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07 September 2020 Initiating Coverage
Kansai Nerolac
HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters
Joined at the hip with Auto Kansai Nerolac (KNPL; #1/#3 in Industrial/Decorative Paints) remains joined
at the hip with Auto OEMs, which are likely to see their 2nd straight year of
16-18% volume declines (given Auto slowdown/COVID-19). Meanwhile, it
has been beefing up its relatively less cyclical non-auto industrial portfolio. In
Decorative, KNPL has outpaced bigger rivals over FY15-19, given its
aggressive marketing & distribution push. This trend, however, is unlikely to
continue over FY20-23 as KNPL’s predisposition would likely be to safeguard
margins/restrict A&P spend amidst the demand destruction & until Auto
recovery is in sight. We build in Rev/EBITDA/PAT CAGR of 6/9/8% over
FY20-23E and initiate coverage on the stock with an ADD recommendation &
DCF-based TP of Rs. 500/sh (implying 44x Sep-22 P/E, 12% discount to APNT).
Alpha hinges on Auto recovery pace, thrust on reducing cyclicality:
KNPL’s high exposure (HSIE:25-28% of sales) to Auto OEMs, which are
likely to see their 2nd straight year of 16-18% volume declines will translate
into deeper topline cuts (vs APNT/BRGR) in FY21. Meanwhile, KNPL has
been subtly pivoting towards relatively less cyclical industrial portfolio such
as Auto-refinish, powder, coil, and protective coating). We build in a modest
3.6% CAGR for its industrial business over FY20-23E.
Decorative salience increasing, albeit volumes to marginally lag Top 2:
KNPL outpaced APNT/BRGR in decorative segment over FY15-19, given its
aggression in both marketing (A&P spends clocked a 23% CAGR vs
APNT/BRGR’s -2/-5% CAGR over FY15-18) and distribution (5-year active
dealers CAGR estimated at 13%+ CAGR). This outperformance is unlikely to
repeat itself over FY20-23 as KNPL’s predisposition would likely be to
safeguard margins from the Auto onslaught by restricting A&P spends.
Ergo, we expect KNPL’s decorative volumes to marginally lag Top 2 and
build in decorative revenue CAGR of 7% over FY20-23E.
Well-covered to play the volume game, margins to improve over FY20-23:
Even if overall volumes clock 9% CAGR over FY20-24, we estimate KNPL to
hit a capacity utilisation of ~80% by FY24. Hence, KNPL seems well-covered
to play the volume game. While demand shock-led benign raw material
costs/high GMs are likely to mean-revert, the reversion for KNPL is likely to
be less steep vs peers, given the increasing decorative salience. Thus, we
build in a 120bp EBITDAM improvement to 16.4% over FY20-23E on the
back of higher GMs and higher utilisation-led marginal cost savings.
Ranks low on fundamental anchors, ergo discount to peers: Higher
industrial salience (lower GMs, higher capital intensity) warrants a
valuation discount to Top 2. That said, increasing decorative salience will
help RoICs improve from 10.8% to 14.5% over FY21-23. Swifter Auto
recovery could offer higher upside. We initiate coverage on KNPL with an
ADD Reco & DCF-based TP of Rs. 500/sh (implying 44x Sep-22 P/E).
Financial Summary (Rs. mn) FY19 FY20 FY21E FY22E FY23E
Net Revenue 54,243 52,800 46,762 56,194 62,759
EBITDA 7,525 8,045 7,122 9,082 10,284
APAT 4,477 5,158 4,264 5,691 6,415
EPS (Rs) 8.3 9.6 7.9 10.6 11.9
P/E (x) 57.3 49.7 60.2 45.1 40.0
EV/EBITDA (x) 34.1 31.9 35.5 27.7 24.6
Core RoCE (%) 12.8 13.6 10.7 13.8 14.0
Source: Company, HSIE Research
ADD
CMP (as on 04 Sep 2020) Rs 485
Target Price Rs 500
NIFTY 11,334
KEY
CHANGES OLD NEW
Rating - ADD
Price Target - Rs 500
EPS % FY21E FY22E
- -
KEY STOCK DATA
Bloomberg code KNPL IN
No. of Shares (mn) 539
MCap (Rs bn) / ($ mn) 262/3,580
6m avg traded value (Rs mn) 137
52 Week high / low Rs 573/294
STOCK PERFORMANCE (%)
3M 6M 12M
Absolute (%) 24.0 (1.1) 4.5
Relative (%) 11.1 (1.0) 0.1
SHAREHOLDING PATTERN (%)
Mar-20 June-20
Promoters 74.99 74.99
FIs & Local MFs 7.82 7.77
FPIs 3.93 4.37
Public & Others 13.26 12.87
Pledged Shares 0 0
Source : BSE
Jay Gandhi
+91-22-6171-7320
Varun Lohchab
+91-22-6171-7334
Page | 2
Kansai Nerolac: Initiating Coverage
Focus Charts Industry paint volume forecasts Industry and Organised Paints revenue forecasts
Source: HSIE Research Source: HSIE Research
Market share loss can primarily be attributed to higher
industrial segment which has been under stress (%)
Revenue mix (%): Decorative business’ skew inching
up for KNPL
Source: Companies, HSIE Research Source: HSIE Research
KNPL’s aggressive A&P spends (% of sales) over FY16-
18…
...ensured it outpaced APNT/BRGR in decorative
volumes (% growth)
Source: Companies, HSIE Research Source: HSIE Research
55
56
58
59
64
65
67
67
45
44
42
41
36
35
33
33
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%F
Y1
6
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
-Decorative -Industrial
(10)
-
10
20
30
40
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
KNPL APNT BRGR
4.7
5.6
3.6
5.0
4.8
5.8
3.9
4.9
5.1
6.8
4.1
4.2
3.9
4.8
6.1
4.7
4.1
5.1
6.8
4.6
3.9
4.7
6.0
4.0
4.2
3.3
5.0
3.1
4.6
3.3
5.0
3.1
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Asian Paints Berger Paints Kansai
Nerolac
Akzo Nobel
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
0
9
-7
20
12 12 12 11
-10
-5
0
5
10
15
20
25
0
500
1,000
1,500
FY
19
E
FY
20
E
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
FY
30
E
Total paints revenue
Organized paints revenue
Org. Paints revenue growth (%) - RHS
Rs bn
-
9
-4
19
9 9 9 8
-10
-5
-
5
10
15
20
25
-
2,000
4,000
6,000
8,000
10,000
FY
19
E
FY
20
E
FY
21
E
FY
22
E
FY
23
E
FY
24
E
FY
25
E
FY
30
E
Total Paint volume (mn Ltrs)
Organized players volumes (mn Ltrs)
Org. Volume growth YoY (%)
18 17 16 16 16 16 16 16 16 15
0%
20%
40%
60%
80%
100%
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Asian Paints Berger Paints
Kansai Nerolac Azko Nobel
Others
As % of sales
Page | 3
Kansai Nerolac: Initiating Coverage
Joined at the hip with Auto
Joined at the hip with Auto: KNPL remains joined at the hip with the fate of the
Auto OEM industry (~25-28% of revenue – FY20) with a market share of nearly
60% (dominant category leader). This segment accounts for ~70% of KNPL’s
industrial business. KNPL is likely to have its second straight year (FY20/FY21) of
mid-teen growth declines in revenue of its Auto industrials business due to the
double whammy of an already ongoing Auto slowdown and the demand
destruction caused by the COVID-19 pandemic (HSIE). However, given its
dominant business share in key auto accounts/market leaders, we believe the
recovery could be swifter-than-industry as Auto market leaders typically lead the
recovery given their strong distribution and after-sale touchpoints. Note: Key
KNPL Auto accounts are Maruti Suzuki, Hero Motors, Honda Motors, Volvo, to
name a few. We build in an 18% decline/14% revenue CAGR in FY21/FY21-23
respectively for the business).
Auto OEMs account for nearly a fourth of the Rs. 150bn
Industrial Coatings business in India
KNPL’s market share in Auto OEMs/Total industrials
Source: Companies, HSIE Research Source: HSIE Research
KNPL’s industrial performance has closely mimicked the fate of the Auto industry
Source: Companies, HSIE Research, SIAM
(20)
(15)
(10)
(5)
-
5
10
15
20
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
FY
20E
FY
21E
FY
22E
FY
23E
KNPL - Industrial growth (%) Auto sales growth (%) PV volume growth (%)
Protective
Coatings, 20
Powder
Coatings,
12
Automotive
OEM , 26
Automotive
Re-finish,
18
Coil
coatings, 12
Marine
coatings , 4
Others, 8
58
40
0
10
20
30
40
50
60
70
KNPL's Mkt share in Auto
Industrials
KNPL's Mkt share in Total
Industrials
Page | 4
Kansai Nerolac: Initiating Coverage
Subtly beefing up its non-Auto portfolio: Given the cyclicality of its Auto
industrial vertical, KNPL is subtly reducing its structural exposure to its non-
Auto industrial coatings business such as Powder Coatings, Auto Refinishes,
General Industrial, Protective and Coil Coatings, which now account for ~30% of
KNPL’s industrial revenues.
KNPL: Estimated industrial revenue mix (%)
Source: HSIE Research
Auto refinish coats (18% of the industrial coatings market): KNPL has
identified Auto-refinish as a key growth driver for its industrial vertical. It has
been consistently gaining market share in the Auto-refinish segment (6% market
share within three years of launch) underpinned by (1) consistent new product
launches, (2) enhancement of its retail and Body Shop network. Key product
launches include:
1. Retan (in Premium Polyurethane (PU) Paints) in 2017 and has been
received well by the market and approved by major automakers. The
product has superior performance in terms of finish, drying time, cost
and coverage and is also environment friendly being a High Solids Paint.
2. Cardea–recently launched in popular PU category–to bolster its presence
in the retail market.
3. “Perfect Match” brand of PU paints to improve the shade matching and
offer the users the factory Original Equipment Manufacturers (OEM)
shade in the two-wheeler segment. The same has been approved by
Honda Motorcycles and Scooters for its entire service network and is also
available through KNPLs retail network.
Note: Demand in Auto-Refinish segment is more predictable/stable than the
Auto OEM business, which could help reduce the cyclicality in the overall
industrial business of KNPL.
73 70 70 67 68 68
27 30 30 33 32 32
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY18E FY19E FY20E FY21E FY22E FY23E
Auto Industrial paints Non-Auto Industrial paints
Page | 5
Kansai Nerolac: Initiating Coverage
Performance Coatings: Under this segment, the company caters to customers by
supplying Liquid Paints and Powder coatings. KNPL continues to be a dominant
leader in Powder Coating market (40% market share) and continues to gain
ground in the Liquid Coating market by entering niche areas such as Bridges and
Pipe Coating (Metro and Railway projects bagged). The company also acquired
Marpol for INR 341mn in FY19 (0.5x sales), which would help it consolidate its
market leadership position in powder coatings. Marpol clocked revenue/PAT of
INR 590/29mn in FY20. Profitability has improved since its acquisition. EBITDA
margin expanded 410bp to 9.7% in FY20. We expect KNPL’s powder vertical to
be tied in with the secular growth story in consumer durables in India.
General industrial, coil and protective coatings (45% of Industrial Coatings
market): These segments remain fragmented courtesy the high unorganised
share. However, with consistent network, customer base and capacity
augmentation, we expect KNPL to gain significant strength in this vertical over
the medium-to-long term. New technology products developed recently include
Low Bake Coil coatings, Uni-coats and Super Durable Coil Coatings.
KNPL’s key Auto OEM client profile
Source: Companies, HSIE Research Source: HSIE Research
KNPL’s non-auto industrial client profile
Source: Companies, HSIE Research
Page | 6
Kansai Nerolac: Initiating Coverage
Decorative salience increasing, albeit volumes to
lag top-2
KNPL managed to outgrow its bigger rivals (in decorative coats) APNT and
BRGR over FY16-19, primarily led by:
1. Aggressive marketing push over FY16-18
2. Consistent push on dealer adds
3. Consistent new product additions across price points to fill white spaces
1. Aggressive marketing push: KNPL stepped up its A&P spends in FY16-
18 (6-7% of sales in ad spends vs 3.5-4% historically and vs APNT/
BRGR’s 4%/5% respectively), translating into an 11/23% CAGR over
FY15-20/FY15-18 resp. This ad-spend lever available to KNPL was partly
due to the up-cycle in Auto industrials business during FY16-18 (HSIE:
10% CAGR over FY16-18). It has reversed since, with the fortunes of the
auto industry. A&P spends were cut to 6/5/5% of sales respectively over
FY18-20 as management focused on safeguarding margins during the
aforementioned period.
2. Consistent push on dealer adds: KNPL is estimated to have added
dealers at a decadal ~9% CAGR and installed tinting machines at a
CAGR of 11%. (HSIE: KNPL’s tinting machine penetration is estimated at
~78%). The dealership gap between KNPL and BRGR (#2 in Decorative)
continues to reduce. It would be interesting to see if KNPL catches up on
throughput per dealer too as room to improve remains the most within
the Top-3. Note: Management intends to grow the dealer network by 8-
10% per annum.
3. Sprucing up the economy emulsion portfolio and filling other product
white spaces in the portfolio.
We believe that KNPL’s decorative outperformance within the Top-3 over FY16-
18 is a function of the above three variables firing together. That said, the
predisposition to safeguard margins is likely to continue in FY21, courtesy the
COVID-led demand destruction (higher in case of KNPL, given its higher
Industrial salience). We do not build any material step-up in A&P spends even
post the pandemic (FY21-23) as we believe the management would prefer a clear
endorsement of Auto recovery before stepping on the gas in terms of A&P
spends. This reluctance to increase A&P spend, in turn, is likely to feed into
marginally lower performance in decorative business vs APNT/BRGR over FY21-
23.
Page | 7
Kansai Nerolac: Initiating Coverage
KNPL’s aggressive A&P spends over FY16-18… ...and active dealer additions...
Source: Companies, HSIE Research Source: HSIE Research, Note: Indexed to APNT/BRGR. How to
Read: In FY20, KNPL’s active dealer network stood at 43%/86% of
APNT/BRGR respectively
...ensured it outpaced APNT/BRGR in decorative
volumes (% growth)…
...there is room to catch up on revenue/per active
dealer though (Rs. mn)
Source: Companies, HSIE Research Source: HSIE Research, NOTE: Revenue adjusted to account for
only decorative revenue. 90% of deco rev assigned to active
dealer
KNPL has been sprucing up its emulsions portfolio, especially in the economy segment with Product Launches
Paint Solutions Segment Type Application Launch year
Nerolac Excel Top Guard Premium Emulsion Exterior FY20
Suraksha Acrylic Exterior Emulsion Economy Emulsion Exterior FY20
Nerolac Waterproof Putty Premium Putty Waterproofing FY20
Soldier Metallics Economy Emulsion Interior & Exterior FY20
Suraksha Range Economy Emulsion Exterior FY19
Beauty Little Master Economy Emulsion Interior FY19
Impression Ultra HD, Ultra Fresh Premium Emulsion Interior FY19
Gloria Band (Fast drying polyurethane) Premium Wood emulsion Wood coating FY18
Excel Rainguard waterproof primer Premium Primer Interior and exterior FY18
Ready Mix (Primer +Putty) Economy Primer/Putty Interior FY17
Excel Alkali Primer and impression Glitter Economy Primer/Putty Exterior FY17
Excel Mica Marble Premium Emulsion Exterior FY17
Soldier Paints Economy Emulsion Interior and exterior FY16
Impression with HD colour technology Premium Emulsion Interior FY15
Excel Rain Guard Premium Emulsion Exterior FY15
(10)
-
10
20
30
40
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
E
KNPL APNT BRGR
4.7
5.6
3.6
5.0
4.8
5.8
3.9
4.9
5.1
6.8
4.1
4.2
3.9
4.8
6.1
4.7
4.1
5.1
6.8
4.6
3.9
4.7
6.0
4.0
4.2
3.3
5.0
3.1
4.6
3.3
5.0
3.1
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Asian Paints Berger Paints Kansai
Nerolac
Akzo Nobel
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
-
10,000
20,000
30,000
40,000
50,000
60,000
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Asian Paints Berger Paints Kansai Nerolac
45-82% of
APNT/BRGR
43-86%
APNT/BRGR
55-85% of
APNT/BRGR
2.9 2.9 2.9 3.0
2.9
1.8 1.8 1.9 2.0
1.7 1.5 1.5 1.5 1.5 1.3
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5 F
Y1
6
FY
17
FY
18
FY
19
FY
20
Asian Paints Berger Paints Kansai Nerolac
Page | 8
Kansai Nerolac: Initiating Coverage
Well-covered to play the volume game until FY24
Well-covered in terms of capacity until FY24: As per our estimates, KPNT seems
covered in terms of in-house capacity to deliver 9-10%/7-8% volume/revenue
CAGR respectively until FY24 (518k KL/pa currently, intends to take it to 525k
KL/pa in FY21). The company’s Vizag plant (earmarked for Decorative Paints)
was expected to be commissioned in FY21 but could get pushed to FY22 (per
management), courtesy the pandemic. Any spurt in the aforementioned volume
run-rate could advance the need for capacity addition. Note: market leader
APNT does not have this compulsion post its mega capex cycle in FY19. During
FY20, KNPL augmented its manufacturing capability with (1) commissioning of
its new digital factory in Goindwal (50k MT for decorative paints) and (2)
approvals in place for supply to major automobile OEMs from its Sayakha,
Gujarat, plant (commissioned in FY19). Capex earmarked for these capacity
boosters was Rs. 11bn, of which Rs. 8.5bn has been utilised.
Of Note: the last big Capex cycle happened in FY13, and the industry absorbed
the excess within five years. We believe that this windfall capacity addition
would further consolidate volumes in the hands of the Top-3 players.
Company-wise capacity (KL/pa) Estimated capacity utilisation (%)
Source: Companies, HSIE Research Source: Companies, HSIE Research
65
80
63 67
82
70
-
10
20
30
40
50
60
70
80
90
APNT BRGR KNPL
FY17 FY18 FY19 FY20 FY21E FY22E FY23E
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
FY17 FY18 FY19 FY20 FY21E FY22E FY23E
APNT BRGR KNPL
Page | 9
Kansai Nerolac: Initiating Coverage
1QFY21 result review: APNT > KNPL’s
performance > BRGR
Contextually a reasonable print in decorative business: Given the heavy
Auto/Industrial skew (40% in FY20) in revenue mix, the pandemic impact on
Kansai’s overall volume/value was bound to be higher vs peers. However, we
estimate that decorative revenue (comparable vertical) has declined by ~49%/45%
in value/volume – weaker than APNT’s 44/38% (HSIE), but on par with BRGR
(48% decline in value). Management highlighted that May and Jun-20 recorded
double-digit volume growth and Jul-20 got a good start. However, we remain
circumspect of the real progression in volume recovery as the May/June recovery
is mostly a function of (1) pent-up demand and (2) incentivised channel up-
stocking. Capacity utilisation is estimated to be north of 50% for June.
The industrial segment gets massacred courtesy high Auto exposure: Industrial
segment is estimated to have declined by ~78% YoY, mainly mimicking Auto
sales. Management remains cautiously optimistic on the Auto recovery.
However, it remains committal on reducing its Auto exposure in the industrial
mix by channelling its efforts to grow the Powder, Coil, Rebar and high-
performance Coating business.
Profitability improvement underpinned by abnormally high decorative skew:
GM’s improvement of 340/320bp YoY/QoQ to 41.6% was primarily a function the
(1) revenue mix significantly getting skewed towards the high-margin decorative
business in 1Q. HSIE (80:20 Decorative: Industrial mix in 1QFY21 vs typically
60:40). The impact on EBITDAM, as a consequence of the GM swing, was the
least within the Top-4 paint companies at -360bp/+50bp YoY/QoQ). APNT/BRGR
EBITDAM contractions were -580/-430bp YoY in 1Q. While employee expenses
remained sticky, other expenses declined 57% YoY, closely tracking sales decline,
indicating significant work done on fixed costs reduction. Net profit declined
71% YoY to Rs427mn (Note: part of these cost savings are not sustainable and are
likely to mean revert once demand picks up).
Tier 2/3/4 cities outperformed Metros and Tier-1 cities: Management
highlighted that Tier 2/3/4 cities witnessed better recovery than Metros/Tier 1
cities due to lower severity and paranoia of the pandemic and better crop
harvest. In order of severity in demand destruction, West remained the most
impacted followed by South and then North and East.
International business – April was a washout; progressively improving: Nepal
remained the most affected during the pandemic, while Sri Lanka and
Bangladesh’s revenue recoup was relatively better.
Construction chemicals pegged at Rs. 50bn, but not targeting the entire market:
Management pegged the construction chemicals market at Rs. 50bn, which
includes Admixtures, waterproofing, Tile Adhesives, etc. While Apr-20 was a
washout, business demand is progressively improving, especially in
waterproofing. Management indicated that profitability of waterproofing
segment is comparable to decorative paints on the retail side, whereas margins
are far lower in the institutional segment. It also highlighted that while the
market is big enough to bite, it intends to restrict its presence in the medium term
to waterproofing and Tile Adhesives and is not likely to be present in
Admixtures. Construction chemicals and Putty are estimated to contribute 5-10%
of KNPL’s sales.
Page | 10
Kansai Nerolac: Initiating Coverage
Quarterly snapshot - consolidated
Rs. Mn 1QFY20 4QFY20 1QFY21 YoY (%) QoQ (%) FY20 FY21
Net Revenue 15,424 10,801 6,389 (58.6) (40.8) 52,800 46,762
Total COGS 9,526 6,593 3,741 (60.7) (43.3) 32,586 28,099
Gross Profit 5,898 4,208 2,649 (55.1) (37.1) 20,214 18,663
Gross Profit Margin (%) 38.2 39.0 41.5 321 bps 249 bps 38.3 39.9
Total Operating expenses 3,361 2,866 1,880 (44.1) (34.4) 12,169 11,548
Reported EBITDA 2,537 1,342 768 (69.7) (42.8) 8,045 7,116
EBITDA Margin (%) 16.4 12.4 12.0 (442 bps) (40 bps) 15.2 15.2
Depreciation 330 384 379 14.8 (1.1) 1,421 1,549
EBIT 2,207 959 389 (82.4) (59.4) 6,623 5,567
EBIT Margin (%) 14.3 8.9 6.1 (822 bps) (279 bps) 12.5 11.9
Finance cost 46 62 55 19.0 (11.0) 209 250
Other income 68 38 82 20.5 112.5 255 429
PBT 2,228 935 416 (81.4) (55.6) 6,670 5,746
Exceptional Item
Tax Expenses 781 281 119 (84.8) (57.7) 1,512 1,446
Effective Tax Rate (%) 35.1 30.1 28.7 (640 bps) (143 bps) 22.7 25.2
Share of associate earnings - - - - - - -
Minority Interest 13 19 38
- -
EO items - - -
- -
PAT 1,434 635 258 (82.0) (59.3) 5,158 4,300
APAT 1,434 635 258
258
APAT margin (%) 9.3 5.9 4.0 (525 bps) (183 bps) 9.8 9.2
Operating Expenses (Rs mn) 3361 2866 1880 (44.1) (34.4) 12169 11548
Employee expenses 773 748 748 (3.3) (0.0) 3104 3133
Other expenses 2588 2117 1132 (56.2) (46.5) 9065 8415
Source: Companies, HSIE Research
Quarterly snapshot - consolidated
Rs. Mn 1QFY20 4QFY20 1QFY21 YoY (%) QoQ (%) FY20
Net Revenue 14,635 9,880 5,981 (59.1) (39.5) 49,432
Total COGS 9,036 6,078 3,490 (61.4) (42.6) 30,576
Gross Profit 5,598 3,802 2,491 (55.5) (34.5) 18,856
Gross Profit Margin (%) 38.3 38.5 41.6 339 bps 317 bps 38.1
Total Operating expenses 3,108 2,524 1,686 (45.8) (33.2) 11,039
Reported EBITDA 2,490 1,278 805 (67.7) (37.0) 7,816
EBITDA Margin (%) 17.0 12.9 13.5 (355 bps) 53 bps 15.8
Depreciation 278 320 318 14.6 (0.7) 1,199
EBIT 2,212 957 487 (78.0) (49.2) 6,617
EBIT Margin (%) 15.1 9.7 8.1 (698 bps) (155 bps) 13.4
Finance cost 13 13 13 4.8 2.3 50
Other income 65 40 79 21.8 98.7 269
PBT 2,265 984 553 (75.6) (43.8) 6,836
Exceptional Item
Tax Expenses 786 270 126 (84.0) (53.4) 1,482
Effective Tax Rate (%) 34.7 27.4 22.8 (1195 bps) (466 bps) 21.7
Share of associate earnings - - -
-
Minority Interest - - -
-
EO items - - -
-
PAT 1,479 715 427 (71.1) (40.2) 5,354
APAT margin (%) 10.1 7.2 7.1 (296 bps) (9 bps) 10.8
Operating Expenses (Rs mn) 3108 2524 1686 (45.8) (33.2) 11,039
Employee expenses 676 649 645 (4.5) (0.6) 2,694
Other expenses 2433 1875 1041 (57.2) (44.5) 8346
Source: Companies, HSIE Research
Page | 11
Kansai Nerolac: Initiating Coverage
1QFY21: Volume declines by an estimated 45% YoY
Source: Companies, HSIE Research
Baking in 6% revenue CAGR over FY20-23 EBITDA margin contraction was the least for KNPL
among peers in 1QFY21
Source: Companies, HSIE Research Source: Companies, HSIE Research
Key assumptions
Key assumptions FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Decorative volume growth (%) 16.0 12.5 14.7 12.0 5.0 (6.5) 29.0 12.5
Decorative realisation growth (%) (6.0) (2.6) 2.7 2.7 (1.0) (4.0) (3.6) (1.8)
Decorative revenue growth (%) 9.0 9.6 17.8 15.0 4.0 (10.2) 24.4 10.5
Standalone revenue growth (%) 5.0 7.6 14.9 16.4 (2.7) (11.4) 20.2 11.7
Industrial revenue growth (%)
(16.6) (13.9) 14.0 12.5
Gross margin (%) 37.1 41.5 39.6 36.2 38.3 39.9 39.1 39.0
EBITDA margin (%) 15.5 18.2 17.0 13.9 15.2 15.2 16.2 16.4
Source: Companies, HSIE Research
40
43
41
41
40
40
40
38
38
36
35
36
38
38
38
38
42
-
5
10
15
20
25
30
35
40
45
-
1,000
2,000
3,000
4,000
5,000
6,000
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
2Q
FY
19
3Q
FY
19
4Q
FY
19
1Q
FY
20
2Q
FY
20
3Q
FY
20
4Q
FY
20
1Q
FY
21
Gross Profit (Rs. mn) Gross Margin (%) - RHS
18
20
18
17
18
19
17
15
16
15
13
13
17
17
15
13
13
-
5
10
15
20
25
-
500
1,000
1,500
2,000
2,500
3,000
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
2Q
FY
19
3Q
FY
19
4Q
FY
19
1Q
FY
20
2Q
FY
20
3Q
FY
20
4Q
FY
20
1Q
FY
21
EBITDA (Rs. mn) EBITDA Margin (%) - RHS
10 14
9 15 12
(45)
(50)
(40)
(30)
(20)
(10)
-
10
20
30
1Q
FY
16
2Q
FY
16
3Q
FY
16
4Q
FY
16
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
2Q
FY
19
3Q
FY
19
4Q
FY
19
1Q
FY
20
2Q
FY
20
3Q
FY
20
4Q
FY
20
1Q
FY
21
Decorative volume growth (YoY)
Page | 12
Kansai Nerolac: Initiating Coverage
Financial analysis
Baking in 6% revenue CAGR over FY20-23: Given KNPL’s higher exposure to
the Auto/Industrial segment, impact on overall volumes is likely to be higher vs
APNT/BRGR in FY21. Predisposition to safeguard profitability may also feed into
lower-than-usual ad spends, hence higher-than- APNT/BRGR volume declines in
the decorative vertical too. We build in 6.5/10% volume/revenue decline in the
decorative biz and ~14% decline in industrial revenue for KNPL in FY21. Over
FY20-23, we build in a moderate 6% revenue CAGR for KNPL.
Baking in 6% revenue CAGR over FY20-23 KNPL’s Decorative mix has been inching up
Source: Companies, HSIE Research Source: Companies, HSIE Research
Margins: While RM prices have significantly corrected (TiO2 and Crude-linked
derivatives account for 80% of RM costs for Paint companies are down 18-22%
YoY). We believe the flow through in material costs may remain relatively low in
FY21 vs street expectations (modest 160bp savings factored in GMs for KNPL in
FY21) as a better part of 1H is likely expected to be about clearing high-cost
inventory and as demand gradually recovers 2H onwards, RM costs are likely to
firm up. Also, part of GM savings may find its way to incentivise the dealer
network for up-stocking.
GM increase due to increasing decorative salience + marginal operational savings
led by normalising capacity utilisation (~70/80% by FY23/FY24) to help EBITDA
margins improve by 115bp over FY20-23E
Modest material cost savings built in FY21 (160bp) EBITDA margins to improve by 115bp over FY20-23E
Source: Companies, HSIE Research Source: Companies, HSIE Research
5.0
7.6
14
.9
16
.4
(2.7
)
(11
.4)
20
.2
11
.7
(15.0)
(10.0)
(5.0)
-
5.0
10.0
15.0
20.0
25.0
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
E
FY
22
E
FY
23
ERevenue (Rs. mn) YoY (%)
55
56
58
59
64
65
67
67
45
44
42
41
36
35
33
33
0%
20%
40%
60%
80%
100%
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
-Decorative -Industrial
32.7 33.5 37.1
41.5 39.6 36.2
38.3 39.9 39.1 39.0
-
10.0
20.0
30.0
40.0
50.0
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
Gross Margin (%)
11.5 12.6
15.5
18.2 17.0
13.9 15.2 15.2
16.2 16.4
-
5.0
10.0
15.0
20.0
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
EBITDA Margin (%)
Page | 13
Kansai Nerolac: Initiating Coverage
While A&P spends remain over-indexed to decorative scale vs Top 2...A&P
growth has tapered off to safeguard margins from KNPL’s Auto woes. We
believe, KNPL’s predisposition to protect margins is likely to continue in
FY21/22.
A&P spends (As % of estimated decorative revenue) Growth in A&P spends (%)
Source: Companies, HSIE Research Source: Companies, HSIE Research
Cash Discounts/Rebates have been inching up and are likely to remain elevated
vs history given the focus on new launches and to gain share in low-end
emulsions. Note: In FY20, KNPL launched 16 new offerings across price points.
Cash Discounts/Rebates have been inching up We build in a PAT CAGR of 7.5% over FY20-23
Source: Companies, HSIE Research Source: Companies, HSIE Research
Structurally, given the higher industrial salience, KNPL’s cash conversion cycle
is longer vs APNT/BRGR. Note: Receivables from industrials clients are typically
longer vs that of dealers from decorative biz. Both inventory /payable days have
inched up/down resp. over FY16-20. (more pronounced over FY18-20). We
suspect this may be due to the Auto slowdown and new products filling in the
channel. A similar trend was observed over FY13-14 (Prev. Auto slowdown).
Capital intensity in industrials is also nearly double that of decorative plants.
Ergo, lower GMs/EBITDAM, longer CC cycle and higher capital intensity
(reflected in lower-than-APNT/BRGR fixed asset turns) for Industrials does
weigh in on structural return ratios for KNPL. This is likely to improve at the
margin as KNPL’s decorative salience increases over the medium-to-long term.
3.5
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Asian Paints Berger Paints
Kansai Nerolac Akzo Nobel
19
14
21
5
18
33
18
(10
)
(22
)
(28
)
56
15
11
17
18
(3)
8
3 2
(10
)
25
(19
)
(5)
(16
)
13
3
(6)
(9)
(40)(30)(20)(10)
-10 20 30 40 50 60 70
Asian Paints Berger Paints Kansai
Nerolac
Akzo Nobel
FY14 FY15 FY16 FY17 FY18 FY19 FY20
34
39
1
(13
)
15
(17
)
33
13
(30)
(20)
(10)
-
10
20
30
40
50
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
APAT (Rs. mn) YoY (%)
5
6
7
8
9
10
11
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
Cash Discounts/Rebates (As % of sales)
Page | 14
Kansai Nerolac: Initiating Coverage
Company-wise Core Cash conversion cycle
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Asian Paints
Inventory 60 58 56 50 63 56 58 60
Receivables 26 25 23 23 29 29 28 24
Trade payables 49 53 41 41 48 48 46 37
Core CC Cycle 37 31 38 32 44 38 39 46
Berger Paints
Inventory days 70 67 62 65 77 73 76 75
Receivables 39 41 42 44 44 46 38 36
Trade payables 42 53 49 60 65 72 64 65
Core CC Cycle 67 55 55 49 56 47 50 46
Kansai Nerolac
Inventory (days) 68 74 56 56 63 64 74 69
Debtors (days) 54 52 51 51 52 54 48 50
Payables (days) 50 51 33 53 50 54 45 38
Core CC Cycle 72 76 74 54 65 63 77 80
Source: Companies, HSIE Research
Lower margins/Higher WC needs (given higher
industrial salience) keep underlying CFO/EBITDA
conversion low vs APNT/BRGR
...Fixed asset turnover also remains lower vs
APNT/BRGR given the higher industrial salience
Source: Companies, HSIE Research, 3-year rolling avg
CFO/EBITDA considered for standalone operations
Source: Companies, HSIE Research,
KNPL’s capital requirements are more volatile too than its decorative-heavy peers
FY15 FY16 FY17 FY18 FY19 FY20
Cash from Operations (excl WC change) 3,340 3,417 5,332 5,333 4,602 6,521
Other Income 67 168 82 213 176 26
Total 3,407 3,585 5,414 5,546 4,777 6,547
Application of funds (Rs bn)
Working Capital 292 (500) 1,820 1,740 3,603 570
Capex 902 (4,506) 2,169 3,431 6,013 2,799
Investments 1,552 3,232 (826) (458) (3,482) 900
Dividend 703 912 1,988 1,955 1,789 1,855
Borrowings 167 6 174 (65) 440 (448)
Others - - 4,311 (1,134) (3,240) 89
Net change in cash (209) 4,440 (4,223) 76 (345) 782
Total 3,407 3,585 5,414 5,546 4,777 6,547
3-yr rolling cumm. WC + Capex as % of sources of funds 72.9 (17.1) 1.4 28.6 119.3 107.6
Source: Companies, HSIE Research
58
46 47
63 55
50
63 64 62
69
83
63 62
75
59 66 65
52
60 57
35
64 62
45
-
10
20
30
40
50
60
70
80
90
Asian Paints Berger Paints Kansai Nerolac
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
%
2.9 2.9 2.8 2.4
2.0 1.7 1.8
1.7 1.0
2.0
3.0
4.0
5.0
6.0
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
KNPL APNT BRGRx
Page | 15
Kansai Nerolac: Initiating Coverage
Return profile to decline in the pandemic-stricken
FY21…expect a V-shaped recovery over FY20-23E
Lags APNT/BRGR in return profile courtesy the
higher industrial salience
Source: Companies, HSIE Research Source: Companies, HSIE Research
14 14
16
18 19
17
13 14
11
14 14
-
2
4
6
8
10
12
14
16
18
20
-
5
10
15
20
25
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
RoE (%) RoCE (%) RoIC (%) - RHS
18 19 17
13 14 11
14 14
39
33
27 25
28 24
32 35
20 19 19 18 21 17
21 23
-
5
10
15
20
25
30
35
40
45
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
KNPL APNT BRGR
%
Page | 16
Kansai Nerolac: Initiating Coverage
Ranks low on key fundamental anchors…ergo, the
valuation discount
Our DCF-based TP of Rs. 500/sh (implying 44x Sep-21 P/E) assumes: 1. 10-yr
revenue CAGR: 10.7%, 2. EBITDA margin expansion of ~290bp over FY20-30E
given increasing decorative skew, 3. FY20-41 FCFF CAGR: 15.5% (FY20-30E FCFF
CAGR: 18.3%, FY30-41E CAGR: 13%), 4. WACC: 10.5%, 5. Terminal growth: 6%,
FCFF/EBITDA conversion of ~40% over FY20-30E (implied P/E of 44x). The 12%
discount to APNT seems justified given the inherently lower fundamental
anchors (Lower GMs/EBITDAM and Higher capital intensity – both WC/Capex)
vs decorative heavy-weights like APNT and BRGR.
DCF Valuation FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30E FY31E FY35E FY41E
EBIT*(1-t) 5,555 6,279 7,076 8,253 9,656 11,272 13,188 15,459 17,355
Less: Capex (2,684) (6,210) (2,004) (3,634) (3,637) (5,745) (4,058) (4,750) (5,327)
Add: Depreciation 1,659 1,893 2,105 2,241 2,418 2,650 2,887 3,094 3,329
Change in NWC (2,197) (1,339) (1,824) (2,233) (2,557) (2,947) (3,188) (3,365) (3,005)
FCF 2,333 624 5,353 4,627 5,880 5,229 8,829 10,438 12,352 14,493 25,199 47,344
FCF growth yoy (%) (53.6) (73.3) 758.4 (13.6) 27.1 (11.1) 68.8 18.2 18.3 17.3 13.3 9.8
Year-ending 31-Mar-22 31-Mar-23 31-Mar-24 31-Mar-25 31-Mar-26 31-Mar-27 31-Mar-28 31-Mar-29 31-Mar-30 31-Mar-31 31-Mar-35 31-Mar-41
Discounting period 0.50 1.50 2.50 3.50 4.50 5.50 6.50 7.50 8.50 9.50 13.51 19.51
Discounting factor 0.95 0.86 0.78 0.70 0.64 0.58 0.52 0.47 0.43 0.39 0.26 0.14
Discounted FCF 2,220 537 4,170 3,262 3,751 3,019 4,612 4,934 5,284 5,611 6,542 6,748
FCF/EBITDA (%) 25.7 6.1 46.3 34.9 38.4 29.5 43.0 43.9 46.6
DCF as on (date) 30-Sep-21
WACC (%) 10.5
Terminal growth (%) 6.0
Terminal FCF multiple (X) 23.6
Implied terminal EV/EBITDA (X) 17.8
PV-Explicit Period 102,884
PV-Terminal Value 158,949
EV 261,833
Net debt/(cash) (7,649)
Equity value 269,482
# of shares (mn) 539
Equity value (Rs/share) 500
CMP (Rs/share) 484
Upside/(Downside) 3.3
Implied Sep-22 P/E 44.5
Source: Companies, HSIE Research
Sensitivity Analysis
WACC (%)
9.5 10.0 10.5 11.0 11.5
Terminal growth rate (%)
5.0 576 503 444 396 356
5.5 621 536 469 415 371
6.0 680 578 500 438 388
6.5 758 632 538 467 410
7.0 867 704 588 502 436
Page | 17
Kansai Nerolac: Initiating Coverage
Company Profile
Kansai Nerolac Paints (KNPL) is a 74.99% subsidiary of Kansai Paints Co. Ltd., Japan.
The parent company is one of the world’s top ten paint companies with a presence in
over 43 companies. KNPL is the second largest coating company in India and a
market leader in Industrial Coatings. Their manufacturing footprint spans six plants,
all of which are strategically located near key Original Equipment Manufacturers
(OEMs), thus lending the company a strong competitive edge. Through technology,
product innovation and a well established distribution network, KNPL has
strengthened its core to be established as a strong consumer brand and is one of
India’s Top 40 brands.
The company has been expanding its horizons by foraying into new market segments
and new geographies. In order to scale up leadership in the Powder Coating segment,
the company acquired 100% share in Marpol in April 2018. In the following year, the
company acquired a small construction chemicals company, Perma Construction
Aids in April 2019. In August 2019, KNPL formed a 60:40 joint venture with Polygel,
a manufacturer of adhesives and sealants. Through acquisitions and joint ventures
the company also operates internationally in Sri Lanka, Nepal and Bangladesh.
Key Personnel
Name Designation Description
Mr. Pradip Panalal Shah Chairman (Independent Director)
Mr. Shah is a qualified Cost Accountant and Chartered
Accountant. He also holds an MBA from Harvard Business School.
He was the founder Managing Director of CRISIL. Mr. Shah also
served as a consultant to USAID, the World Bank and the Asian
Development Bank. Mr. Shah started IndAsia, a corporate finance
and private equity advisory business. He is currently Chairman at
KPNL.
Mr. Harishchandra Bharuka Vice Chairman and Managing Director
Mr. Bharuka has a bachelor’s degree in Commerce from Mumbai
University. He is also a qualified AICWA from the Institute of Cost
and Works Accountants of India.
Mr. Anuj Jain Executive Director
Mr. Jain has a bachelor’s in Science and a masters degree in
Marketing from University of Mumbai. He has 27 years of
experience under his belt. He joined the company in 1990 and was
Director – Decorative and Industrial Sales & Marketing of the
Company. prior to his appointment as a Whole-time Director. He is
now Executive Director at the company.
Mr. Prashant Pai Director – Finance
Mr. Pai served as CFO & Senior VP – Finance prior to his current
role of Director – Finance. He has been with the company since
1989.
Source: Company, HSIE Research
Page | 18
Kansai Nerolac: Initiating Coverage
Key Risks
Name Description
Correlation of sales with the
economy
While the three top paint companies have shown resilience in terms
of volume growth over the past few quarters even during the extant
economic slowdown, the sustenance of the slowdown could pose a
downside risk to our estimates.
Sharp rise in input costs
There are several raw materials which are directly driven by crude
oil. Approximately 70% of the input costs can be accounted for by
crude derivations. The remaining ~30% of the input costs arise from
non-crude (TiO2) forms. Therefore, any sharp increase in input costs
could adversely impact the business
Finance risks originating out of
currency fluctuations
The USD-INR exchange is an important component of the input
costs. Hence, a depreciation of INR vis-à-vis the USD, could affect
the company’s bottom line directly by the way of gross margins.
Disruption in the supply chain
In a year of high uncertainty in the macro environment and
geopolitical scenarios, disruptions in the supply chain are an
important risk to monitor. The unavailability of raw materials could
impact the estimates negatively.
Source: Company, HSIE Research
Page | 19
Kansai Nerolac: Initiating Coverage
Financials Income Statement Year End (March) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Net Revenues 37,669 40,526 46,581 54,243 52,800 46,762 56,194 62,759
Growth (%) 5.0 7.6 14.9 16.4 (2.7) (11.4) 20.2 11.7
COGS 23,682 23,691 28,136 34,618 32,586 28,092 34,204 38,310
Employee Expense 1,733 2,026 2,351 2,834 3,104 3,133 3,259 3,546
A&P Expense 2,361 2,810 2,857 2,783 2,733 2,198 2,909 3,217
Freight and handling charges 1,698 1,950 2,273 2,752 2,768 2,806 2,922 3,232
Power and fuel 697 713 758 868 736 652 784 844
Other Expenses 1,652 1,961 2,276 2,863 2,828 2,759 3,035 3,326
EBITDA 5,847 7,374 7,931 7,525 8,045 7,122 9,082 10,284
EBITDA Growth (%) 29.6 26.1 7.6 (5.1) 6.9 (11.5) 27.5 13.2
EBITDA Margin (%) 15.5 18.2 17.0 13.9 15.2 15.2 16.2 16.4
Depreciation 683 701 771 1,063 1,421 1,549 1,659 1,893
EBIT 5,164 6,673 7,161 6,462 6,623 5,574 7,423 8,390
Other Income (Including EO Items) 5,629 980 709 605 255 374 432 432
Interest - - - 100 209 250 250 250
PBT 10,792 7,653 7,870 6,968 6,670 5,698 7,605 8,572
Total Tax 1,772 2,552 2,732 2,491 1,512 1,434 1,914 2,158
RPAT before associate earnings 9,020 5,101 5,138 4,477 5,158 4,264 5,691 6,415
Share of Associate earnings - - - - - - - -
Minority Interest - - - - - - - -
RPAT 9,020 5,101 5,138 4,477 5,158 4,264 5,691 6,415
Exceptional Gain/(loss) 5,353 - - - - - - -
Adjusted PAT 3,667 5,101 5,138 4,477 5,158 4,264 5,691 6,415
APAT Growth (%) 33.8 39.1 0.7 (12.9) 15.2 (17.3) 33.5 12.7
Adjusted EPS (Rs) 7 9 10 8 10 8 11 12
EPS Growth (%) 33.8 39.1 0.7 (12.9) 15.2 (17.3) 33.5 12.7
Source: Company, HSIE Research
Balance Sheet Year End (March) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
SOURCES OF FUNDS
Share Capital - Equity 539 539 539 539 539 539 539 539
Reserves 24,557 27,606 30,784 33,624 37,064 39,638 44,029 48,169
Total Shareholders Funds 25,096 28,145 31,323 34,163 37,603 40,177 44,568 48,708
Minority Interest 60 153 164 201 217 217 217 217
Long Term Debt 294 182 97 44 234 234 234 234
Short Term Debt 167 105 255 1,036 1,548 1,548 1,548 1,548
Total Debt 461 287 352 1,080 1,782 1,782 1,782 1,782
Net Deferred Taxes 129 795 814 1,267 1,081 1,081 1,081 1,081
Other Non-current Liabilities & Provns - - - - 638 638 638 638
TOTAL SOURCES OF FUNDS 25,746 29,379 32,652 36,710 41,321 43,894 48,286 52,426
APPLICATION OF FUNDS
Net Block 9,353 9,552 10,333 14,455 17,541 17,703 18,728 23,045
CWIP 420 1,544 3,460 3,164 1,691 1,691 1,691 1,691
Goodwill 23 23 23 196 198 198 198 198
Other Non-current Assets - - - - 1,325 1,325 1,325 1,325
Total Non-current Assets 9,795 11,118 13,815 17,814 20,755 20,917 21,942 26,259
Investments 5,388 5,314 5,207 1,965 3,060 3,060 3,060 3,060
Inventories 5,827 7,032 8,292 11,111 10,084 9,865 11,085 12,208
Debtors 5,455 5,904 7,026 7,556 7,870 7,431 8,468 9,285
Other Current Assets 1,153 4,379 3,323 5,771 5,148 4,559 5,325 5,603
Cash & Equivalents 4,785 2,614 3,636 962 1,920 5,211 6,380 4,865
Total Current Assets 22,609 25,244 27,484 27,365 28,081 30,125 34,318 35,021
Creditors 5,513 5,607 6,999 6,934 5,954 5,765 6,312 6,998
Other Current Liabilities & Provns 1,146 1,377 1,648 1,535 1,562 1,383 1,662 1,856
Total Current Liabilities 6,659 6,984 8,647 8,469 7,516 7,148 7,974 8,854
Net Current Assets 15,950 18,260 18,837 18,896 20,566 22,977 26,343 26,167
TOTAL APPLICATION OF FUNDS 25,746 29,379 32,652 36,710 41,321 43,894 48,286 52,426
Source: Company, HSIE Research
Page | 20
Kansai Nerolac: Initiating Coverage
Cash Flow Statement Year ending March FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Reported PBT 10,792 7,653 7,870 6,968 6,670 5,698 7,605 8,572
Non-operating & EO Items (5,560) (761) (543) (421) (124) (374) (432) (432)
Interest Expenses - - - 100 209 250 250 250
Depreciation 683 701 771 1,063 1,421 1,549 1,659 1,893
Working Capital Change 500 (1,820) (1,740) (3,603) (570) 879 (2,197) (1,339)
Tax Paid (2,498) (2,261) (2,764) (3,107) (1,655) (1,434) (1,914) (2,158)
OPERATING CASH FLOW ( a ) 3,917 3,512 3,593 999 5,951 6,567 4,971 6,788
Capex 4,506 (2,169) (3,431) (6,013) (2,799) (1,711) (2,684) (6,210)
Free Cash Flow (FCF) 8,423 1,343 162 (5,014) 3,152 4,856 2,287 578
Investments (3,232) 826 458 3,482 (900) - - -
Non-operating Income 168 (4,229) 1,347 3,416 (63) 374 432 432
INVESTING CASH FLOW ( b ) 1,441 (5,573) (1,627) 885 (3,762) (1,337) (2,253) (5,778)
Debt Issuance/(Repaid) (6) (174) 65 (440) 448 - - -
Interest Expenses - - - (100) (157) (250) (250) (250)
FCFE 8,417 1,169 227 (5,553) 3,444 4,607 2,038 328
Share Capital Issuance - - - - - - - -
Dividend (912) (1,988) (1,955) (1,689) (1,699) (1,690) (1,300) (2,275)
Others - - - - - - - -
FINANCING CASH FLOW ( c ) (918) (2,162) (1,890) (2,229) (1,407) (1,939) (1,549) (2,524)
NET CASH FLOW (a+b+c) 4,440 (4,223) 76 (345) 782 3,291 1,169 (1,515)
EO Items, Others 7 2,058 3,004 694 871 - - -
Closing Cash & Equivalents 4,785 2,614 3,636 962 1,920 5,211 6,380 4,865
Source: Company, HSIE Research
Key Ratios FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
PROFITABILITY (%)
GPM 37.1 41.5 39.6 36.2 38.3 39.9 39.1 39.0
EBITDA Margin 15.5 18.2 17.0 13.9 15.2 15.2 16.2 16.4
EBIT Margin 13.7 16.5 15.4 11.9 12.5 11.9 13.2 13.4
APAT Margin 9.7 12.6 11.0 8.3 9.8 9.1 10.1 10.2
RoE 17.8 19.2 17.3 13.7 14.4 11.0 13.4 13.8
RoIC (or Core RoCE) 18.3 18.6 16.8 12.8 13.6 10.7 13.8 14.0
RoCE 17.0 18.5 16.6 13.1 13.6 10.4 12.8 13.1
EFFICIENCY
Tax Rate (%) 32.59 33.35 34.72 35.75 22.67 25.17 25.17 25.17
Fixed Asset Turnover (x) 2.5 2.6 2.7 2.4 2.0 1.7 1.8 1.7
Inventory (days) 56 63 65 75 70 77 72 71
Debtors (days) 53 53 55 51 54 58 55 54
Other Current Assets (days) 11 39 26 39 36 36 35 33
Payables (days) 53 50 55 47 41 45 41 41
Other Current Liab & Provns (days) 11 12 13 10 11 11 11 11
Cash Conversion Cycle (days) 56 93 78 107 108 115 110 106
Net Debt/Equity (x) (0.17) (0.08) (0.10) 0.00 (0.00) (0.09) (0.10) (0.06)
Interest Coverage (x)
64.8 31.7 22.3 29.8 33.6
PER SHARE DATA (Rs)
EPS 6.8 9.5 9.5 8.3 9.6 7.9 10.6 11.9
CEPS 8.1 10.8 11.0 10.3 12.2 10.8 13.6 15.4
Dividend 3.1 3.0 2.6 2.6 2.6 2.0 3.5 4.0
Book Value 46.6 52.2 58.1 63.4 69.8 74.6 82.7 90.4
VALUATION
P/E (x) 71.3 51.2 50.9 58.4 50.7 61.3 45.9 40.7
P/BV (x) 10.4 9.3 8.3 7.7 7.0 6.5 5.9 5.4
EV/EBITDA (x) 44.0 35.1 32.5 34.7 32.5 36.2 28.3 25.1
EV/Revenues (x) 6.8 6.4 5.5 4.8 4.9 5.5 4.6 4.1
OCF/EV (%) 1.5 1.4 1.4 0.4 2.3 2.5 1.9 2.6
FCF/EV (%) 3.3 0.5 0.1 (1.9) 1.2 1.9 0.9 0.2
FCFE/Mkt Cap (%) 3.2 0.4 0.1 (2.1) 1.3 1.8 0.8 0.1
Dividend Yield (%) 0.6 0.6 0.5 0.5 0.5 0.4 0.7 0.8
Source: Company, HSIE Research
Page | 21
Kansai Nerolac: Initiating Coverage
RECOMMENDATION HISTORY
200
250
300
350
400
450
500
550
600
650
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Ma
r-2
0
Ap
r-2
0
Ma
y…
Jun
-20
Jul-
20
Au
g-2
0
Sep
-20
Kansai Nerolac TPDate CMP Reco Target
07-Sep-20 485 ADD 500
Rating Criteria
BUY: >+15% return potential
ADD: +5% to +15% return potential
REDUCE: -10% to +5% return potential
SELL: >10% Downside return potential
Page | 22
Kansai Nerolac: Initiating Coverage
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