Paints: Spark Shade-Cardmailers.sparkcapital.in/uploads/Consumer/Shade Card 3QFY14.pdf · Kansai...

Paints: Spark Shade-Card

1

Executive Summary

Market data

BSE SENSEX 21265

Nifty 6318

Date Jan 17, 2014

Tejash Shah

[email protected]

+91 22 4228 8155

Gnanasundaram S

[email protected]

+91 44 4344 0062

Spark Shade-Card: 3QFY14 – ‘Showing brighter shade, somehow’

In our endeavor to keep pace with the ever evolving Indian paint sector, we publish our second edition of our quarterly

update on the sector - ‘Spark Shade-Card’. As almost all the key listed participants in the sector maintain utmost

secrecy on the vital business details, we have to rely heavily on our channel checks aka ‘Scuttlebutt notes’ and media

inputs to keep abreast with the key developments in the sector. Hence, we believe that a structured effort like ‘Spark

Shade-Card’ could not only help us paint a coherent picture on the paint industry but also update the investor

community on the near term trends and emerging long term themes.

Post our interaction with the industry participants at the end of 9MFY14, we believe the following trends are

emerging this quarter. (1) After being subdued in 1HFY14 due to extended monsoon, exterior paint sales have

bounced back sharply this quarter ... (2) … However, the good monsoon has led to increased disposable

income in the rural market which should translate to better paint demand and higher rural offtakes in the

coming quarters (3) Good festive offtakes in October and moderate sales in November and December is

expected to lead to healthy volume traction this quarter. (4) Premiumisation trend continues across decorative

paints offerings (5) We understand that the dealer network is gearing up for an another round of price increase

in February, though official communication is still awaited (6) In the industrial paints segment, pressure on

growth and margins continued in this quarter as well.

How do we see the current quarter shaping up for the coverage paint companies

Akzo Nobel India (AKZO): Growth of ~12% to be pegged on volume growth of ~9% in decoratives segment. Operating

margins to remain flat despite higher raw material costs on account of low other operating expenses. Watch out for

guidance on its business plan for the merged entities. New CEO comments on growth plans and margin expansion.

Asian Paints (APNT): Growth to be led by ~12% volume offtakes and ~4% pricing increase in the decoratives

segment. Better traction in construction chemicals to lead to higher growth. Watch out for comments on demand

outlook, raw material prices (TiO2 in particular). Some hint on the anticipated expansion in the scope of business

activities will be crucial.

Berger Paints (BRGR): Favorable mix to improve volume growth in the decorative paints segment. Growth to be led

by increasing offtakes in tier 2 and tier 3 towns. Festive off-takes have been on expected lines. Operating margins to

remain flat. Watch out for comments on Hindupur plant status and overall business outlook.

Kansai Nerolac (KNPL): Tepid industrial (automotive/non-automotive) demand to keep revenue growth subdued. On

account of high cost inventory and low pricing power in non-decorative business, gross margins are expected to

contract sequentially, albeit EBITDA margins to expand yoy. Watch out for guidance on - demand outlook across

business verticals, raw material basket (TiO2 in particular).

Stock Calls: Akzo Nobel India- Add (TP: Rs. 946), Asian Paints - Add (TP: Rs. 538), Berger Paints- Reduce (TP:

Rs. 228), Kansai Nerolac – Reduce (TP: Rs. 1088)

Stock performance

Company 1m 3m 12m

Asian

Paints2.0 3.1 15.8

Berger -5.1 -2.2 36.9

Akzo Nobel

India1.3 -2.8 -10.2

Kansai

Nerolac3.0 -0.9 3.3

Sensex 2.9 3.5 7.3

Nifty 2.7 3.8 5.3

mailto:[email protected]

mailto:[email protected]


2

All numbers in Rs. mn except per share data

Quarter Change

Dec-13 Sep-13 Dec-12 YoY QoQ

Akzo Nobel India (Consolidated) (Date of results : YTA)

Net sales 6,768 5,764 6,052 12% 17%

EBITDA 574 376 498 15% 53%

EBITDA Margin 8.5% 6.5% 8.2% 24bps 195bps

PAT 554 337 506 9% 64%

EPS 11.9 7.2 10.9 9% 64%

Asian Paints (Consolidated) (Date of results : 20th January 2014)

Net sales 35,381 31,147 30,529 16% 14%

EBITDA 6,226 5,108 5,104 22% 22%

EBITDA Margin 17.6% 16.4% 16.7% 88bps 120bps

PAT 3,958 3,268 3,352 18% 21%

EPS 4.1 3.4 3.5 18% 21%

Berger Paints India (Consolidated) (Date of results : 1st February 2014)

Net sales 10,829 9,662 9,203 18% 12%

EBITDA 1,295 1,042 1,168 11% 24%

EBITDA Margin 12.0% 10.8% 12.7% -73bps 118bps

PAT 811 627 768 6% 29%

EPS 2.3 1.8 2.2 6% 29%

Kansai Nerolac Paints (Consolidated) (Date of results : 31st January 2014)

Net sales 8,434 7,917 7,666 10% 7%

EBITDA 967 917 846 14% 5%

EBITDA Margin 11.5% 11.6% 11.0% 43bps -12bps

PAT 549 517 489 12% 6%

EPS 10.2 9.6 9.1 12% 6%

Spark quarterly Estimates


AKZO concentrated on its premium offering ‘Velvet’ and exterior offering

‘Dulux weather shield’…

Source: Company, Youtube, Spark Capital

3

APNT’s premium variant Aspira advertisement was rolled out this quarter

while exterior paint brand Apex Ultima Ads were back on air.


Exterior Weather coat offering and Premium Silk offering advertisements

were the most prominent from Berger’s stable this quarter.


..while KNPL extensively promoted their exterior emulsion offering pan

India and economy Nerolac little master offering in southern markets.


http://www.youtube.com/watch?v=BL8OhKga9dY

http://www.youtube.com/watch?v=GU-NyONc3D4http://www.youtube.com/watch?v=3UprZimTprI

http://www.youtube.com/watch?v=fdSWyNEn1TA

All the players extensively promoted exterior offerings this quarter

Aspira Advt featuring Celebrities,

(Saif & Soha Ali Khan)

Berger exterior ads resurfaced

this quarter

While Silk Advts continued to

be prominent

Dulux Weather guard exterior

was extensively promoted…

Ad behind economy Nerolac

Master was visible in South India

… along with ‘velvet’

advertisements

Apex Ultima – Exterior paints

While external Nerolac Excel ads

were prominent pan India

http://www.youtube.com/watch?v=BL8OhKga9dY

http://www.youtube.com/watch?v=GU-NyONc3D4

http://www.youtube.com/watch?v=3UprZimTprI

http://www.youtube.com/watch?v=fdSWyNEn1TA


0

50000

100000

150000

200000

250000

Jan

-12

Fe

b-1

2

Ma

r-12

Ap

r-12

Ma

y-1

2

Jun

-12

Jul-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan

-13

Fe

b-1

3

Ma

r-13

Ap

r-13

Ma

y-1

3

Jun

-13

Jul-1

3

Au

g-1

3

Se

p-1

3

Oct-

13

Nov-1

3

Dec-1

3

Domestic Passengercar offtakes

90

100

110

120

130

140

150

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

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Jan

-11

Ap

r-11

Jul-

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Oct-

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-12

Ap

r-12

Jul-

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Oct-

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-13

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r-13

Jul-

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Jan

-14

0%

5%

10%

15%

20%

25%

0

10000

20000

30000

40000

50000

60000

70000

80000

New Launches Absorption Rate

4

GDP growth continues to dwindle

Source: Industry, Spark Capital

So does absorption of new real estate projects

Source: Industry, Spark Capital

Passenger cars production is struggling to bounce back

Source: SIAM, Company, Spark Capital

Demand Drivers

Price hikes affected in decorative paints to counter weakening Rupee

Source: Bloomberg, Company, Spark Capital

Weakening Rupee has

forced the companies to

affect ~4% price increase

in 3QFY13

GDP growth is expected to

remain subdued in FY14.

Real estate activity remains lackluster

9.3

7.7

11.4

9.58.7

9.29.9

7.56.5

65.1 5.4 5.2

4.7 4.8 4.4 4.8 4.7

0

2

4

6

8

10

12

YoY GDP growth Quarterly


150

170

190

210

230

250

270

290

TiO2 (INR/Kg)

TIO2 prices have risen on a YoY basis…

Source: Bloomberg, Spark Capital

40

45

50

55

60

65

70

0

1000

2000

3000

4000

5000

6000

7000

8000

0

20

40

60

80

100

120

INR

/Barr

el

US

D/B

arr

el

USD/Barrel INR/Barrel

5

...so does Rupee weakening


…Global crude oil prices though have increased 10% YoY this quarter


Further Diesel price hike though could force further price rise...


Raw material price movement

Indian crude prices were up

26% YOY this quarter due

to weaker Rupee

With the Rupee weakening by 14% YoY,

pressures are evident on imported Ti02

prices and Crude oil.

Titanium Di-Oxide prices are up 11.2%

yoy this quarter on Rupee weakening

40

45

50

55

60

65

70

Diesel (INR/Lit)

Diesel prices are already up 12%

YoY in 3QFY13, further pressure

could prompt another price rise


6

Major filings by the paint companies in the exchanges

Date Category Announcement

Asian Paints

20-Dec-2013Strike at Sriperumbudur,

Tamil Nadu

Operations at the Company's Paints Plant situated at Sriperumbudur, Tamil Nadu will be affected due to the strike called by the Asian Paints

Employees’ Union Sriperumbudur

18-Dec-2013 UpdateCompany's Chemical Plant engaged in manufacturing of Penta situated at Cuddalore, Tamil Nadu, has taken temporary shut down for annual

preventive maintenance.

25-Nov-2013 UpdateAsian Paints Industrial Coatings Limited (APICL), has closed down the operations of its powder coatings plant at Baddi, Himachal Pradesh with effect

from November 25, 2013.

11-Nov-2013 Update Announces voluntary unconditional cash offer for the shares of Berger International Limited (BIL), Singapore by Asian Paints (International) Limited

21-Oct-2013 Change in Directorate Mrs. Ina Dani, Non - Executive Director has resigned as a Director of the and the vacancy so created has been filled by the Board of Directors by

appointment of Shri Malav Dani as a Non - Executive Director

21-Oct-2013Board declares Interim

Dividend

Board of Directors of the Company at its meeting held on October 21, 2013, inter alia, have recommended payment of interim dividend of Rs.

1.10/share

Berger Paints

03-Dec-2013U.K Paints increases stake

via inter se-transfer with

promoters

U.K.Paints (which held 45.63% prior to the transaction) purchased 0.10% from Mr.Vinu Dingra (2.20% prior to the transaction) via inter se-transfer

with in promoters for Rs. ~80mn (350000 shares @Rs.228.50 per share)

Akzo Nobel India

18-Dec-2013 Change in Directorate Mr. Amit Jain, Managing Director, will be stepping down from the Board of the Company as the Managing Director with effect from close of business

on December 31, 2013.

18-Dec-2013 Change in Directorate Mr. Himanshu Agarwal, Wholetime Director and CFO has, in addition to his current role, been nominated as the Operating Head of the Company.

2-Sep-2013 Company UpdateAkzo Nobel India Ltd has submitted to BSE a press release issued on October 28, 2013, after the formal inauguration of Company's Gwalior plant by

Akzo Nobel Group CEO Mr. Ton Buchner.

Kansai Nerolac

09-Jan-2014 Company UpdateTrading Window" of the Company will remain closed from January 17, 2014 to January 31, 2014 in view of the Board Meeting to be held on January

31, 2014 to consider the unaudited financial results for the quarter ended December 31, 2013 for the Directors/ Officers and designated employees.

Source: Exchange filings, Company, Spark Capital

Corporate Announcements


7

Key Developments

Asian Paints

Source: Company, Spark Capital

Berger Paints


Akzo Nobel India


Kansai Nerolac


Strike at Sriperumbudur,

Tamil Nadu

Closed down its powder

coatings plant at Baddi,

Himachal Pradesh

Announces the launch of

Berger Silk to Nepal

Indicates robust growth

from rural India backed by

good monsoon

Mr.Himanshu Agarwal

appointed to lead

operations

Plant in Gwalior official

inaugurated.Ties-up to be the official

partner of Kidzania, India

Rolls out mobile-swipe

promotions to promote

Nerolac Excel


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Stock performance (%)

Company 1 month 3 months 6 months 12 months

Asian Paints 2.0 3.1 2.5 15.8

Berger Paints -5.1 -2.2 -11.6 36.9

Akzo Nobel India 1.3 -2.8 -20.2 -10.2

Kansai Nerolac 3.0 -0.9 -2.9 3.3

Sensex 2.9 3.5 7.1 7.3

Nifty 2.7 3.8 6.1 5.3

Valuations

ROE Vs PE


EPS growth Vs PE



Recap of what happened in 1HFY14

1QFY14 2QFY14

CompanyYoY Revenue

Growth

YoY PAT

Growth

YoY Revenue

Growth

YoY PAT

Growth

Asian Paints 11.5% -4.6% 18.3% 36.7%

Berger Paints 12.6% 10.6% 19.1% 17.4%

Akzo Nobel India 1.9% -42.8% 10.1% -24.7%

Kansai Nerolac 9.5% -3.8% 16.1% 9.1%


PPG industries

Sherwin Williams

Akzo Nobel

Nippon Paints

Kansai Paints

Asian Paints

Berger Paints

Akzo Nobel India

Kansai Nerolac

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

10.0 15.0 20.0 25.0 30.0 35.0

EP

S G

RO

WT

H (

%)

1 YR FWD PE

PPG industries

Sherwin Williams

Akzo Nobel

Nippon Paints Kansai

Paints

Asian Paints

Berger Paints

Akzo Nobel India

Kansai Nerolac

0%

10%

20%

30%

40%

50%

60%

10.0 15.0 20.0 25.0 30.0 35.0

RO

E -

1 Y

R F

WD

1 YR FWD PE


9

Company Parent

Country

Markt Cap

(USD Mn)

EV (USD

Mn)

PE PB EV/EBITDA ROE (%)OCF

Yield

Dividend

Yield

CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E 2012 2012

Ppg Industries IncUnited

States27,084 28,500 23.5 23.2 20.0 5.2 5.7 5.2 11.1 12.2 11.5 70.6 27.0 28.6 15.2% 0.3%

Sherwin-Williams

Co/The

United

States19,571 20,520 25.8 25.5 21.1 10.8 11.5 12.9 14.3 14.6 12.7 43.3 42.8 51.6 22.0% 0.3%

Akzo Nobel Netherlands 10,060 11,711 NA 20.2 16.8 2.4 2.0 2.0 9.4 10.0 8.6 9.5 9.9 11.1 17.2% 0.6%

Koninklijke Dsm Nv Netherlands 13,857 8,973 27.1 17.3 14.2 1.6 1.6 1.5 10.8 9.2 8.2 6.0 8.9 10.2 14.0% 0.9%

Clariant Ag-Reg Switzerland 5,121 8,143 17.0 16.1 14.0 2.1 1.9 1.8 8.9 8.9 8.0 -0.2 5.7 13.6 14.4% 1.9%

Valspar CorpUnited

States6,229 7,492 21.5 17.9 15.5 5.6 5.3 4.8 12.0 11.0 10.0 24.7 30.9 32.7 15.6% 0.4%

Rpm International IncUnited

States5,773 7,091 22.8 20.5 18.4 4.4 3.8 3.4 12.3 12.3 11.3 14.8 20.3 20.5 15.7% 0.6%

Nippon Paint Co Ltd Japan 4,608 4,567 17.8 16.0 15.3 2.4 2.5 2.2 11.5 12.4 11.9 17.2 16.9 14.2 15.2% 0.4%

Kansai Paint Co Ltd Japan 3,898 3,893 16.6 19.1 18.8 1.6 1.8 1.7 9.7 10.8 9.8 10.8 9.9 8.5 16.3% 0.5%

Global paint companies valuation summary



10

Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) EBITDA Margin

Company FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E

Asian Paints 96,322 1,09,7071,28,6511,53,032 15,088 17,319 21,178 24,895 9,887 11,139 13,095 15,646 10.3 11.6 13.7 16.3 15.7% 15.8% 16.5% 16.3%

Akzo Nobel

India19,878 22,320 24,793 29,249 1,746 1,885 2,207 2,790 2,017 2,188 2,142 2,453 54.8 46.9 45.9 52.6 8.8% 8.4% 8.9% 9.5%

Berger

Paints29,477 33,464 39,184 46,372 3,034 3,712 4,340 5,314 1,800 2,184 2,535 3,158 5.2 6.3 7.3 9.1 10.3% 11.1% 11.1% 11.5%

Kansai

Nerolac26,006 28,566 32,086 36,899 3,373 3,361 3,772 4,313 2,159 1,995 2,302 2,645 40.1 37.0 42.7 49.1 13.0% 11.8% 11.8% 11.7%

P/E (x) EV/EBITDA (x) EV/Sales (x)CMP (Rs)

Mkt Cap Target * Rating

Company FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E (Rs. mn) P/E Price Absolute

Asian Paints 47.9 42.5 36.2 30.3 30.9 26.9 21.8 18.3 4.8 4.2 3.6 3.0 494 473460 33x 538 Add

Akzo Nobel

India15.3 17.9 18.3 16.0 11.0 14.9 13.7 10.5 1.0 1.3 1.2 1.0 839 40215 18x 946 Add

Berger Paints 40.7 33.6 28.9 23.2 24.6 20.5 17.6 14.3 2.5 2.3 1.9 1.6 212 73419 25x 228 Reduce

Kansai Nerolac 28.4 30.7 26.6 23.2 17.5 17.9 15.8 13.5 2.3 2.1 1.9 1.6 1137 61275 22x 1088 Reduce

Company

Dividend OCFWC days

FY14E

ROE

FY14E

ROCE

FY14EPer Share

FY14EPayout %

Dividend

YieldOCF/Sales OCF Yield

Asian Paints 5.2 38% 1.1% 10.9% 2.5% 46 34.9% 31.2%

Akzo Nobel India 20.0 44% 2.4% 7.1% 3.5% 10 18.5% 17.5%

Berger Paints 2.0 27% 0.9% 0.0% 0.0% 71 24.4% 17.4%

Kansai Nerolac 12.0 28% 1.1% 6.6% 3.4% 72 16.9% 15.3%

Valuation Summary



Spark Disclaimer

Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with

SEBI as a Stock Broker and Category 1 Merchant Banker.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is

provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or

financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document.

Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this

document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely

for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not

directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,

publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction.

The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to

inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction

where such an offer or solicitation would be illegal.

Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital ,

its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the

securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company

referred to in this report.

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we

would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory,

compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives

shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or

actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential

including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report.

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has

incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Absolute Rating Interpretation

Buy Stock expected to provide positive returns of >15% over a 1-year horizon

Add Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

Reduce Stock expected to provide returns of <5% – -10% over a 1-year horizon

Sell Stock expected to fall >10% over a 1-year horizon

11


Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities

Exchange Act of 1934, as amended) only by Decker & Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker &

Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker & Co.

All responsibility for the distribution of this report by Decker & Co, LLC in the US shall be borne by Decker & Co, LLC. All resulting transactions by a US person or entity should be effected

through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Decker & Co, LLC is prohibited or restricted by any legislation

or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker & Co, LLC and Spark Capital Advisors (India) Private Limited are

permitted to provide research material concerning investment to you under relevant legislation and regulations;

Disclosure of interest statement Yes/No

Analyst ownership of the stock No

Group/directors ownership of the stock No

Broking relationship with the company covered No

Investment banking relationship with the company covered No

12

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