07 September 2020 Initiating Coverage Kansai Nerolac Nerolac...1. Aggressive marketing push over FY16-18 2. Consistent push on dealer adds 3. Consistent new product additions across

07 September 2020 Initiating Coverage

Kansai Nerolac

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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

[email protected]

+91-22-6171-7320

Varun Lohchab

[email protected]

+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)


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


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


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


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


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


KNPL’s non-auto industrial client profile

Source: Companies, HSIE Research

Page | 6


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


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


Nerolac

Akzo Nobel


-

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


Page | 8


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


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


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


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


Page | 11


1QFY21: Volume declines by an estimated 45% YoY


Baking in 6% revenue CAGR over FY20-23 EBITDA margin contraction was the least for KNPL

among peers in 1QFY21


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


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


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


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


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


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 (%)


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


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


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


Company-wise Core Cash conversion cycle


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


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


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



%

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


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


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


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


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


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.


Page | 18


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.


Page | 19


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


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


Page | 20


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


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


Page | 21


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


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