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SYNOPSIS

Kansai Nerolac Paints Ltd is the second largest coating company in India and market leader in Industrial Coatings.

The Company is a subsidiary of Japan based Kansai Paint Company Limited, which is one of the top ten coating companies in the world.

Company’s manufacturing units have received ISO 9001-2000, ISO-14001 and OHSAS-18001 for its quality management.

Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 18% over 2010 to 2013E respectively.

During the quarter, the company has reported Net Profit increased to Rs.571.10 million from Rs.536.10 million in previous year same quarter.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 21398.80 3393.30 2059.80 38.22 23.02

FY 12E 25122.19 3968.54 2446.67 45.40 19.38

FY 13E 27634.41 4375.00 2687.17 49.86 17.65

Stock Data:

Sector: Paints

Face Value Rs. Rs.10.00

52 wk. High/Low (Rs.) 973.95/720.00

Volume (2 wk. Avg.) 137.00

BSE Code 500165

Market Cap (Rs.In mn) 47423.20

Share Holding Pattern

1 Year Comparative Graph

Kansai Nerolac paints

Ltd BSE SENSEX

C.M.P : Rs.880.00 Target Price : Rs.994.00 Date : 03rd FEB 2012 BUY

KANSAI NEROLAC PAINTS LTD

Result Update: Q2 FY 12

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Kansai Nerolac Paints 880.00 47423.20 38.22 23.02 5.06 100.00

Asian Paints 2849.65 273337.8 92.29 30.88 13.84 320.00

Shalimar Paints 444.60 1683.1 31.70 14.03 3.31 80.00

Berger Paints 95.45 33039.3 4.57 20.89 4.58 65.00

Investment Highlights

Q2 FY12 Results Update

Kansai Nerolac Paints Ltd disclosed results for the quarter ended Sep 2011. Net

sales for the quarter increased by 15% to Rs.6160.50 million as compared to

Rs.5345.10 million during the corresponding quarter last year. During the

quarter, the company has reported Net Profit increased to Rs.571.10 million from

Rs.536.10 million in previous year same quarter. The Basic EPS of the company

stood at Rs.10.60 for the quarter ended Sep 2011.

Quarterly Results - Standalone (Rs in mn)

As At Sep-11 Sep-10 %change

Net sales 6160.50 5345.10 15

PAT 571.10 536.10 7

Basic EPS 10.60 9.95 7

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Basic EPS of the company stood at Rs.10.60

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Break Up of Expenditure

Expenditure for the quarter stood at Rs.5245.90mn, which is around 16% higher

than the corresponding period of the previous year. Raw material cost of the

company for the quarter accounts for 66% of the sales of the company and stood

at Rs.4064.40mn from Rs.3518.40mn of the corresponding period of the previous

year. Other Expenditure cost increased 11%YoY to Rs.959.5mn from

Rs.868.00mn and accounts for 16% of the revenue of the company for the

quarter.

OPM and NPM for the quarter stood at 15% and 9% respectively from 17% and

10% respectively of the same period of the last year.

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FY11 Performance

Net profit of the company has increased at 24% yoy Rs.2059.80mn from

Rs.1655.00mn of same period of last year. Total revenue for the year stood at

Rs.21398.80 mn from Rs.17074.10 which is 25% increased than that of a year ago.

Total Income has increased from Rs. 21621.90 million for the year ended March

31, 2011 to Rs.17267.60 million for the year ended March 31, 2010.EPS for the

year stood at Rs.38.22 per equity share of Rs.10.00 each.

Operating profit of the company stood at Rs.3393.30mn. OPM for the year stood at

15.86%. Expenditure of the company increased 26% YoY to Rs.18228.60mn.

Company Profile

Kansai Nerolac Paints Ltd. is the second largest coating company in India and market

leader in Industrial Coatings. It’s Industrial Coatings it has a wide range of products

in the Automotive, Powder, General Industrial and High performance Coatings space.

Nerolac paint, as it is popularly known, is an established brand in decorative paints.

Kansai Nerolac Paints Ltd is a subsidiary of Japan based Kansai Paint Company

Limited, which is one of the top ten coating companies in the world. The technological

edge of Kansai helps us constantly innovate and come up with products that meet

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consumer need gaps. Kansai Nerolac has always believed that the key to its business

is:

• Technology

• Research & Development

• Innovations

• Quality

Company Products

• Decorative Paints

• Automotive Coatings

• General Industries Coatings

• High Performance Coatings

• Powder Coatings

• Specialty Coatings

In India the company has presence in Assam, Goa, Gujarat, Haryana, Himachal

Pradesh, Madhya Pradesh, Orissa, West Bengal, Rajasthan, Maharashtra, Punjab,

Uttaranchal, Bihar, New Delhi, Tamil Nadu, Uttar Pradesh and many more.

Company’s manufacturing units have received ISO 9001-2000, ISO-14001 and

OHSAS-18001 for its quality management. Company has also implemented Japanese

5-S and TPM (total productive maintenance) concepts in organization.

Nerolac has a wide distribution network of over 11,000 dealers which one of the key

strength of company.

Company’s R&D facility focuses on improving its manufacturing processes and

innovate its products. This facility has officially recognized by the Department of

Science and Technology (DTI), Government of India.

Company has technically collaborated with two companies Kansai Paint Co. and

Oshima Kogyo Co. of Japan. The company markets its products under the brand

name such as 'Impressions', 'Beauty', 'Excel' and 'Suraksha'.

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Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY10A FY11A FY12E FY13E

12m 12m 12m 12m

Description

Net Sales 17074.1 21398.8 25122.19 27634.41

Other Income 193.5 223.1 225.33 229.84

Total Income 17267.6 21621.9 25347.52 27864.25

Expenditure -14426.9 -18228.6 -21378.98 -23489.25

Operating Profit 2840.7 3393.3 3968.54 4375

Interest -12 -8.4 -8.74 -9.18

Gross Profit 2828.7 3384.9 3959.79 4365.82

Depreciation -442.6 -493.6 -533.09 -575.74

Profit before Tax 2386.1 2891.3 3426.71 3790.08

Tax -731.1 -831.5 -980.04 -1102.91

Profit after Tax 1655 2059.8 2446.67 2687.17

Extraordinary items 0 0 0 0

Net Profit 1655 2059.8 2446.67 2687.17

Equity Capital 269.5 538.9 538.9 538.9

Reserves 7458.7 8828.7 11275.37 13962.54

Face Value 10 10 10 10

Total No. of Shares 26.95 53.89 53.89 53.89

EPS 61.41 38.22 45.4 49.86

*A=Actual, *E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Mar-11 30-Jun-11 30-Sep-11 31-Dec-11

3m 3m 3m 3m(E)

Description

Net Sales 5195.9 6520.5 6160.5 6425.4

Other Income 81.3 56.9 29.3 32.23

Total Income 5277.2 6577.4 6189.8 6457.63

Expenditure -4361.8 -5592.5 -5245.9 -5590.1

Operating Profit 915.4 984.9 943.9 867.53

Interest -0.9 -2.5 -2 -2.16

Gross Profit 914.5 982.4 941.9 865.37

Depreciation -132.1 -120.1 -135.8 -142.59

Exceptional Items 0 0 0 0

Profit before Tax 782.4 862.3 806.1 722.78

Tax -193.8 -250 -235 -213.22

Profit after Tax 588.6 612.3 571.1 509.56

Equity Capital 538.9 538.9 538.9 538.9

Face Value 10 10 10 10

Total No. of Shares 53.89 53.89 53.89 53.89

EPS 10.92 11.36 10.6 9.46

*A=Actual, *E=Estimated

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Key Ratio

Particulars FY10 FY11 FY12E FY13E

EPS (Rs.) 61.41 38.22 45.4 49.86

EBITDA Margin (%) 16.64% 15.86% 15.80% 15.83%

PAT Margin (%) 9.69% 9.63% 9.74% 9.72%

P/E Ratio (x) 14.72 23.02 19.38 17.65

ROE (%) 21.42% 21.99% 20.71% 18.53%

ROCE (%) 27.16% 28.45% 27.08% 24.64%

EV/EBITDA (x) 8.58 13.98 11.95 10.84

Debt-Equity Ratio 0.14 0.09 0.07 0.06

Book Value (Rs.) 286.76 173.83 219.23 269.09

P/BV 3.15 5.06 4.01 3.27

Charts:

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Outlook and Conclusion

At the current market price of Rs.880.00, the stock is trading at 19.38 x FY12E and 17.65 x FY13E respectively.

Price to Book Value of the stock is expected to be at 4.01 x and 3.27 x respectively for FY12E and FY13E.

Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.45.40 and Rs.49.86 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 18% over 2010 to 2013E respectively.

During the quarter, the company has reported Net Profit increased to Rs.571.10 million from Rs.536.10 million in previous year same quarter.

On the basis of EV/EBITDA, the stock trades at 11.95 x for FY12E and 10.84 x for FY13E.

We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.994.00 for Medium to Long term investment.

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Industry Overview

Paint industry in India has been long considered as the barometer of Industrial

activity in the country. The industry has witnessed buoyant growth during the last

decade riding on increasing per-capita disposable incomes in the country and the

boom in real estate and automobile industry.

Despite the sharp growth in recent times, the per capita consumption of paints in

India remains very low at 0.8 kg per year compared with 4 kg in the South East Asian

nations and 22 kg in developed countries. The global average per capita consumption

is around 15 kg. This leaves much room for growth for the industry going forward as

the Indian economy braces for a high growth trajectory in the current decade.

Profile of the Industry

The paint market can be divided into decorative paints which cater to household and

industrial paints which cater to needs of automotive, white goods and other

industries. The demand for decorative paints is highly price-sensitive and also

cyclical in nature. Monsoon represents the slack season while the peak business

period is the Sept-Oct festival season when most people repaint their houses close to

Diwali. Decorative paints can further be classified into premium, medium and

distemper segments. Premium decorative paints are acrylic emulsions used mostly in

the metros and other large cities and high-end offices. The medium range consists of

enamels, popular in smaller cities and towns. Distempers are economy products and

are used in plenty in the suburban and rural markets. This segment is dominated by

the unorganized sector players.

The industrial paints segment, on the other hand, is a high volume-low margin

business. Industrial paints include powder coatings, high performance coating and

automotive and marine paints. Nearly two-thirds of the industrial paint demand in

the country comes from the automotive sector while the rest is constituted by

producers of white goods, electronics etc.

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The share of industrial paints in the total paint consumption of the nation is very low

compared to global standards. It accounts for nearly 30% of the paint market with

70% of paints sold in India belonging to the decorative purposes. In most developed

countries, the ratio of decorative paints and industrial paints is around 50:50. But,

with the economy growing rapidly over the last decade and industries like automotive

and consumer durables picking up speed, the ratio is likely to improve going forward.

Market Structure

Paint industry is characterized by both organized and unorganized segments.

Organized segment controls nearly 80% of total industry output. Asian Paints is the

market leader in the organized sector with 37% of the market share. Other two big

companies Berger and Nerolac accounts for 18% and 15% share respectively.

Unorganized segment consists of around 2000 small companies which usually cater

to the local demand, particularly in household paints.

Current Scenario

Paint industry in India has seen tremendous growth in the last decade. However, like

the rest of the world, the industry faced surge in cost of production in early 2008 and

some slack in demand towards end of the year as economy slowed down. However,

with a rapid recovery in the Indian economy, the paint industry is back on track and

saw strong growth in 2009.

Decorative Paints

As stated earlier, decorative paints account for around 70% of the overall paint

market in India and most of the companies saw good revenue in this segment. The

decline in raw material prices helped boost revenue of all the companies. All though

cost of production has started to increase in 2010-11, with strong overall economic

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growth and revival in construction activity, the segment is set to perform well in the

current fiscal as well.

Industrial Paints

With sharp surge in the industrial activity, industrial paints segment too has

performed very well over the last one year. Both consumer durables and automotive

sales in the country have seen an unprecedented rally over last several months,

generating massive demand for the paint industry.

New Capex Cycle Begins

Riding on the strong sales seen over last few quarters and improvement in margins,

the paint industry is set to enter a new capex cycle. India's largest paint maker Asian

Paints is investing Rs 735 crore for a 400,000 tonne a year plant in Maharashtra and

the first phase of the project is expected to be commissioned by end-2012. Second

biggest paint company Kansai Nerolac Paints is also investing Rs 600 crore to raise

capacity by 50% over next three years. Berger Paints, the third-largest player, plans

to increase its capacity from 250,000 tonnes to 450,000 tonne over the next two

years. We expect that with rapid growth in economy, rising disposable incomes and

living standards and sharp surge in industrial production, the capacity expansion

will help the industry to cater to rising demand and boost top line of the industry.

Outlook

The Rs 13,000-crore paint industry has been growing at over 15% due to high

demand from decorative paints led by housing and real estate construction, and

industrial paints led by strong performance of automotive and white goods

industries. With strong outlook of the Indian economy, we expect per-capita paint

consumption will grow rapidly going forward, providing the key to sustained high

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growth to the industry. Historically, the industry has grown at nearly 1.5x-2x the

growth of national income. We expect the Indian economy to post 8-10% average

growth over the next decade, which provides for a lot of scope for the paint industry

to sustain its high growth trajectory seen in recent years.

On the fillip side, the industry faces a volatile cost structure. After a surge in early

2008, cost of production for the paint industry came down as the commodity rally

waned. However, over the last couple of quarters, costs have started to increase

again. Prices of titanium dioxide, the key raw material, have risen 8% since January

and are expected to increase another 5% in the next few months. Prices of other raw

materials are also on an uptrend.

Overall, however, we believe that the oligopolistic nature of the organized sector and

strong demand growth scenario will provide enough market power to the paint

makers to pass on most of the increase in costs to consumers, particularly in the

decorative segment. In the industrial segment, while the prices often rise after

substantial lag to the rise in costs, increasing volumes in wake of high growth in

auto, consumer goods and infrastructure spaces projects can help mitigate the

impact of rise in costs.

_______________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

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is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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