premium & luxury emulsions growing at a rapid pace Fig 16 – Geographic segmentation East 14% West 32% South 28% Source: Indian Small Scale Paints Association. As per our interactions with industry sources. contribution 20% 40% 40% Fig 18 – Paint material costs Paint type Luxury Emulsion Premium Emulsion Economy Emulsion Distemper Material cost Rs/sqft 3. better looking finish in a wider colour range. premium products (>Rs200 per litre) contribute only ~20% to industry volumes indicating that there is a significant scope for up trading. While the trend of higher growth in emulsions continue.8 1.
is amongst the fastest-growing industrial coatings segments.India Paint Sector l 19 January 2011 Growth in Industrial paints steady The industrial paints segment is dominated by the organised sector owing to its high technology orientation. Fig 19 – Industrial paints segmentation Other industrial coatings 15% Powder coatings 15% Fig 20 – Growth in automobile-segments 40 30 20 10 % Auto paints 45% 0 -10 -20 -30 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Protective coatings 25% Source: Industry. electrical equipments and interiors of trains & buses. moderation in growth rates expected Economic growth in the past few years has attracted global auto companies to Indian markets. India has emerged as a favourite investment destination and is slowly transforming into an export hub for global auto manufacturers. As demand for industrial paints is mainly derived in nature. the nextlargest segment (25% of industrial paints segment) derives its demand from industrial plants and machinery setups. This revival in growth has resulted in strong performance of auto paint companies like Kansai Nerolac (auto paints comprises ~35% of overall sales). the segment’s growth is dependent on various industries such as automobiles and consumer durables as well as infrastructure spending on roads. Volume in auto sector has revived handsomely post the poor show due to global economic slowdown in FY09. l Equity Research l FY13E 11 . Consumer durables and auto-ancillary products use powder coatings. However. power plants. etc. Standard Chartered Research PV CV Two-wheeler Source: SIAM. price rationalisation. respectively. it forms one-third of the industry in terms of value and we don’t see it changing significantly in the near term as we expect decorative growth to be marginally higher than industrial. growth rates for the automotive sector are expected to moderate. In developed markets. where as coil coatings are used in industrial construction. demand for industrial paints is expected to grow at a healthy pace. Growth in domestic sales of passenger vehicles (PVs) was 29.4% in FY10 and is expected to be an impressive ~25% in FY11E. Performance coatings. expected revival of capex cycle augurs well for powder coatings. Moreover. Auto sector – On a high base. Standard Chartered Research estimates Strong growth in consumer appliances to increase demand for powder coatings Powder coatings. industrial paints contribute 50% of the overall industry. All industrial segments to contribute to growth Automotive paints form ~45% of the industrial paints segment. but in India. Our auto analyst expects PVs to grow at 16% and 14% in FY12E and FY13E. a technologically intensive segment. on a high base. easier financing and wider distribution. On the back of increasing affordability. increasing auto exports and rising investments in infrastructure projects. With robust growth in domestic sales of automobiles. marine development. we expect growth rates of white goods to be strong going forward.
roads. Standard Chartered Research Significant investments in infrastructure projects Other industrial paint segments such as performance coatings. coil and marine coatings are expected to surge on the back of strong investment in infrastructure projects such as power. Standard Chartered Research Source: CSO. The projected investment in the infrastructure sector is expected to double to US$1trn over 2007-12 compared with US$514bn during 2002-07. All the sectors like ports.India Paint Sector l 19 January 2011 Fig 21 – Growth expected in white goods Product TV Refrigerator Washing m/c AC Value growth FY03-08 FY08-13E 3 7-9 8 9-11 12 10-12 16 14-16 Fig 22 – Consumer durable ind. railways and airports are expected to witness significant investments. growth 50 40 30 20 % 10 0 -10 -20 Apr'05 Apr'06 Apr'07 Apr'08 Apr'09 Oct'05 Oct'06 Oct'07 Oct'08 Oct'09 Apr'10 Oct'10 Source: Industry. l Equity Research l 12 . ports and roads.
Nippon and Sherwin Williams have also entered the Indian market in the past few years. It currently has a small network of >175 dealers. but has also taken judicious price cuts when input costs have reduced. Despite this. It initially planned to gain market share of 8% by ’10.000 players in the unorganised segment. Since the acquisition.8 Berger 20. It has opened two new plants and plans to invest another Rs2.0% Berger 13. It opened its first store in February ’09 in Bangalore. the other top-four players have also largely maintained their share. brand building and manufacturing.0% Source: Industry.0% Berger 16.000te of powder coating.5bn over the next three years to double capacity of the Chennai plant. Thus. there are over 2. In the past four years. Standard Chartered Research Fig 24 – International players have not been able to gather momentum Nippon Paints Nippon. the industry works as a cosy oligopoly. Fig 23 – Market share of organised players (top-5) Akzo Nobel 9. despite sharp increase in input costs. No new player has been able to garner any scale mainly owing to the high entry barriers in distribution. 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. the Jotun Group set up shop in India in 2005 – It invested Rs1. but.2% Kansai Nerolac 11. Also. As per industry estimates. but also gained market share. and strong brand equity. other large players have not attempted to gain market share via price cuts. Thus.25bn to set up a manufacturing unit in Pune. Asia’s largest coatings maker.0% Asian Paints 59. Various international players such as Jotun. Sherwin Williams Sherwin Williams started operations in India by acquiring the paints unit of the Nitco Group in ’06 for ~Rs2bn. commencing operations in the South by investing Rs800m to build a manufacturing unit in Chennai. hence.0% Shalimar 10.0% APL has established itself as a ‘price setter’ Asian Paints 51.7 Kansai Nerolac 18.0% Industrial Others 9. It also operates through a network of 3. Source: Standard Chartered Research l Equity Research l 13 .0% Decorative Akzo Nobel 10.0% Asian Paints 20.7 Kansai Nerolac 48. Jotun India Part of the Norway-based paints major. exhaustive product portfolio.000 Nitco dealers. this seems unlikely. APL has been able to improve its leadership position on account of its nationwide distribution network. APL has not only maintained leadership position. with turnover of ~Rs2. it has not been able to significantly scale up its presence. it has only been able to have 500 dealers with presence in seven states and intends to have a pan-India presence by 2012.1 Overall Shalimar 3. it has not only passed-on raw material cost hikes to the consumer. APL has ensured that on a ‘like-to-like’ basis it does not make ‘abnormal’ margins. It is also looking for land to setup one more unit with an investment of Rs1bn in North India. with 50m litre capacity of wet paint and 10. industry margins have not only been stable. but have also risen marginally. entered India in 2006.5bn in CY08.India Paint Sector l 19 January 2011 Industry structure − A cosy oligopoly Top five players have maintained market share despite entry of foreign players Decorative paints’ low technological requirement had historically attracted various small players foraying into the segment. APL has established itself as a ‘price setter’ in the industry. hence.
Thus.35 sq ft). it is probably easier to set up FMCG distribution than distribution in paints. in paints. high spend on advertising and sampling. hence. thereby leading to lack of space for a retailer to keep more than 1-2 tinting machines. Tinting machines required to sell emulsions act as significant barrier Most large outlets that sell emulsion paints have tinting machines that are used to generate the desired shade. the distribution chain does not have any wholesale distributors. Also. even though the latter may give credit to retailers. thereby discouraging retailers to introduce new brands. low consumer involvement and high retailer involvement and non-existence of third-party wholesale channel makes distribution in paints extremely difficult. distribution is direct to retail Unlike in the FMCG sector. paint companies’ relationship with painter associations and architects is critical in establishing a stronghold as the latter largely influence paint usage. tinting machines require significant space (25. However. Compared with this. the industry gives a credit of three weeks to retailers). brand building is a much more complex and time-consuming process. in paints. Also. traditional avenues of brand building are not easily available. paint retailers are not inclined to introduce new products. contractors and dealers/retailers signifying higher involvement of influencers. Also. This has become a significant entry barrier. as the number of retailers. the paint industry has no wholesale distributors who break bulk or help manage credit to retailers.500 distributors. it is extremely difficult for a new company to set up new tinting machines in existing outlets. Most FMCG companies do not give credit to wholesale distributors.000 is much lower than the ~ 7 m FMCG stores. any FMCG company has to directly deal with only 500-1. Thus. consumer decisions of buying paints continues to be highly influenced by painters. However. any company planning a pan-India presence needs to directly deal with thousands of retailers and manage credit with them (on average. We believe that there is no significant positioning difference between large paints players. distribution for a new paint company is difficult High consumer involvement in FMCG categories leads to consumers demanding for new brands/ products from retailers after being exposed to advertising for these brands/ products in the media. 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. Distribution in paints extremely difficult Tinting machine requires significant space at the retail outlet Brand building relatively more difficult vis-à-vis FMCG Brand building in FMCG entails differentiated positioning (Bingo! versus Lays. Unlike FMCG. Hence. despite increased advertising spends by various companies to increase brand awareness. etc.India Paint Sector l 19 January 2011 Distribution − Highly challenging as compared to FMCG Paints distribution chain does not have any wholesaler Unlike FMCG. at ~ 40. However. However. Provided there is sufficient brand pull. Thus. l Equity Research l 14 . paint being a bulky product tends to occupy significant shelf space. Fair & Handsome versus Fair & Lovely). because of low space & capital requirement retailers are not hesitant to stock new FMCG brands/ products. Hence. in paints.
they tend to lose out on volume discounts offered by companies. Fig 26 – Consumer vs retail involvement of various FMCG categories Consumer involvement High Personal care Packaged food Auto Consumer Durables Low Homecare Staples Paints Low High Retailer involvement Source: Standard Chartered Research l Equity Research l 15 . 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. 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. we do not find a parallel example in paints. While there are many such success stories in FMCG.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. the company is now focussing on specific premium products like Royale and Apex Ultima). Also. decorative paints tend to have low consumer and high retailer involvement. Similarly. Low space and capital requirement backed by sufficent consumer demand makes the retailer stock up new FMCG brand/ products. Due to high consumer involvement in FMCG. While distribution in FMCG is difficult. This was possible mainly on the back of launch of superior & differentiated brands/ products. it achieved its leadership status through unconventional advertising and superior products. signifying low retailer involvement. L’Oreal was successful in achieving leadership position in the hair colour market and significant shares in other categories through superior & differentiated brands/ products. 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. The key reason that describes this anomaly is the fact that while most FMCG categories tend to have high consumer and low retailer involvement. 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!). For example. Lower consumer involvement makes it difficult for paint companies to come up with a differentiated or ‘niche’ offering. hence in most cases they tend to stock just one or two brands. However. In contrast. Significant outlay of space (due to many SKUs and need for tinting machine) and capital requirement makes decorative paints a high involvement category for retailers and hence they are reluctant to keep many brands of paints. while earlier most APL advertising used to be on the ‘har ghar kuch kehta hai’ theme. contractors and dealers. many companies have been able to build a distribution network from scratch.
in paints. Also. Passing on increased cost pressures to institutional customers becomes difficult in an inflationary environment but cost benefits in the event of softening of input prices need to be passed on. Plants in Khandala (Asian Paints). l Equity Research l 16 . High technology and customised requirements in industrial paints have made global tie ups important. where the product can be manufactured in a few locations and then distributed across the country. Fig 27 – Plant locations of major paint companies Outsourcing is limited only to low-end paints Source: Company data. Hence. Hosur (Kansai Nerolac). However. which acts as a natural barrier. Hindupur (Berger) are expected to be commissioned in next 2-3yrs Different entry different barriers for industrial paints Entry barriers in industrial paints are completely different versus decorative paints. For example. For example. Replacing such a large relationship can be challenging and acts as a barrier. However these high entry barriers come at the cost of low bargaining power. Unlike some FMCG manufacturing. replacing a long-term relationship could be major hindrance as it could disturb production. outsourcing in paints is limited to low end Some FMCG categories such as biscuits. the paint company has to work closely with major customers and. Most organised players have installed their own manufacturing units to maintain product quality. requiring a manufacturing presence in close vicinity to markets – unlike in other FMCG categories such as personal products and cigarettes. in certain cases. Kansai Nerolac’s (KNPL) global tie up with Suzuki is an entry barrier for other players. the rest of it was manufactured in-house. any new player planning a pan-India presence also requires manufacturing presence across the country. a large number of Kansai Nerolac’s engineers work closely with Maruti Suzuki. unlike most FMCG categories Paints have high volume-to-value ratio and requires manufacturing near markets Requires manufacturing units in close vicinity to markets Paints have a high volume-to-value ratio and are thus expensive to transport. This results in high initial capital outlay. outsourcing of product manufacturing is limited to certain low-end paints. The top-four players purchased nearly 29% of their total sales volumes. because of the high capex and technological access. alcohol and detergents outsource manufacturing.India Paint Sector l 19 January 2011 Manufacturing – Key barrier.
India Paint Sector l 19 January 2011 Margins – Steady and improving Volatile raw material costs. Nearly 45% of the raw material is linked to crude and. With demand recovery and softening input prices. Standard Chartered Research l Equity Research l 17 . Standard Chartered Research Source: Company data. Due to this global demand supply imbalance. Despite high material costs and volatile nature. is volatile in nature. Fig 28 – SCSI Paints RM Index 180 170 160 150 140 130 120 110 100 90 80 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-10 Oct-10 Margins higher than historical Our Paints RM index has increased 18% from Jan’10 to Nov’10 Fig 29 – Industry EBITDA margins 18 13.2 16 17. However. 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. Our Paints RM index has increased 18% from Jan ’10 to Nov ’10.0 14.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. Hence. however. According to our Paints RM Index.7 14. paint companies have successfully transferred cost to consumers in the past. However. Strong pricing power has enabled the industry to pass on these costs to consumers . prices shot up and availability has become an issue. The margin correction in FY09 was not only due to the sharp rise in crude prices but also due to a combination of factors like sharp drop in demand. CAGR in input costs over FY05-10 has been ~8.2 13.8 20 Source: Industry data. etc. The recession experienced in 2008-09 resulted in the closure of various titanium dioxide and monomoer manufacturing units in Europe. hence. passing of excise benefits to inventory carried by retailers.5 14. we note that it would be difficult for the industry to pass on the input cost increases to industrial consumers in general and automotive companies in particular.1 14. we are not overly concerned by raw material inflation. 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.5%. these capacities might come up again once the situation in these global economies improve. but not a major concern Industry raw material intensive (~60% of sales) The paint industry is raw-material intensive (~60% of sales) and requires >300 constituents. while we are cautious.1 14 12 10 8 6 4 2 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 % 13.0 14. paint companies have been able to manage stable EBITDA margins during this period.5 11.
In this event. Fig 30 – Manufacturing capacity of top-four paint companies Manufacturing capacity expected to double in the next three to four years 2. Berger Paints l Equity Research l Thousand tonnes 18 . However.000 1. This implies a capacity CAGR of ~20%. the capacity of the top four companies is expected to nearly double in the next four years.500 1. any global shocks or slowdown in the Indian economy can create serious supply-side pressure. We believe if economic growth is robust and resultant demand remains strong then this capacity can be absorbed easily. However.000 500 0 FY05 FY06 FY07 FY08 FY09 FY10 FY13-14E A demand shock can create supply side pressure Source: Company data. companies will be more focussed on pushing volume rather than sitting on idle capacity or very poor utilisation. This can seriously impact margins for the industry.500 2. Standard Chartered Research Note: Capacity of top four paint companies including Asian Paints. Akzo Nobel India. Kansai Nerolac. As per announced plans. strong demand in the sector has resulted in ambitious expansion plans for various paint companies.India Paint Sector l 19 January 2011 Demand slowdown in current expansion mode can hurt margins Significant ramp up in capacities of major paint companies Capacities of the top four organised players have increased at a CAGR of 9% over FY05-10.
3 6.9 8.7 11.0 7.5 13.2 15.8 1.6 14.5 9.3 8.463 9.4 38.1 14.4 12.2 10.9 7.2 3.2 (US$m) CAGR (CY10-12E) Sales EBITDA EBITDA margins (%) RoE (%) Div.9 6.9 15.5 13.4 6. Valspar has October YE l Equity Research l 19 .4 1.3 13.4 1.3 13.441 5. Prices as of 13 January 2010 Kansai and Nippon has March YE.8 12.3 10.8 14.9 14.096 3.9 5. P/E (x) EV/EBITDA (x) yield CY11E CY12E CY11E CY12E (%) EPS CY11E CY12E CY11E CY12E Source: Bloomberg.0 7.3 1.6 14.6 16.1 7.3 4.5 12.4 8.3 12.6 6.8 1.4 8.0 11.3 10.2 4.4 11.0 6.3 10.3 10.9 13.0 12.9 13.9 6.9 13.0 6.3 16.5 15.701 2.5 14.3 3.3 11.5 12.8 7.9 33.5 10.1 10.3 1.India Paint Sector l 19 January 2011 Annexure − Comparison with international peers Fig 31 – Operational parameters and valuations of international paint companies Mcap Name Paint companies Kansai Paint Nippon Paint Akzo Nobel Sherwin Williams Valspar Average 2.067 14.5 7.8 1.8 7.0 10.6 10.1 14.
India Paint Sector l 19 January 2011 l Equity Research l 20 .
India Paint Sector l 19 January 2011 Company Section l Equity Research l 21 .
374 3.8 18.0 6.077.813 91.484 12.7 7. Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj. higher margins and improved return ratios are likely to keep APL’s valuations at a premium.2.200 2. In addition.2 22.800 2. Bloomberg BSE SENSEX 30 INDEX (rebased) -1 mth 0 5 -3 mth -12 mth 1 45 8 35 Promoter (52.1% in FY05 to 52.0 2011E 75.000 email@example.com 11. initiate with OUTPERFORM We initiate coverage on APL with an OUTPERFORM rating and 12-month price target of Rs3. Supported by rapid growth in premium products and strong operating leverage.3 18.8 27.6 37. APL trades at a premium of 27% to its historical fiveyear median.693 16. Nevertheless.7 2013E 107.700 14.1 30.5 18.158 Sanjay Singh sanjay. change - Rs1.642 79.855 7.7 1. Our 12-month price target of Rs3.com +91 22 6755 9851 l Equity Research l 22 .6 49.1 38.3 17.9 20. Higher-than-industry growth rate – We expect APL to not only ride the structural growth in the paints category but also post above industry growth mainly supported by 1) strong brand equity built in premium emulsions in the past couple of years coming into play and 2) unmatched distribution network in Tier 2 & 3 towns where growth is likely to remain high.9 15.600 2.8 285 -35 42.3 39.457.179 3. we expect APL to maintain higher-than historical margins in the medium term.com +91 22 6755 9898 Pratik Biyani pratik.3 34.2 7.3%) 6.2 6. Robust growth.6% over FY10-13E. management action (it hiked prices a cumulative 11% in FY11 despite the high margin) indicates comfort with current margins.9 30. higher operating leverage and economies of scale.889 19.2 5.2 1.738 132.India Paint Sector l 19 January 2011 Asian Paints Limited (APL) High margins here to stay.478m (US$5.139 12.9 56. We expect APL to post higher-than-industry growth with consolidated sales CAGR of 17.032 16.800 1.811m) EPS est.4 44.8 19.077 Reuters code APNT IN Market cap ASPN.5 2.5 45. Risks – Adverse movement in raw material prices coupled with complete withdrawal of stimulus benefits and any demand slowdown in an environment where capacities are expected to increase sharply. APL is well-placed to ride the structural growth in India’s paint sector. Standard Chartered Research estimates Share price performance 3.2 11.0 54.005 13.7 20. which we feel is rational especially given the sharp improvement in return ratios (RoE has improved from 32.1 11.3 35.7 92.4 9.1 Source: Company.BO 12 month range Rs261.292 16.077 is based on forward P/E of 24x.6 178 -29 52.671 20.9 11. leading to strong consolidated EPS CAGR of 18.7 37.105 10.4 48.518 8.3 11.8x.862 2.000 1.8 20.3 2012E 90.8 1.5 42.174 19.4 18.533 109.3 353 -34 41.400 2.977 - High margins for the medium term – APL’s current standalone EBITDA margin of >19% is significantly higher than historical margins (15-16%).9 15.3 17.4 18.4 18.600 Jan‐10 Apr‐10 Jul‐10 Oct‐10 Jan‐11 Asian Paints Limited Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$) Source: Company.5 24.019 2. Valuations still in a rational zone – At FY12E P/E of 24. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROCE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%) 2010 66.6 229 -30 45.4 12.5% in FY10).726 Bloomberg code Rs3.9 29.679 13.9 15. OUTPERFORM (initiating coverage) PRICE (as at 14 January 11) PRICE TARGET Rs2. Note that management is planning aggressive capacity expansion – doubling capacity in the next four years.8% over FY10-13E. we expect APL to maintain current levels in the medium term given an improving product mix (premium emulsions growing at a fast pace).firstname.lastname@example.org% over FY10-13E.0 18.045 12. We expect it to post robust standalone sales CAGR of 22.761 .9 11.
2) comprehensive product portfolio with strong presence in premium emulsions.5 4.8%.5 3.0 Source: Company data.3 Source: Company data.7%.0 9. however. Fig 1 – APL vs. 3) unmatched distribution network especially in Tier 2 & 3 towns where the growth has been higher in recent times and 4) successful launch of new products and innovative services.6 4.0 4.5 5. Industry volume growth 15.7 45. Standard Chartered Research 8. expected withdrawal of excise benefits could result in lower net sales CAGR of 20.3 3.5 Fig 2 – APL − Standalone sales & growth 110 90 Rs bn 70 50 30 10 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 30 25 20 15 10 5 % Net sales (LHS) YoY growth (RHS) Industry APL Source: Company data. Consistently increasing ad-spend has worked in its favour – its market share improved from 44% in FY05 to 52% in FY10 in the overall paints market.6 17.1 13.2 13.8% over FY10-13E. Fig 3 – APL − Market share 50.8 16 11.8% volume CAGR compared with the organised industry’s 13.0 4.1 8. We estimate gross sales CAGR of 22.0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 3.7 44.4 15.5 2. is even higher at ~60%. Standard Chartered Research l Equity Research l 23 .7 54 52 50 46.9 4. It has also been able to reposition the paint category from a commodity product to a branded product with aesthetic and protective values.7 3.8 Source: Company data.7 3. Decorative paints contribution to APL’s standalone sales is greater than 95%. Standard Chartered Research Market share amongst top five paint companies 44.4 11.7 % 13 10 7 4 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 16.0 4.4 19 13.8 14.4 17.0 2.0 3.0 % 4.6%. APL posted 15.6 4. We expect APL to continue posting higher-than-industry growth supported by 1) strong brand equity. Standard Chartered Research estimates Improved market share from 44% in FY05 to 52% in FY10 Strong brand equity with focus on decorative paints APL’s successful marketing campaigns over the years have made it the leading player in the decorative segment with nearly three times the market share of the nearest competitor. gross sales CAGR was a robust 19.9 Fig 4 – APL − Adspends-to-sales increased 5. which contributes ~76% of total market volume. APL’s market share in decorative paints. Asian Paints (APL) has not only successfully leveraged the strong category growth but has also consistently outperformed the industry. Over FY05-10.9 45.5 51.9 45.6 16.6 13.India Paint Sector l 19 January 2011 Investment argument and valuation Growing faster than industry APL has consistently registered higher-than industry growth in the past five years Growth in paints is structural in nature and volume is normally in the mid-teens.5 48 % 46 44 42 40 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 44.6 4.
in interior emulsions it has the highest-selling and attractively priced economy brand Tractor and hugely successful Royale in the premium end. In FY08.India Paint Sector l 19 January 2011 Comprehensive product portfolio − Exterior and premium emulsions growing faster APL has the most comprehensive product portfolio among paint companies. as smaller towns have posted faster growth than large towns. It has products ranging from low-end distemper to specialty premium paints with brands varying across price points in each paint type.000 12.000 dealers across India. Fig 5 – APL’s tinting machines 20.000 20.000 by Nov ’10. which has 14.000 25. shades. 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 .000 Tinting m/c Dealers Source: Company data. It has benefited from its strong presence in tier 2 and 3 cities. The number of tinting machines had risen over eight times in the past 10 years to ~17. nearly twice the size of its nearest competitor (Berger Paints).000 4. compared with 6.000 10. while only a couple of campaigns were run for its economy brands Tractor (emulsion) and Utsav (distemper). Standard Chartered Research Launch of innovative products/services APL has been at the forefront of making painting a convenient and colourful experience by introducing innovative products.000 machines for the second-largest player. 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. For example.000 15. enamels or distempers. Unmatched distribution network − Strongest in tier 2 & 3 cities APL has a wide and formidable distribution network of 26. in enamels it has Gattu at the economy end and Apcolite at the premium end. Advertising focus in past five years on premium emulsions Its premium emulsion brands Royale (interior) and Apex Ultima (exterior) are growing at a much faster pace than other emulsions. etc It launched a retail signature store ‘Colour with Asian Paints’ in 2009 which doesn’t sell paints.000 dealers Fig 6 – Competitors tinting machines 30.000 16. Standard Chartered Research * Tinting machines installed till Nov’10 Source: Company data.000 8. A strong advertising push for premium brands might have urged consumers to up trade – in the past five years Royale and Apex Ultima were the most advertised APL brands on television. services and retail initiatives. 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.000 0 APL KNPL 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11* Berger Akzo Nobel India Strong and wide network of 26.000 dealers.000 5. online consultations with experts to select paints.
7 Source: Company data. Standard Chartered Research estimates Fig 9 – APL: Standalone adspends-to-sales 5.9 4.5 18 % 16 14 12 10 15. In FY09. This also helps APL to command higher margins than competitors. We note that APL’s EBITDA margin and gross margin expansion (since FY08) have been higher than those for other players. indicating that APL’s margin expansion could partly be attributed to improvement in product mix.5 2.5 4.7 19.7 4.2 55. however.4 19. APL was able to maintain EBITDA margin in the tight range of 15-16%. Fig 7 – APL: Standalone RM cost-to-sales 66 64 57. 3) operating leverage from strong volume growth and 4) economies of scale benefits.6 4. evident in declining other cost-to-sales.7% in FY10.7% – supported by higher operating leverage.5 EBITDA margin likely to remain above 19% Fig 8 – APL: Standalone EBITDA margin 19.7 4.0 % 3. EBITDA margin rose higher – up 660bps yoy to 19.0 4.9 21.4 FY13E 18.3 15. This has helped APL to post standalone EBITDA margin of 19.0 4. Industry interactions indicate that premium emusions are growing faster than other segments.9% in 1H FY11.8 57.5 5.1 FY04 FY05 FY06 FY07 FY10 19. Improving product mix with high growth in premium emulsions Most of Asian Paints’ marketing campaigns are currently targeted at premium emusions like Royale and Apex Ultima.8 4. APL has increased product prices by a cumulative of 11% in FY11 in response to increase in input costs. especially titanium dioxide (Standard Charetered RM index up 23% yoy in Nov ’10).India Paint Sector l 19 January 2011 Higher-than-historical margins here to stay Over FY04-08.8 4.6 Fig 10 – APL: Standalone other cost-sales 22.0 21.5 3.3 FY13E 22 20 57.1 62 60 58 56 54 52 50 48 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E % 57.7 15.8 22. We expect APL to maintain EBITDA margin above 19% (higher than historical level of 15-16%) in the medium term given 1) management’s intent to maintain margins at these levels reflected in recent price increases. l Equity Research l 19.2 58. gross margin bounced back 580bps yoy.9 26 24 22 20 % 18 16 14 12 FY04 FY05 FY06 FY07 FY08 FY09 FY11E 22. margin fell to 13. demonstrating management’s intent to maintain margins at these levels.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 3.1 FY11E 25 .9 59. as inputs costs softened and product mix improved. Standard Chartered Research estimates Source: Company data.6 61.3 20.1% as demand slowed and input costs rose.2 FY08 FY09 13. 2) improving product mix.6 56.0 4.8 FY10 Source: Company data. Standard Chartered Research estimates Raising prices four times in FY11 shows management’s intent Significant price increases.0 16.8 58.2 15. Standard Chartered Research estimates Source: Company data. despite margins at all-time high Despite EBITDA margin being at an all-time high of 19.0 4.0 2. In FY10.8 FY12E 19.3 FY12E 18.
0 60 14. In addition.3 13.1 8.5 11. Standard Chartered Research estimates * FY10 results for overseas business includes result for 15 months l Equity Research l Berger Paints Asian Paints Akzo Nobel India 16.8 25 20 15 % 10 5 0 Kansai Nerolac Berger Paints Asian Paints Akzo Nobel India Fig 12 – RoCE of paint companies 50 47. Standard Chartered Research International business − Grim economic scenario Rationalisation of international operations improved profitability The global slowdown and divestment of some international businesses resulted in muted sales growth of 6.3 26 .4 40 % 30 20 10 0 20.7 33. China and Thailand in FY10 improved the profitability of the international business – from a loss of Rs175m in FY09 to a profit of Rs480m. Hong Kong.India Paint Sector l 19 January 2011 Benefits from economies of scale and higher capacity utilisation Economies of scale offer significant advantages APL’s current manufacturing capacity is ~440.7 15. However.4 10. YoY growth numbers are adjusted for it.0 14. APL’s high capacity utilisation of ~90% compared with peers’ 70% result in higher asset turnover and better return on capital employed (RoCE) than competitiors. APL plans to increase capacity to ~1m tonnes over the next three to four years. the new plants are much larger than existing plants.2 14.9 12.4 2.6 20.5 10. the divestment of loss-making international subsidiaries in Malaysia. Standard Chartered Research estimates * FY10 results for overseas business includes result for 15 months.9 8.9 14. double that of the second-largest decoratives player.5 15. Fig 13 – International sales and growth 18 15 12 Rs bn 9 6 3 0 FY04 FY05 FY06 FY07 FY08 FY09 FY11E FY12E FY13E FY10* 15 10 5 30 25 20 % Fig 14 – International EBIT margin 16 14 12 10 % 8 6 4 2 0 FY06 FY07 FY08 FY09 FY11E FY12E FY13E FY10* 0.1 14. Fig 11 – EBITDA margin of paint companies 16.6 International sales (LHS) YoY growth (RHS) Source: Company data. Standard Chartered Research Source: Company data. We expect this to help APL maintain higher-than-histroical margins.7% (adjusted for 15 months’ sales) in FY10.3 21.1 11. Source: Company data.2 19.2 16.000 tonnes.1 Kansai Nerolac FY08 FY09 FY10 FY09 FY10 Source: Company data.4 7. offering it significant benefits from economies of scale.5 10.
Standard Chartered Research estimates APICL: Asian Paints Industrial Coatings Ltd. 27% premium to its five-year median P/E of 19. While valuations may appear expensive compared with the historical median.6% over FY10-13E. saw some up-tick in non-auto industrial paint demand in 2Q FY11 over 1Q FY11.6x.2% in 1H FY11. An extended monsoon has also led to delays in projects and maintenance demand. which we expect to improve further in FY12-13E. Overall. continue to remain uncertain and challenging.India Paint Sector l 19 January 2011 Fig 15 – International sales breakup FY10* South East Asia 8% South Asia 15% South Pacific 7% Middle East 54% Fig 16 – International EBIT breakup FY10* South Pacific South 7% East Asia 8% South Asia 13% Middle East 66% Caribbean 16% Caribbean 6% Source: Company data. We expect international market conditions to improve and estimate growth of 7. FY13E Source: Company data. which will enable it to post strong EPS CAGR of 18. APL has consistently seen earnings upgrades and hence the historical median might l Equity Research l 27 . Fig 17 – Industrial sales 6 5 4 35 30 25 20 15 10 5 0 -5 Fig 18 – Second in industrial paints Others 9% Shalimar 10% Kansai Nerolac 48% Rs bn 3 2 1 0 % Berger 13% APL + PPG 20% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Net Sales (LHS) YoY growth (RHS) Source: Company data. international sales grew 3. we find the paint category highly attractive. the Middle East and the Caribbean.9% yoy. We estimate sales growth of 15% in FY11E. Standard Chartered Research * FY10 results for overseas business includes result for 15 months Conditions in APL’s largest international markets.2% in FY11E followed by mid-double digit growth in FY12-13E. Growth in Asian markets was strong at 21. We also expect APL to maintain higher-than-historical margins. while the South Pacific region posted a modest 7. we note that over FY05-10. Standard Chartered Research Valuations in a rational zone . Standard Chartered Research * FY10 results for overseas business includes result for 15 months Source: Company data. where as in the Middle East it was flat. Sales in the Caribbean region declined 11% yoy in 1H FY11.8x. As discussed earlier. APL.7% yoy in 1H FY11. however. Industrial paints − Capex growth yet to pickup Deferral in capex spends impact nonauto industrial paint demand Industrial paints’ growth has been largely driven by strong growth at its automotive JV (Asian PPG Industries). APL is currently trading at FY12E P/E of 24.initiate with Outperform Given long-term structural growth prospects and oligopolistic nature of the industry. we expect APL to deliver higher-than-industry volume growth for some time to come. even when compared with other FMCG categories. We expect international margins to be in the range of 14-15% going forward. Non-auto industrial paint demand has not yet picked up due to deferral of capex spends.
Standard Chartered Research Median P/E Fig 21 – APL − Premium over Sensex 100 80 60 % 40 20 0 -20 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Premium to sensex Source: Company data.500 1. superior margins. we expect stock returns to be moderate from a one-year perspective. stable cash flows and excellent return ratios.000 500 0 Mar-06 Mar-07 Apr-05 Aug-07 Aug-08 Aug-09 Jan-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 Jul-10 32x 28x 24x 20x 16x Source: Company data. l Equity Research l 28 . Standard Chartered Research Five-year median APL stock performance has been strong since the last market peak APL has outperformed the broader indices on a consistent basis.077 is based on forward P/E of 24x.500 3. increasing EBITDA margin and improving return ratios (RoE increased from 32.000 2.5% in FY10) enable APL to trade at higher valuations. We believe APL will continue to command premium valuations on the back of strong growth. Our one-year price target of Rs3. Bloomberg.1% in FY05 to 52.India Paint Sector l 19 January 2011 not give the true picture. Also. Fig 19 – APL − P/E bands 3.500 Rs 2. Since the market peaked in Jan ’08. Given the sharp outperformance over the past few years.000 1. Standard Chartered Research Fig 20 – APL − One-year forward P/E chart 35 30 PE (x) 25 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Dec-10 One year forward P/E Source: Company data. APL stock has jumped 140% versus a flat BSE Sensex.
1 15.5 BSE Sensex 7.4 36. This could lead to short term margin squeeze.7 13.7 44.2 16.India Paint Sector l 19 January 2011 Fig 22 – APL stock performance vis-à-vis broader indices APL 1 year 3 year 5 year 10 year Source: Bloomberg Note: For periods greater than a year. the returns are annualised FMCG Index 28. 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.7 14. l Equity Research l 29 .0 31. implying a capacity increase CAGR of ~19% over the next four years.5 Risks Further increase in prices of raw materials like titanium dioxide or crude combined with complete withdrawal of stimulus benefits could force APL to absorb some of the costs as it has already increased prices four times in FY11.9 34.3 -3.0 16. APL plans to more than double its manufacturing capacity in the next three to four years.
0 16 % 14 12 10 8 6 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 18.6 3.6 Source: Company data.5 3.5 4.8 60.3 20.7 FY13E 58. Fig 23 – APL: Sales & sales growth 120 100 Rs bn 80 60 40 20 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 35 30 25 % Fig 24 – APL: RM cost to sales 63 58.India Paint Sector l 19 January 2011 Financials We estimate consolidated sales.5 4. Standard Chartered Research estimates Fig 27 – APL: EBITDA margin 18. 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.5 2.6 21.3 20 15 10 5 % 59 57 55 53 51 FY04 FY05 FY06 FY07 FY08 FY09 FY10 56.8%.2 Source: Company data.7 22.6% respectively over FY10-13E.3 18.0 2.7 61 57.7 FY12E 58.1 13.0% & 18.5 22 Fig 28 – APL: PAT & PAT growth 14 12 10 Rs bn 12. Standard Chartered Research estimates l Equity Research l 18.3 8 6 4 2 0 PAT YoY growth (RHS) Source: Company data.5 4.5 5. Relatively high capex results in FCF post capex as proportion of reported net profit to be lower at 55-60%. Standard Chartered Research estimates 3. Standard Chartered Research estimates Source: Company data.0 13.0 Net sales (LHS) YoY growth (RHS) Source: Company data.4 19.5 30 25 20 % 15 10 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY13E 100 80 60 40 20 0 -20 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E % 25. Dividend payout is at 40-50% and its RoE is a healthy >40%.1 30 .2 19.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Fig 26 – APL: Other costs as % of sales 24.4 20 14.2 65 60. Standard Chartered Research estimates Source: Company data.6 4.8 62.2 13.3 18.6 4.0 4.5 3.5 59.9 18 13.8 20. EBITDA & EPS CAGR for APL to be at 17. Standard Chartered Research estimates Fig 25 – APL: A&P as % of sales 4. 18.4 4.0 % 3.0 4.5 22.9 FY11E 57.
5 483 8.813 8.EBITDA margin (%) Depreciation & Amortisation Gross Interest Other Income Recurring PBT Add: Extraordinaries Less: Taxes .138 1.3 11.9 18.2 491 8.4 26.2 18.204 21 2.India Paint Sector l 19 January 2011 Fig 29 – APL: Cash flow as % of PAT 160 130 100 Fig 30 – APL: Return ratios 60 50 40 % % 70 40 10 -20 30 20 10 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY11E FY12E Operating Cash Flow FCF post capex FY13E RoE RoCE Source: Company data.986 52.978 3.8 11.738 20.4 18.833 14.032 74.775 186 1. Standard Chartered Research estimates Source: Company data.580 29.926 38.357 7.053 20. Standard Chartered Research estimates Fig 31 – APL: Income statement (Rs m) Year end: March Net Sales .of which Standalone .964 -4.045 51.809 37.5 1.484 0 6.079 16.031 13.403 15.2 FY10 66. Standard Chartered Research estimates l Equity Research l FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 31 .481 186 1.0 703 12.3 1.889 89.8 16.730 31.230 43.3 FY11E 75.706 20.956 62.694 32.694 1.4 FY12E 90.6 22.533 19.005 14.043 31.518 0 4.021 15.648 855 76.789 42.Growth (%) .232 6.533 43.738 12.4 836 285 699 11.9 18.5 11.197 38.of which subsidiaries Other operating income Total Revenue Raw materials consumed Gross Profit .533 10.693 19.7 12.1 18.6 Source: Company.679 62.276 83.998 31.105 0 4.Growth (%) .4 FY13E 107.839 42.3 744 263 517 6.632 33.8 7.312 691 54.096 16.751 18.067 108.630 11.642 92.855 715 3.272 19.941 42.Gross Margin (%) Other operating expenses EBITDA .729 46.813 15.effective tax rate (%) Less: Minority Interest Net Income (Reported) Recurring Net Income .3 1.187 183 882 13.629 954 90.7 216 3.954 12.174 20.9 11.030 32.023 765 66.Net margin (%) FY09 53.3 14.215 31.0 574 10.227 42.
337 2.985 2.357 -208 -932 7.775 -568 13.of which CWIP Goodwill Total Assets Equity Share Capital Reserves & Surplus Net Worth Borrowings Deferred Tax Liability Minority Interest Capital Employed Source: Company.710 1.877 33.945 -2.104 7. In Cash & Bank balance Add: beginning balance Closing balance Source: Company.018 4.309 FY13E 12.899 713 22.659 7.559 5.904 959 21. Standard Chartered Research estimates FY09 3.120 367 31.533 1.978 497 17.091 4.541 6.508 558 -5.783 14.813 1.058 2.188 715 -1.243 10 7.435 10.000 25.058 FY11E 8.220 5.931 6.182 6.209 3.072 367 20.217 2.080 6.423 27.889 1.179 882 64 -4.171 3.593 2.398 10.104 1.026 21.518 17.072 367 25.003 22.309 6.585 4.243 10 6.of which Strategic .086 533 756 16.329 -3.356 562 1.033 1.045 2.908 21 997 1.356 562 1.488 6.569 2.150 16.200 367 37.899 FY11E 2.374 -4.of which Marketable Net Fixed Assets .921 6.100 31.233 21.100 5.738 1.019 579 -4.281 4.653 9.499 334 -1.407 959 11.107 2.401 FY13E 6.India Paint Sector l 19 January 2011 Fig 32 – APL: Balance sheet (Rs m) Year end: March Cash & Bank balance Inventory Sundry Debtors Loans and Advances Other Current Assets Total Current Assets Sundry Creditors Other Current Liabilities Provisions Current Liab.309 13.233 12.141 17.733 18.713 4.556 25.529 14.818 4.580 6.401 959 26.801 4.904 FY12E 5.626 3.698 -3.100 2.048 7.124 8.481 -505 11.032 3.251 867 33.058 9.746 646 18.066 784 10 774 9.073 12.947 1.750 4.104 FY10 8.658 1.383 2.910 4.407 FY10 1.743 10 6.051 921 506 16.855 Fig 33 – APL: Cash Flow statement (Rs m) Year end: March Reported Net Income Depreciation & Amortisation Others Operating Cash flow Working Capital Changes Capital Commitments Free Cash Flow Investing Activities Inc (Dec) in Borrowings Dividend paid Extraordinary Items Chg.187 -392 9.712 -2.243 10 6.233 14.608 -1.531 2. & Prov.100 37.899 959 16.716 5.760 -794 -2.855 959 32.280 -189 2.066 786 28.529 l Equity Research l 32 .775 1. Standard Chartered Research estimates FY09 2.003 -5.810 11.804 -1.817 5.978 147 -322 3.941 14.211 7. Net Current Assets Investments .987 7.425 1.292 562 945 20.862 772 -5.716 10.483 2.719 1.010 6.690 5.836 2.356 562 1.716 FY12E 10.
8 56.9 31.8 1.11 37.3 20.1 l Equity Research l 33 .0 FY11E 91.5 15.0 19.9 12.9 56.3 22.7 11.2 41.3 2.5 19.5 0.4 29.0 2.7 2.5 7.7 48.7 24.1 229.13 38.9 20.7 30.4 83.4 2.7 48.India Paint Sector l 19 January 2011 Fig 34 – APL: Ratios Year end: March Per Share Data (Rs) Recurring EPS Reported EPS Dividend per share (DPS) Book Value per share (BV) Growth Ratios (%) Net Sales EBITDA Recurring EPS Valuation Ratios (x) P/E P/BV EV / EBITDA EV/ Net Sales Operating Ratio (%) Raw Material/Sales SG&A/Sales Effective Tax Rate NWC / Total Assets Inventory Turnover (days) Receivables (days) Payables (days) D/E Ratio (x) Return/Profitability Ratio (%) RoCE RoNW Dividend Payout Ratio Dividend Yield Source: Company.1 47.5 12.0 178.4 23.3 29.8 66.4 0.17 42.6 29.0 12.2 45.8 48.8 45.8 0.8 132.0 21.7 38.4 4.2 15.7 87.7 FY13E 132.9 3.2 14.6 49.4 92.8 62.9 58.1 44.6 14.6 1.2 352.2 47. Standard Chartered Research estimates FY09 41.9 0.2 47.7 12.9 51.8 48.5 24.5 2.30 27.4 58.8 0.8 1.2 42.8 20.7 32.0 52.8 9.9 18.5 17.4 57.3 41.5 125.3 48.1 50.8 109.7 36.5 39.6 1.7 -4.1 13.9 285.9 35.2 34.0 5.1 27.3 49.1 15.3 3.1 28.0 31.6 47.9 20.09 37.9 31.6 FY10 79.2 19.9 91.8 34.2 7.9 0.7 12.8 31.3 FY12E 109.8 19.
Sc. International operations contribute ~1520% to its consolidated sales and it has a presence in various Middle East. Murty MD & CEO manufacturing plants and human resources. Decorative paints contribute >95% of standalone sales and command a market share of 60% share. Bombay. He holds Ashwin Dani Vice Chairman a B. He has been in the company for the past 37 years and has worked in various capacities in sales. Choksi is one of the promoters of the company and has been Non-Executive Chairman since April 2009.T.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.6% Source: BSE Fig 36 – Management profile Name Designation Background Mr.C. Fig 35 – Shareholding pattern as of Dec’10 Others 21. Calcutta of 1971 batch. materials. Dani is the co-promoter and has been engaged with the company since 1968. He has also Ashwin Choksi Chairman served as MD from 1984 to 2008. He also holds a Masters Degree in Polymer Science from Ohio and Diploma in Colour Science from New York. P.4% Promoter 52. in Math and Post Graduate in Management from IIM.Sc. (APICL).7% DIIs 11. Non-auto industrial paints are offered through its wholly-owned subsidiary Asian Paints Industrial Coatings Ltd. Mr. India. He holds a Master’s degree in Commerce from the University of Mumbai.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.000 dealers (with nearly 17. It plans to double its manufacturing capacity in the next three to four years from 440.000 having tinting machines).M. post joining the company in 1965.D. nearly three times the nearest competitor. He has also served as MD for the company for a short period from Dec’08 to Apr’09. from the Institute of Science and from U.3% FIIs 14. Source: Company l Equity Research l 34 . He is a B. Asian and Caribbean countries. 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.
1 20. any sharp crude price decline can expand margins in near-term.7 4. KNPL’s volume has grown at a strong 20%.0 15.BO 12 month range Rs48.9 18. Nevertheless.6 Source: Company.078m) EPS est. Risks – Continued momentum in auto sales with volume growth of >20% can impact topline growth & consequently improve earnings.1 30.122 2.2 34.9 21.6 5. Margins likely to remain stable.1 2012E 24.2 872 1. Also. strong volume growth and resultant operating leverage led to operating margin remaining stable at 14-15% over FY0510 (except in FY09 when a sharp and rapid increase in input prices combined with a demand slowdown reduced it to 11. but prone to risks – Despite gross margin dipping 580bps in the past five years.647 30.811 2.061 2. which we believe is high given a likely slowdown in volume growth.5%). We value it at a forward P/E of 18x leading to 12-month price target of Rs852 (implying ~5% downside).064 2.9 7.236 41.9 365 2.5 169 -38 23.India Paint Sector l 19 January 2011 Kansai Nerolac Paints Ltd (KNPL) Growth slowdown.8 964 1.2 18.3 email@example.com 11. We expect KNPL to broadly maintain margins over FY10-13E (with a marginal drop in FY11E). which is at a justifiable 25% discount to APL given KNPL’s cyclical business and lower return ratios.241 2.7x.8 17.8 13.6 229 -37 22.3%) 177. Initiate with UNDERPFERFORM.262 3.com +91 22 6755 9898 Pratik Biyani pratik.0 13.386 1.7 20. At FY12E P/E of 21.207 3. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROCE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%) 2010 17.2 30.000 900 800 700 600 500 Jan‐10 Apr‐10 Jul‐10 Oct‐10 Jan‐11 Kansai Nerolac Paints Limited BSE SENSEX 30 INDEX (rebased) Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$) Source: Company.5 25.5 26.4 9.1 9.398 2. initiate with UNDERPERFORM – Strong performances in FY10 and 1H FY11 saw the stock outperform the Sensex by ~50% in CY10.3 29. However. Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj.com +91 22 6755 9851 l Equity Research l 35 .315 3.3 24.637 2. we note margins can face downward pressure if demand slows and/or input prices increase firstname.lastname@example.org% over FY10-13E Our price target of Rs852 is based on a forward P/E of 18x.579 3. Standard Chartered Research estimates Share price performance 1.4 9.8 197 -39 22.6 731 2.245 3.6 21.9 12.9 1.4 14. Valuations expensive.8 2011E 21. but will not be sustainable in the longer run.6 14.5 32.5 14.5 0.5 9.7 13. we expect volume growth to moderate to 14%/15% in FY12/FY13 given a high base and a likely moderation in auto sales growth.5 28.846 3.2 2013E 28.7 1.751 Sanjay Singh sanjay.6 66.2 14.5 14.6 10. driven mainly by robust auto demand and stable growth in decoratives.7 3. we estimate KNPL’s volume growth could slow to 14%/15% in FY12/FY13 from above 20% over the past 18 months We expect margins to be steady leading to EPS CAGR of 16.826 1. UNDERPERFORM (initiating coverage) PRICE (as at 14 January 11) PRICE TARGET Rs900 Bloomberg code Rs852 Reuters code KNPL IN Market cap KANE.6 9.1026 - Volume growth likely to slow – In the past 18 months.833 4.100 1. KNPL trades at a 25% premium to its five-year median.2 20.3 6. Bloomberg -1 mth -1 3 - -3 mth -12 mth -10 67 -4 56 Promoter (69.520m (US$1.629 48.0 15.7 17.5 14.5 143 -43 23.950 36. initiate with UNDERPERFORM We initiate coverage on KNPL with an UNDERPERFORM rating and price target of Rs852 Given a high base and cooling auto sales growth. change - Rs509 .5 1.
KNPL is also dominant in the auto-refinish market. Industrial segment growth dependent on auto demand growth KNPL is the leader in automotive paints and powder coatings. Given a high base and cooling auto sales growth. But our auto analyst expects auto volume growth to cool to 16%/14% in FY12/FY13 from 29. KNPL has built for itself an almost unassailable position in automotive paints.India Paint Sector l 19 January 2011 Investment argument and valuation We initiate coverage on KNPL with an UNDEPERFORM rating and price target of Rs852. auto demand growth plays a major role in KNPL’s industrial paint growth. Fig 1 – KNPL: Industrial sales breakup Others Fig 2 – KNPL vs PV volume growth 34 29 Rs bn 24 19 14 9 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E 30 25 20 % 15 10 5 0 FY13E Powder coating Auto Net sales (LHS) Source: Company data. Auto paints contribute 70% to KNPL’s industrial paint sales The company has a dominant 60% market share in the auto paint category. Standard Chartered Research estimates KNPL has built an unassailable position in automotive paints Leadership position in automotive paints KNPL has a competitive advantage in automotive paints. Given this.8% yoy in 1H FY11 (PV volume rose 29. driven mainly by robust auto demand and stable growth in decoratives. KNPL’s volume has grown at a strong 20%. Given Kansai’s relationships and technology. at a justifiable 25% discount to Asian Paints’ given KNPL’s cyclical business and lower return ratios. Barring Hyundai Motors. Though the entry barriers are high given the collaborative 36 l Equity Research l . Other paint companies are not as cyclical given most of their sales come from the stable decoratives segment. In our view. we estimate KNPL’s volume growth would slow to 14%/15% in FY12/FY13 from above 20% over the past 18 months. Most global automobile OEMs prefer paint suppliers who have global tie-ups with their parent. We now expect volume growth to moderate to 14%/15% in FY12/FY13 given a high base and a likely moderation in auto sales growth. and has successfully riden on the growth in these sectors. 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).4% yoy in FY10 and 27% in 1H FY11). It supplies 95% of Maruti Suzuki’s paint requirements. We expect 20% volume growth in FY11. KNPL is the supplier to all leading automotive industry leaders. where OEMs have a major say in which company’s products are used for repainting. which accounts for 70% of its industrial paint revenue.1% in FY10 and 22. the stock looks expensive at current valuations. Standard Chartered Research YoY growth (RHS) Source: SIAM. Volume growth likely to slow In the past 18 months. though the actual decision depends on the authorised service station. KNPL is enjoying the upswing in auto demand – KNPL’s net sales grew 24. Company data. Our 12-month price target of Rs852 is based on 18x on one-year forward earnings. KNPL’s strong relationship with OEMs has made it dominant in this segment.4% in FY10 and 25% in FY11. Currently.
India Paint Sector l 19 January 2011 nature of the business. cutting painting cycle time and overcoming myriad material and finish-related issues on the spot are critical in adding value to the customer. Solid & Metallic Top Coats and Clear Coats Touch-up Paints.000 have tinting machines supplied by the company. Automotive paints require a high level of technological intervention Technological edge – Continuously changing painting trends in the automotive industry necessitate the development of compatible paint formulations and paint processes. In the past few years. it has taken various initiatives to bolster its decoratives segment and increase the proportion of its emulsion sales from the current ~30%. Impressions marble finish. Automotive & Industrial Coatings Pre-Treatment Chemicals Heat Resisting paints High Performance Coatings Remark Owns 69. Japan Oshima Kogyo. Increased participation of KNPL in various infra projects and rising investments in infrastructure development will also increase demands for performance coatings and other industrial paints. Intermediate Coats/primer Surfacers. Electro Deposition Primers. Impressions texture coating and Suraksha Plus Positioning its paints as environmental friendly. KNPL has forged strong technological collaborations to deliver superior products to its customers which. Higher focus to drive growth in decorative paints KNPL is the third-largest player in the decorative paint segment and has a strong dealer network of 12.000. Japan Ameron/PPG.3% equity in KNPL - Source: Company. Standard Chartered Research Growth in other industrial coatings to be strong Powder coatings will witness robust growth driven by strong performance of white goods industry and also shift from liquid paints to powder coatings in auto ancillary industries. 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. US Country Japan Japan Japan USA Products ED Primers. we believe. In addition. this is a low margin business that can easily be impacted when there are steep fluctuations in raw material prices. Japan Nihon Parkerizing. 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. Despite auto manufacturers’ high bargaining power.. out of which 5. quick response to client needs. KNPL’s initiatives: KNPL is the thirdlargest player in decoratives Enhanced branding efforts by increasing advertising of its emulsions brand Impressions Leveraging its technology expertise in the decorative segment by introducing innovative products – Impressions tile guard. KNPL offers a total painting system to auto makers in India with a range of products such as Pretreatment Chemicals. will keep the company at the edge of innovation. Fig 3 – Technological collaborations give KNPL an edge Collaborating company Kansai Paint Co. Through its various strategic collaborations. KNPL introduced ‘Nerolac Style Icon’ awards for architects and interior designers in ’07 KNPL has taken many initiatives to bolster its decoratives portfolio l Equity Research l 37 . the company has been riding the strong category growth witnessed in decorative paints. KNPL’s competence in addressing these critical issues gives it a competitive advantage over other players. An efficient supply chain that reduces inventory at the customers’ end.
000 10. Margins likely to be maintained at ~15% The institutional nature of buyers in auto paints result in relatively lower pricing power. the recent increase in input costs is likely to soften margins in the next few quarters and result in FY11E EBITDA margin of 14.9 21. Fig 6 – Adverse price increase in raw materials impacted margins in FY09 20 18 16 % 14 12 30 10 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10 Dec-10 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 10 150 130 (US$/bl) 110 90 70 50 Margins vulnerable to rapid movement in crude prices Quarterly EBITDA margins (LHS) Source: Company data.000 5. its margins tend to depend on the movement of crude prices. hence making it difficult for KNPL to completely transfer sharp and adverse increases in raw material prices.9 20. Standard Chartered Research.5% in FY10. Furthermore.000 15. We expect FY11E net sales to grow 23. However. Strong margins and a low base (earnings declined 18% in FY09) helped KNPL post strong earnings growth of 67% in FY10. Hence.6% in FY12E and FY13E.2 25. We expect recurring EPS growth to be healthy at 14.8%. Margins for Dec-10 are our estimates Crude prices (RHS) l Equity Research l 38 .000 0 APL KNPL Berger Akzo Nobel India Tinting m/c Dealers Source: Industry data. We expect earnings growth to be 18.4% yoy.000 18. lower prices of crude-linked raw materials and excise benefits helped KNPL post EBITDA margin of 15.India Paint Sector l 19 January 2011 Improved efficiency of its distribution system KNPL has instituted a host of measures to correct credit systems in its distribution network to make it more efficient and to prepare it to handle higher volume and growth.6% in 1H FY11 (despite a 210bps yoy decline in gross margin).5 24 22 20 18 % 16 14 12 10 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 20. a gradual increase in input prices can be partly passed through.2 20. Continuing momentum in auto sales has supported higher sales growth of 23% yoy and kept margin steady at 15. However.7% and 17.6 Fig 5 – Distribution networks of companies 30. Fig 4 – KNPL: Overall market share 20. respectively. lower than net sales growth.9 20. Standard Chartered Research Margins likely to be stable Strong volume growth. as most of KNPL’s raw materials are crude linked. Standard Chartered Research Source: Company data.000 19.5 20. 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. While this has led to loss of market share in FY09.4% in FY11. it is positive in the longer run as it will help KNPL control its working capital requirements. especially when crude price movements are rapid.1 17. in our view.
Hence. We value the total ready-for-sale land (Thane. we believe current valuations are expensive and expect the discount to APL to increase. has reduced the moving five-year discount to APL from 27% last year to 18% currently. However. Net cash and cash equivalent per share amounts to Rs62. While some land tracts are no longer used for manufacturing. the total intrinsic value of land (ready-for-sale) and cash stands at Rs136/share.India Paint Sector l 19 January 2011 Valuations dear. we initiate with an UNDERPERFORM rating and a 12month price target of Rs852 based on a forward P/E of 18x (25% discount to our target multiple of 24x for APL). given the expected slowdown in growth. At present.000 800 Rs 600 400 200 0 Mar-06 Mar-07 Apr-05 Aug-07 Aug-08 Aug-09 Jan-10 Jul-10 Feb-08 Sep-05 Sep-06 Feb-09 Jan-11 Dec-10 28x 24x 20x 16x 12x Source: Company data. initiate with UNDERPERFORM KNPL enjoys a strong competitive position in automotive and industrial paints and has favourable growth prospects in decorative paints. We value KNPL at a forward P/E of 18x. Bloomberg. An excellent performance in the past 18 months. Intrinsic value of land and cash per share provide strong support KNPL has significant landbank in various parts of the country. inherent cyclicality in auto sales and higher vulnerability of margins to crude prices.4x. but it is prone to the cyclicality linked with the automotive sector. 25% discount to our target multiple for APL However. Fig 7 – KNPL: P/E bands 1. Hence. Standard Chartered Research Median P/E l Equity Research l 39 . Standard Chartered Research Fig 8 – KNPL: One-year forward P/E chart 30 25 PE (x) 20 15 10 5 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 One year forward P/E Source: Company data. there are other valuable land tracts where production continues.200 1. KNPL trades at FY12E P/E of 21. driven by strong volume growth in auto paints. we do not factor in the land value in our price target. the company has no plans to sell/ develop the existing land at present and hence. Lower Parel and Vatva) at Rs4bn and the value of land at the Chennai plant at Rs3bn. Any move to appropriate value from its landbank can be a positive trigger for the stock.7x versus the five-year median P/E of 17.
However. the returns are annualised FMCG Index 28.1 15.7 14.7 13.India Paint Sector l 19 January 2011 Fig 9 – KNPL: Discount to APL 60 40 20 % 0 -20 -40 May-07 May-08 May-09 Nov-07 Nov-08 Apr-05 Apr-06 Oct-05 Oct-06 Dec-09 Jun-10 Dec-10 Discount to APL Source: Company data. 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. a sharp and rapid decline in crude can increase near-term margins for a few quarters and can create a spurt in stock prices. Erratic movement in crude.3 28. For example.5 BSE Sensex 7.7 67. can result in higher-thanexpected paint volume growth for KNPL.0 16. Standard Chartered Research Five-year median Fig 10 – KNPL stock performance vis-à-vis broader indices KNPL 1 year 3 year 5 year 10 year Source: Bloomberg Note: For periods greater than a year.0 Risks Continued momentum in auto sales for a longer period and volume growth surprises >20% compared to our auto analyst’s estimate of 14-16% in FY12/13.6 17.3 -3. l Equity Research l 40 .3 37.2 16.
India Paint Sector l 19 January 2011 Financials We estimate net sales.2 19.9 20.9 63 % 61 59 5 0 57 55 FY04 FY05 FY06 FY07 FY08 FY09 FY10 60. Standard Chartered Research estimates Source: Company data. EBITDA & EPS CAGR for KNPL to be at 18. respectively.8 14. but has been strong with operating cash flow at 97% of reported net profit in the past five years.5 FY13E 64.4 16.4 5 4 3 % 4. Fig 11 – KNPL volume growth to be healthy 17. return ratios RoE and RoCE are lower compared to APL at 23.3 20.6%.1 24 22 20.5 41 .0 25 20 12.9 22.6 14.7 5.1% and 20.6 12.1 3.0 Fig 15 – KNPL: Other costs as % of sales 22.9 FY11E FY13E 16. Standard Chartered Research estimates Fig 14 – KNPL: A&P as % of sales 6 4.9 3.8 FY12E FY11E 64.1 Net sales YoY growth (RHS) Source: Company data.6 3.9 3.3 3.1 60. Standard Chartered Research estimates Source: Company data.7 62.7 4.4 67 63.6 Source: Company data Fig 12 – KNPL: Sales & Sales growth 34 29 Rs bn 24 19 14 9 4 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 30 25 20 % 15 10 Fig 13 – KNPL: RM cost to sales 65.5 63. in FY10.9% respectively over FY10-13E.2 2 1 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E % 18 16 14 12 10 FY04 FY05 FY06 FY07 FY08 FY09 Source: Company data.5 11. As a result.5 15 % 10 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 64.2% & 16.2%.9 3. Standard Chartered Research estimates l Equity Research l FY10 17. KNPL’s reserve as a proportion of share capital is at 26 times compared to 17 times for APL in FY10. Low dividend payout at 30-35% has resulted in swelling reserves.9 3. KNPL’s cash flow has been relatively more volatile compared to APL.3 19. 17.6 FY12E 16.4 20 19.4 65 60.8 3.
0 1.567 7.718 6.655 1.601 35.315 74 24.2 FY12E 24.811 1.India Paint Sector l 19 January 2011 Fig 16 – KNPL: EBITDA margin 15.7 15.5 FY11E 21.5 376 18 222 1.012 10. Standard Chartered Research estimates Fig 18 – KNPL: Cash flow as % of PAT 250 200 150 % Fig 19 – KNPL: Return ratios 35 30 25 % 20 15 10 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY13E 100 50 0 -50 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Operating Cash Flow FCF post capex RoE RoCE Source: Company data.0 14.629 2.709 2.402 416 29. Standard Chartered Research estimates l Equity Research l 42 .005 31.997 13.6 15.9 9.5 Fig 17 – KNPL: PAT & PAT growth 3.4 14.122 18.9 1.7 986 986 -17.6 4.637 67.5 0.4 15.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY12E 80 60 % 40 20 0 -20 -40 14.215 9.1 PAT YoY growth (RHS) Source: Company data.575 -15.8 501 20 225 2.6 15.5 14.2 3.950 1.0 2.745 42 13.0 1.372 3.6 11.7 585 22 268 3.4 9.4 5.6 9.704 8.181 31.5 443 12 204 2.386 9 740 30.245 18.992 35. Standard Chartered Research estimates Fig 20 – KNPL: Income statement (Rs m) Year end: March Net Sales Exports Domestic Raw Material cost Gross Profit Gross Margin (%) Other operating expenses EBITDA % growth % margin Depreciation & Amortisation Gross Interest Other Income Recurring PBT Add: Extraordinaries Less: Taxes Effective tax rate Net Income (Reported) Recurring Net Income % growth % margin FY09 13.579 14.061 64 20.0 684 22 272 3.996 4.5 1.494 35.6 3.0 16 15 14 13 % 12 11 10 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 11.747 4.7 7.4 5.241 1.749 34.629 17.7 9.236 14. Standard Chartered Research estimates Source: Company data.0 2.714 8.647 66.0 0.826 876 31.950 18.0 2.5 Rs bn 2.346 37.064 52 17.8 14.9 14.207 85 28.242 15.1 FY10 17.022 3.236 2.122 18.2 Source: Company.175 1. Standard Chartered Research estimates Source: Company data.1 FY13E 28.6 14.5 13.
015 4 4.950 501 -234 2.512 4.891 404 10.724 2.162 608 7.474 2.012 3.944 4 2.543 9.082 1.915 4 4.810 12.281 1.615 FY13E 750 3.533 872 -128 -688 65 685 750 l Equity Research l 43 .300 142 838 3.096 417 4.236 4.334 539 11.058 164 8.081 881 -512 1.100 -115 11.731 356 7.218 5.060 4.620 2.629 684 -281 3.275 6.India Paint Sector l 19 January 2011 Fig 21 – KNPL: Balance sheet (Rs m) Year end: March Cash & Bank balance Inventory Sundry Debtors Loans and Advances Other Current Assets Total Current Assets Sundry Creditors Other Current Liabilities Provisions Total Current Liab.032 -627 -1.515 4 4.713 269 7. In Cash & Bank Add: beginning balance Closing balance Source: Company.713 FY11E 439 2.700 2.324 411 5.640 4.939 103 1.349 1.100 527 6.100 -115 10.334 Fig 22 – KNPL: Cash flow statement (Rs m) Year end: March Reported Net Income Depreciation & Amortisation Others Operating Cash flow Working Capital changes Capital Commitments Free Cash Flow Cash Flow Investing Activities Inc(Dec) in Borrowings Dividend paid Chg.784 3.731 3.706 2.067 FY12E 685 3. Standard Chartered Research estimates FY09 986 318 -224 1.980 1.678 4.544 -258 -1.544 936 -106 7.522 103 1.459 7.321 964 -132 -596 246 439 685 FY13E 2.294 2.615 539 10.067 539 8.981 2.100 -115 13.627 460 11.912 5.719 3.728 1.716 103 1.655 440 -213 1.099 4. & Prov.630 1.091 10.472 4.375 269 6.940 103 937 3.475 6.942 4.259 2.882 -384 -767 731 -867 164 -378 -351 762 411 FY11E 1.450 -600 -43 -378 428 334 762 FY10 1.277 3.217 -517 -1. Standard Chartered Research estimates FY09 762 1.100 -115 8.375 FY10 411 2.477 526 13.236 585 -278 2.112 3.941 2.115 4 4.103 705 9. Net Current Assets Investments of which Strategic/Group of which Marketable Net Fixed Assets of which CWIP Total Assets Equity Share Capital Reserves & Surplus Net Worth Borrowings Deferred Tax Liability Capital Employed Source: Company.334 365 125 -471 28 411 439 FY12E 2.
7 21.6 14.4 18.7 62.0 0.0 47.5 31.7 1.9 5.9 34.8 14.India Paint Sector l 19 January 2011 Fig 23 – KNPL: Ratios Year end: March Per Share Data (Rs) Recurring EPS Reported EPS Dividend per share (DPS) Book Value per share (BV) Growth Ratios (% YoY) Net Sales EBITDA Recurring EPS Valuation Ratios (x) P/E P/BV EV / EBITDA EV / Net Sales Operating Ratios (%) Raw Material / Sales SG&A / Sales Effective Tax Rate NWC / Total Assets Inventory (days) Receivables (days) Payable (days) D/E Ratio (x) Profitability Ratios (%) RoCE RoNW Dividend Payout Dividend yield Source: Company.6 -17.4 24.6 18.1 21.9 23.4 4.6 10.6 1.2 15.3 18.6 17.4 24.0 15.8 22.4 66.7 47.0 56.6 23.5 41.6 29.3 65.9 10. Standard Chartered Research estimates FY09 18.0 0.9 14.7 1.8 38.1 45.5 14.6 10.7 30.0 16.4 10.4 0.1 14.7 7.1 67.2 7.1 20.0 0.8 31.7 31.6 30.5 6.9 3.8 1.1 16.4 28.0 197.3 17.7 30.1 52.9 29.6 64.5 11.1 44.7 FY10 30.5 23.0 121.2 36.1 20.2 64.0 0.4 18.0 56.7 12.2 9.5 0.5 229.0 56.3 14.1 FY12E 41.6 12.2 FY13E 48.3 6.0 0.5 143.0 47.8 10.8 FY11E 36.5 168.1 15.5 1.1 28.4 10.2 22.8 48.3 56.3 2.7 4.0 47.1 -15.0 18.7 56.2 30.0 16.1 20.7 49.7 45.4 45.5 3.4 45.6 l Equity Research l 44 .6 2.9 64.
JJ Irani Chairman also serves as special director of HDFC Ltd. Its industrial range of products includes auto paints. general industrial and high performance coatings. which acquired entire stake of Tata Forbes group in 1999.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 strongest in the northern region.7% Promoter 69. He has been Chairman since July 2003. It commands a market share of ~60% in auto paints and is a supplier to all leading auto companies.3% stake). which comprises ~40% of the sales Fig 24 – Shareholding pattern Others 19. It sells its products under its brand of Nerolac through a dealer network of 12. It is a subsidiary of Kansai Paint Japan (69. l Equity Research l 45 . it is the third largest players (after Asian Paints and Berger Paints) and has a market share of 11%. since January 2008.7% DIIs 5.3% FIIs 5. Mr. powder coatings. In decorative paints.3% Source: BSE Fig 25 – Management profile Name Designation Background Jamshed Jiji Irani is a Promoter of Tata Steel Limited and Dr.000 across India. Bharuka has been the MD of Kansai Nerolac Paints Ltd HM Bharuka Source: Company MD since April 2004 and has a varied experience of around 24 years in various facets of management in the Paints Industry. except Hyundai.
On a general basis. Disclosures Appendix Where “disclosure date” appears below. implied or statutory regarding this document or any information contained or referred to in the document. SCB makes no representation or warranty of any kind. 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. Our ratings are under constant review. and No part of his or her compensation and other benefits was. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES AND MUST NOT BE SENT OR TAKEN OR TRANSMITTED INTO THE UNITED STATES OR DISTRIBUTED DIRECTLY OR INDIRECTLY IN THE UNITED STATES.400 2. “SCB”) and the research analyst(s) named in this report.600 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Source: FactSet prices / SCB ratings and price targets Company Kansai Nerolac Paints Limited As at the disclosure date. All share prices quoted are the closing price for the business day prior to the date of the report.600 2. the efficacy of recommendations is a factor in the performance appraisals of analysts. unless otherwise stated. express.200 2. Standard Chartered Bank Singapore Branch.000 1. is or will be directly related to the specific recommendations or views contained in this research report.100 1.000 2.current rating is: OUTPERFORM 3.000 900 800 700 600 500 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Source: FactSet prices / SCB ratings and price targets l Equity Research l 46 . Standard Chartered Securities (India) Limited and/or one or more of its affiliates (together with its group of companies.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. the following applies: Asian Paints Limited .800 2.800 1. Company Asian Paints Limited As at the disclosure date. this means the day prior to the report date. Additional information with respect to any securities referred to herein will be available upon request. the following applies: Kansai Nerolac Paints Limited .current rating is: UNDERPERFORM 1.
4% 14.3% Research Recommendation Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market IN-LINE (IL) index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or UNDERPERFORM (UP) more over the next 12 months OUTPERFORM (OP) SCB uses an investment horizon of 12 months for its price targets. Recommendation Distribution and Investment Banking Relationships % of covered companies currently assigned this rating % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months OUTPERFORM IN-LINE UNDERPERFORM 63.990 units of call warrants (KRA7411500A9) as of 17 January 2011.499.India Paint Sector l 19 January 2011 Company Hyundai As at the disclosure date.499. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.497.0% 3.160 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. the following applies: SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3.940 units of call warrants (KRA741106074) as of 17 January 2011.2% 11.990 units of call warrants (KRA741145080) as of 17 January 2011.5% 28.500.1% 8.990 units of call warrants (KRA741177083) as of 17 January 2011.499. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3. SCSK is a liquidity provider for the equity-linked warrants of Hyundai Motor and beneficially owned 3. Terminology l Equity Research l 47 .499.000 units of call warrants (KRA741147086) as of 17 January 2011.
to the extent permitted by applicable law and/or regulation. trading or investment strategy. assumptions. to issuers of such investments. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. or have provided advice. error. fault. incidental. If you have any queries as to the legal or tax implications of any investment you should seek independent legal and/or tax advice. opinions and other information appearing herein may have been obtained from public sources. United States: Neither this document nor any copy of it may be sent or taken or transmitted into the United States or distributed. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. text. Copyright in all materials. The stated price of the securities mentioned herein is as of the date indicated and is not any representation that any transaction can be effected at this price. Hong Kong: This document is being distributed in Hong Kong by. information may be available to us which is not reflected in this material. and may only be reproduced with permission of an authorised signatory of. punitive or exemplary damages) from your use of this document. SCB. SCB may have received or may expect to receive remuneration for investment banking services from companies mentioned herein. Users of this document should seek professional advice regarding the appropriateness of investing in any securities. any defect. SCB is not a legal or tax adviser. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. please note the following: United Kingdom and European Economic Area: Standard Chartered Bank is authorised and regulated by the Financial Services Authority. Any investments discussed may not be suitable for all investors. Data. be long or short any securities or financial instruments referred to in this document and on the website or have a material interest in any such securities or related investment. Standard Chartered Bank. and is not purporting to provide you with legal or tax advice. redistributed. Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. All rights reserved. this document is intended solely for distribution to professional and institutional investors. investment banking or other services. estimates. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. and is attributable to. l Equity Research l 48 . damage or expense arising from. and we may have acted upon or used the information prior to or immediately following its publication. or due to any unavailability of the document or any part thereof or any contents or associated services. forecasts. nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. Chapter 289 of Singapore. While all reasonable care has been taken in preparing this document. Accordingly. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. © Standard Chartered Bank 2011. including ‘inside’ information is not publicly disclosed unless in line with its policies and procedures and the rules of its regulators. Copyright: Standard Chartered Bank 2011. instruments or currencies mentioned in this document. recommendation or solicitation to any person to enter into any transaction or adopt any hedging. or copied in whole or in part for any purpose without SCB’s prior express consent. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value. or in connection with. including persons involved in the preparation or issuance of this document may at any time. but not limited to. directors. Future returns are not guaranteed. Opinions. compliance or other reasons that prevent us from doing so. or provide. Singapore: This document is being distributed in Singapore by Standard Chartered Bank Singapore Branch only to accredited investors. articles and information contained herein is the property of. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Bank and should not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised signatory of Standard Chartered Bank. directly or indirectly. Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). In any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have. and/or a connected company. howsoever arising. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading. SCB and/or any member of the SCB group of companies or its respective officers. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. Within the last three years. India: This document is being distributed in India by Standard Chartered Securities (India) Limited which is a SEBI registered broker and a member of the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. or may be the only market maker in relation to such investments. derived valuations and price target(s) contained in this document are as of the date indicated and are subject to change at any time without prior notice. there may be regulatory. expert investors or institutional investors. consequential. its contents or associated services. as defined in the Securities and Futures Act. employee benefit programmes or employees. this document. Australian investors should note that this document was prepared for wholesale investors only (as defined by Australian Corporations legislation). hedging or investment decision. financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised.India Paint Sector l 19 January 2011 Country-Specific Disclosures If you are receiving this document in any of the countries listed below. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information. and a loss of original capital may be incurred. It does not constitute any offer. SCB makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. in the United States. While we endeavour to update on a reasonable basis the information and opinions contained herein. and including any loss. GENERAL DISCLAIMER The information on this document is provided for information purposes only. SCB may also have acted as manager or co-manager for a public offering of securities of issuers referred to herein. mistake or inaccuracy with this document. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special. price or income of such securities and financial instruments. may have a position in any of the securities. Recipients in Singapore should contact Standard Chartered Bank Singapore Branch in relation to any matters arising from. imperfection. This material is for the use of intended recipients only and the contents may not be reproduced.