Paint Sector - Apr16 (IC) PDF

Indulge in this finish
20 April 2016
BSE Sensex: 25844
Sector: Paints
Asian Paints
CMP (Rs)
Mkt Cap (Rsbn/USDm)
886
850/ 12,832
Target Price (Rs)
1,015
Change in TP (%)
NA
Potential from CMP (%)
14.6
Berger Paints India

CMP (Rs)
Mkt Cap (Rsbn/USDm)
251
174/2,627
Target Price (Rs)
299
Change in TP (%)
NA
19.2
Kansai Nerolac Paints

CMP (Rs)
Mkt Cap (Rsbn/USDm)
304
174/2,476
Target Price (Rs)
313
Change in TP (%)
NA
2.9
Akzo Nobel India

CMP (Rs)
Mkt Cap (Rsbn/USDm)
1,345
65/974
Target Price (Rs)
1,442
Change in TP (%)
NA
7.2
We believe the Indian Paints industry is the best structural proxy to

play the themes of a sharp rise in urbanisation, improved disposable
incomes, low per capita consumption and meagre penetration in India.
Moreover, recent macro tailwinds such as the Seventh Pay
Commission, One Rank One Pension (OROP) scheme and likely good
monsoons are set to propel industry volume growth FY17 onwards.
Additionally, benign commodity prices and continued mix
improvement will drive gross margin improvement of 30-60bp for the
top-four players over FY16-18E. An oligopolistic structure and a stable
competitive landscape make the industry more attractive, thereby
increasing earnings visibility versus other consumer segments. We
factor in average 20% earnings CAGR over FY16-18E for the top-four
paint companies in India. We initiate coverage on Asian Paints
(APNT)/Berger Paints with Outperformer, and on Kansai Nerolac
Paints (KNPL)/Akzo Nobel India with Neutral rating.
Volume recovery underway: After a modest FY12-15, the top-three
paint companies in India have posted double-digit volume growth in
FY16. We expect the volume growth trajectory to accelerate as
structural factors such as increasing disposable incomes and low per
capita consumption combine with external triggers such as the Seventh
Pay Commission, OROP and likely good monsoons. We expect the topfour domestic paint companies to post an average volume CAGR of 13%
over FY16-18E.
Earnings/margin visibility high: The paints industry enjoys pricing
power and a stable competitive landscape, resulting in higher earnings
visibility. Consequently, paint companies posted healthy earnings
growth during periods of inflation/deflation, unlike other FMCG
businesses. Moreover, given that ~35-45% of the paint industrys raw
materials are crude linked, with benign crude oil prices, the companies
gross margin should expand for another two quarters. Overall, we
estimate 13-30% earnings CAGR for the top-four players over FY16-18E.
Premium justified; initiating with positive bias: We believe the industry
deserves premium multiples not only over international peers, but also
against domestic consumer staples companies. Further, given the
structural opportunity and strong growth visibility, we value the topfour paint companies on DCF. We prefer the top two companies with
improved high-margin decorative mix and superior financial metrics in
terms of volume growth, profitability and return ratios. We initiate
coverage on APNT/Berger Paints with Outperformer and on
KNPL/Akzo Nobel India with Neutral rating.
Comparative valuations-FY18E
Price
Mkt Cap
EPS
(Rs)
(Rs bn)
(Rs)
EPS CAGR
FY16-18E (%)
Outperformer
886
849.7
28.3
Outperformer
251
174.0
8.5
Neutral
304
164.0
Neutral
1,345
64.5
Companies
Reco
Asian Paints
Berger Paints India
Akzo Nobel India
P/E EV/EBITDA
RoE
RoCE
(%)
(%)
20.4
35.8
44.1
17.6
30.4
37.1
31.5
19.7
19.5
23.7
23.4
14.0
23.1
28.0
(x)
(x)
20.2
31.3
29.7
29.7
9.7
19.1
56.7
13.1
Source: IDFC Securities Research
Harit Kapoor
Mehul Desai
harit.kapoor@idfc.com
91-22-662 22649
mehul.desai@idfc.com
91-22-662 22640
For Private Circulation only.
Important disclosures appear at the back of this report
INITIATING COVERAGE
Paints
Paints
INDULGE IN THIS FINISH

xx
INDIAN PAINTS INDUSTRY LEVERAGING INDIAS ECONOMIC GROWTH
Indian pants industry Strong correlation with nominal
GDP growth
Paints
Domestic paint industry has grown at a CAGR of 17% over

FY05-15
GDP
Overall paint (Rs bn)
35.0%
450
28.0%
360
21.0%
270
14.0%
180
406
10 yr CAGR of 17%
187
7.0%
90
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY05
FY06
FY15
FY14
FY13
FY12
FY11
FY10
0.0%
82
DECORATIVE PAINTS THE LIONS SHARE; ADRESSING A STRUCTURAL OPPORTUNITY!

Our analysis on the likely growth CAGR for the Organized Decorative Industry
Number of households in India in 2011 based on Census (m)
247
Estimated number of households in India in 2021 assuming 2.5% growth (m)
316
Carpet area assuming 100sqft per person (sqft)
500
Total area to be painted per household (3.5x the carpet area) (sqft)
1,750
Estimated base case cost per sqft (Rs)
10
Total cost per house (Rs)
17,500
Total addressable Deco Paint size in 2021 (Rs m)
5,533,165
% of Painted households by 2021 (%)
50
Total Deco Paint size in 2021 (Rs m)
276,6583
Total Deco Paint size assuming a 5 year repainting cycle (Rs m)
55,3317
Current estimated Decorative Paint industry size in 2016 (Rs m)
301,252
Consequent growth CAGR likely in the next 5 years (%)
12.9
Estimated organized industry share in 2016 (assuming 65% share)
195,814
Estimated organized industry share in 2021 (assuming 70% stake)
387,322
5 year decorative organized industry CAGR
15%
+
(%)
Decorative paints
Industrial paints
100.0
75.0
The two leading companies
have historically had a
greater focus and share of
the decorative segment
50.0
25.0
0.0
Overall
Asian Paints
Berger
Kansai
Nerolac
Akzo Nobel
+
2| IDFC SECURITIES
20 April 2016
Paints
Revenue CAGR - FY05-15 reflects this adequately
19%
As does the earnings CAGR - FY05-15
23%
18%
16%
Asian
Paints
Berger
Paints
Asian
Paints
15%
13%
Kansai
Nerolac
Akzo Nobel
India
Berger
Paints
12%
12%
Akzo Nobel
India
Kansai
Nerolac
+
Crude oil prices continue to remain benign
Titanium Dioxide prices have remained stable

(Rs/kg)
140
Brent Crude oil
(USD/barrel)
80
60
TiO2
130
40
120
20
Mar-16
Jan-16
Feb-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Mar-16
Jan-16
Feb-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Jan-15
110
Feb-15
Getting set for a higher growth trajectory than the recent past!
Expect a pickup in the revenue growth across players
FY12-15
And a similar beat on EBITDA growth as well
FY16-18E
18.0%
30%
13.5%
24%
9.0%
18%
FY12-15
FY16-18E
Berger
Paints
Kansai
Nerolac
12%
4.5%
6%
0.0%
Asian Paints
Berger
Paints
Kansai
Nerolac
0%
Akzo Nobel
India
Asian Paints
Akzo Nobel
India
+
Premium valuations for premium growth
Paints
Asian Paints
Mcap
(Rs)
(Rs bn)
(Rs)
(%)
FY17E
FY18E
FY17E
FY18E
FY17E
FY18E
886
849.7
OP
1015
20.2
38.3
31.3
24.9
20.4
33.7
35.8
251
174.0
OP
299
29.7
39.3
29.7
22.5
17.6
27.8
30.4
304
163.9
313
19.1
36.8
31.5
23.0
19.7
18.9
19.5
1,345
64.5
1442
13.1
27.2
23.4
16.8
14.0
21.7
23.1
Berger Paints
Akzo Nobel
Reco
TP
EPS
CAGR
CMP
PE (x)
EV/EBITDA (x)
RoE (%)
INITIATE COVERAGE WITH

OUTPERFORMER ASIAN PAINTS, BERGER PAINTS
NEUTRAL KANSAI NEROLAC PAINTS, AKZO NOBEL INDIA
3| IDFC SECURITIES
20 April 2016
Paints
Contents
INVESTMENT ARGUMENT ......................................................................... 5
Paints Direct beneficiary of economic growth ........................................... 5
Macro tailwinds to boost growth......................................................................... 7
A stable competitive order aids incumbents ................................................. 9
Softness in commodity prices to prop margins ........................................... 11
Organised players versus unorganised companies ................................... 12
Decorative paints Play on urban consumption ........................................ 14
Industrial paints Leveraging technology & relationship ....................... 15
FMCG versus Paints Key differentiators and disrupters ...................... 17
Financial analysis ...................................................................................................... 19
Valuations and view Premium justified....................................................... 20
Key Risks ..................................................................................................................... 22
Companies ..................................................................................................... 23
Asian Paints ................................................................................................................ 24
Berger Paints ............................................................................................................. 44
Kansai Nerolac Paints ............................................................................................. 61
Akzo Nobel India ..................................................................................................... 78
4| IDFC SECURITIES
20 April 2016
Paints
INVESTMENT ARGUMENT
The ~US$6bn Indian paints industry is the best proxy to play the
themes of increasing urbanisation and disposable incomes, given its
strong correlation with GDP growth, lower penetration and higher
volume/profit growth visibility.
Propped by external growth triggers such as Pay Commission, OROP,
rise in rural welfare schemes and expectations of good monsoons, we
believe discretionary consumption is set to grow the Paints industry
is likely to be the biggest beneficiary of this opportunity.
Industry
leaders
enjoy
competitive
advantage
over
smaller/unorganised players, backed by scale, distribution and
innovation. These together with stable competitive order should
boost growth. We estimate FY16-18E earnings CAGR of 13-30% for
four leading paint companies.
We believe paint companies that are currently valued in line with
staple companies deserve a valuation premium given their superior
growth visibility and strong operational metrics.
We initiate coverage on APNT/Berger Paints with Outperformer, and
on KNPL/Akzo Nobel India with Neutral rating.
Paints Direct beneficiary of economic growth

We believe the India paints industry is the best structural proxy to play the
themes of a sharp spike in urbanisation and disposable incomes. The
sector offers greater growth stability (versus other discretionary
consumption categories), and higher volume visibility and profit growth
given its strong correlation with GDP growth.
Over the past 10 years, Indias nominal GDP CAGR stood at an impressive
14.5%, led by a consumption boom. The key drivers were an increase in
disposable incomes and reduced savings-to-GDP rate (implying an
increased propensity to consume). The Indian paints industry directly
benefited from this trend the industry size increased from ~Rs82bn to
~Rs406bn, at a CAGR of ~17% over FY05-15. In contrast, the FMCG industry
grew only ~13% during the period.
Exhibit 1: Indian paints industry Strong correlation with economic growth
Paints industry growth
Nominal GDP growth
FMCG growth
35.0%
28.0%
21.0%
14.0%
7.0%
0.0%
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company, IDFC Securities Research
5| IDFC SECURITIES
20 April 2016
Paints
Exhibit 2: Domestic paints industry has grown at a CAGR of 17% over FY05-15
Overall paint industry size (Rs bn)
406
450
350
360
305
270
158
180
90
82
95
115
187
224.4
260.4
134
0
FY05 FY06 FY07 FY08 FY09 FY10
FY11
FY12
FY13
FY14
FY15
Source: Industry, IDFC Securities Research
Further, over the next decade, continued macro tailwinds, strong

incumbents with global partnerships and a stable competitive order add
visibility to the profitable growth outlook.
Exhibit 3: Domestic paint industry Segmental mix
Industrial
paints
30%
Decorative
paints
70%
Source :Industry, IDFC Securities Research
Growth more broad based given lower cyclicality

Generally, it is believed that the Indian Paints industry is more cyclical in
nature and not as consumer centric. However, cyclicality is mostly driven
by the industrial business, which forms only 30% of the Indian paints
industry. Further, the largest sub-segment in the industrial category is
dependent on four-wheeler and two-wheeler demand, making the industry
consumer centric.
The Indian paints industry
enjoys lower cyclicality,
resulting in better growth
visibility
The remaining 70% is formed of decorative/architectural paints, more than

the global average of ~58%. Of this, only 15% demand comes from new
projects (builder-led); the rest is repainting demand, which is stickier in
nature.
Further, over the years, the consumers involvement in the painting
decision has increased with rising advertising/consumer involvement
strategies. Consequently, cyclicality has reduced, making the business
more consumer-centric.
6| IDFC SECURITIES
20 April 2016
Paints
Exhibit 4: Lower cyclicality provides better growth visibility
(%)
Asian paints
Berger - Std
Kansai Nerolac
30
25
20
15
10
5
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Macro tailwinds to boost growth

We believe a modest recovery in urban growth, external tailwinds such as
the Seventh Pay Commission and OROP, and a modest growth in pockets
of industrial segment will drive volumes for the paints industry over FY1618. Further, the implementation of GST is likely to reduce the overall
central and state tax incidence from 24-25% to ~18%, aiding volume
growth/profitability.
Long-term structural opportunity compelling
We expect the organised

paints industry to post
15% revenue CAGR over
FY16-21, indicating scope
for longer-term growth
The structural growth opportunity for the paints industry is compelling.

India has 247m residential houses, as per 2011 census data. This has
increased by 30% between 2001 and 2011, which implies a 3% CAGR.
Assuming a 2.5% CAGR over the next decade, the total households in India
will be 316m. Further, assuming a 500sqft carpet area for a family of five in
each household, Rs10 paint cost per sqft, five years repainting cycle and a
50% penetration of the industry by 2021, we expect the decorative paints
industry to post 13% CAGR in the next five years. Even if the share of the
organised segment (currently 65%) increases by 500bp in this period, the
organised industry will post 15% revenue CAGR over FY16-21.
Consequently, the scope for longer-term growth for the industry is
significant.
Exhibit 5: Our analysis on decorative industry growth
Number of households in India in 2011 (m)
247
CAGR over 2011-2021 assumed (%)
2.5
Number of households in India in 2021 (m)
316
Number of persons in a household

Carpet area assuming 100sqft per person (sqft)
Multiplier for painting (x)
Total area to be painted per household (sqft)
Cost per sqft (Rs)
Total cost per house (Rs)
Total addressable Deco Paint size in 2021 (Rs m)
Percentage of painted households of the total by 2021 (%)
Total Deco Paint size in 2021 (Rs m)
5
500
3.5
1,750
10
17,500
5,533,165
50
2,766,582
Total Deco Paint size assuming a 5 year cycle (Rs m)
553,317
Decorative Paint industry size in 2016 (Rs m)
301,252
Growth CAGR likely in the next 5 years (%)
12.9
Estimated organized industry share in 2016(assuming 65% share)
195,814
Estimated organized industry share in 2016(assuming 70% share)
387,322
5 year decorative organised industry CAGR (%)
15
Source; IDFC Securities Research
7| IDFC SECURITIES
20 April 2016
Paints
Seventh Pay Commission to boost urban discretionary demand
The Seventh Pay Commission recommendations, submitted in Nov-15,
imply an increase of 23.55% in overall pay/allowances/pensions
indicating an additional infusion of Rs1.02tn for central government
employees. The impact of this change on Indias expenditure-to-GDP is
expected at 0.65%. The revision will be effective from 1 January 2016 and
consequently, employees will receive arrears.
This one-off raise in incomes has benefitted discretionary demand more
than staples, that too in urban markets. Consequently, we believe the
decorative paints industry stand to benefit the most as per our analysis,
for every 1% of the additional infusion moving to decorative paints, the
industry will grow by an additional 4%.
Exhibit 6: Volume growth accelerated post Sixth Pay Commission in 2005-06
Asian Paints
Berger Paints
20.0%
15.0%
10.0%
5.0%
0.0%
FY06
FY07
FY08
OROP Another small impetus to growth

Before the Seventh Pay Commission recommendations come into force,
the central government is likely to implement OROP, which will result in
increased income for existing/retired defence force personnel. Given past
two years of pending arrears (the scheme would be effective from 1 July
2014) and overall higher pension scales, OROP will result in an additional
infusion of Rs10-11bn from FY17 in four instalments. We expect this to
provide another impetus to urban demand in India, albeit marginally.
Good monsoons to prop rural demand outlook

Through FY10-15, overall rural demand in India continued to outpace urban
demand, led by higher disposable incomes (on higher minimum support
prices and schemes such as NREGA). However, in the past few quarters,
rural demand growth has weakened to below urban growth. Urban growth,
however, has remained steady-to-improving.
The impact of two weak monsoons has clearly impacted rural growth.
However, as per the first monsoon estimate by the Indian Meteorological
Department (IMD), rainfall this year is likely to be 106% of the long period
average. We believe this could boost rural sentiment just in time for the
festive season, when home painting is at its peak.
8| IDFC SECURITIES
20 April 2016
Paints
Exhibit 7: IMD predicts monsoons to be 106% of the long period average for the year
Monsoon (% of LPA)
120
110
100
90
80
70
60
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
GST Incremental profitability trigger

In Dec-15, the GST panel recommended a standard rate of 17-18%, taking
into account all central and state taxes. Currently, for the paint industry,
the excise duty stands at 12% of gross sales. Further, the top-four paint
companies operate at a duty rate of 10-12% depending on the extent of
marginal tax benefits enjoyed on certain manufacturing facilities. Also, VAT
is at 12.5-13% depending on the state. Together, these imply a 22-24%
overall tax incidence on paint companies.
If the GST is implemented at the standard rate, the industry stands to
benefit immensely. A complete pass-through of the benefits will result in
upsides to volumes and a partial retention could prop our EBITDA margin
estimates.
Exhibit 8: GST implementation to aid profitability
Excise duty
VAT
Total Tax
Asian Paints
9.4%
12.5%
21.9%
Proposed GST
rate
18.0%
Berger
9.2%
12.5%
21.7%
18.0%
3.7%
Kansai Nerolac
11.4%
12.5%
23.9%
18.0%
5.9%
Akzo Nobel
9.9%
12.5%
22.4%
18.0%
4.4%
Company
Benefit
3.9%
A stable competitive order aids incumbents

The top-four players constitute ~55% of the total paints industry in India. A
stable competitive order with low disruption (in terms of
pricing/discounts) implies profitable growth and stable market share,
especially in the decorative segment. Unlike staples, wherein competitive
intensity impacts market share/profitability of incumbents, a stable
competitive order in paints implies higher flow through of input cost
benefits and consequently, improved profitability.
9| IDFC SECURITIES
20 April 2016
Paints
Exhibit 9: Market share of top-four players in FY10
Asian
Paints,
27.4%
Others,49.4
%
Exhibit 10: Market share of top-four players in FY15
Asian
Paints,
30.3%
Berger,
9.0%
Top 4,
50.6%
Kansai
Nerolac,
9.1%
Others,
45.4%
Top 4,
54.6%
Kansai
Nerolac,
8.7%
Akzo
Nobel, 6.2%
Akzo
Nobel, 5.0%
Berger,
9.4%
Pricing power adds visibility; entry barriers the key reason

As per our analysis, industries where the leading players have adequate
pricing power grow in a sustained and profitable manner The decorative
paints industry is a prime example. The top four players pass on the cost
inflation to consumers at times of high inflation, with the leading player
acting as a benchmark. Also, recently, we have seen instances of pricing
power being maintained during deflation, which allows companies to
compensate for lower revenue growth with superior EBITDA margins.
This pricing power is due to entry barriers for new players in the industry.
New players cannot match the distribution and supply chain of the
incumbent and also have to spend disproportionately to get their product
accepted by painters, dealers, user industries and end consumers.
Moreover, matching the pricing power of the leaders involves scale
efficiencies, which are not easily achieved.
An analysis of price changes effected by APNT implies that pricing order
has been maintained in the decorative segment. Despite price changes,
volume growth has not been compromised and profitability has been
sustained. Further, lack of disruptive competition among larger players
indicates that the cost of incremental volume growth was not impacted by
irrational competition, as is the case in certain staples categories.
Exhibit 11: APNT Balanced volume and price growth
Volume growth
Exhibit 12: Pricing power ensures steady margin uptick
Price/mix growth
Aggregate Gross margins
30.0%
46%
23.0%
44%
42%
16.0%
40%
9.0%
38%
2.0%
36%
34%
-5.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY11
FY12
FY13
FY14
FY15
FY16E
Higher earnings visibility from stable competitive landscape

The industry structure gives incumbents a huge advantage, both in the
decorative and industrial segments. In the decorative segment, entry
barriers exist for entrants/marginal players given the pricing power and
increased distribution network of large players. Further, even in the
industrial segment, global/historical relationships and constant innovation
are required, indicating that few players garner a large share. We believe
that this competitive advantage is likely to sustain, resulting in higher
earnings visibility.
10| IDFC SECURITIES
20 April 2016
Paints
Softness in commodity prices to prop margins

About 35-40% of the paint industrys raw materials are crude linked. With
benign crude oil prices, the companies gross margin has expanded for
four consecutive quarters. Further, we expect another two quarters of
margin benefit from a continued fall in crude oil prices. Also, as prices of
Titanium Dioxide (15-20% of the RM basket) and Mineral Turpentine oil (67% of RM basket) are not inflationary even after accounting for rupee
depreciation, no pressure points exist in the RM basket.
Consequently, we expect margin to improve further, led by strong pricing
power in the decorative segment and time lag in passing price cuts to
industrial customers. We factor in 30bp-180bp EBITDA margin expansion
over FY16-18E for top four paint companies. We believe the improvement
will continue to be more pronounced for APNT/Berger Paints given that
their mix is in favour of the high-margin decorative segment (90%/80%
respectively).
EBITDA margin expansion

more pronounced for
APNT/Berger Paints
Exhibit 13: High crude oil linkage to benefit paint companies

(USD/barrel)
80
Brent Crude oil
60
40
20
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15

Exhibit 14: Titanium Dioxide price stable
(Rs/kg)
Exhibit 15: Gross margin expansion to continue
TiO2
140
Asian paints
Berger - Std
Kansai Nerolac
Akzo Nobel
55.0%
130
Source: Bloomberg, IDFC Securities Research
11| IDFC SECURITIES
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q1FY14
Mar-16
Jan-16
Feb-16
Dec-15
Oct-15
Nov-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Mar-15
25.0%
Apr-15
110
Feb-15
35.0%
Jan-15
120
Q2FY14
45.0%
20 April 2016
Paints
Organised players versus unorganised companies

We believe the gulf between organised and unorganised paint players is
only likely to widen going forward given increasing scale of the top
organised players, resulting in better cost efficiencies/reach. Further,
continued innovation (to augment product offerings) and sustained
distribution expansion will act as key differentiators for organised players.
Additionally, the unorganised players find it difficult to penetrate the
current dealer network. We expect these factors to drive growth for the
top paint companies, ahead of the industry, and factor in 11-17% revenue
CAGR over FY16-18E for the top four players.
Organised players cost efficient led by increased scale

We believe increased scale adds to the cost efficiency (lower overheads as
a percentage of sales) and augments the competitive advantage of larger
organised players.
Exhibit 16: Driving scale Significant capacity expansion across key markets in last 10 years
FY05
FY15
Top-four players have

significantly expanded
their capacities/presence
to meet higher volume
requirement
Consequently, the top-four players have significantly expanded their

capacities/presence to meet higher volume requirement. APNT is doubling
capacity at its Rohtak plant and will set up manufacturing capacities in
Andhra Pradesh and Karnataka. Further, in Maharashtra, the company shut
down its Bhandup plant in 2014 to start manufacturing in its Khandala
plant (commissioned in 2013; 10x capacity of Bhandup plant). APNT has
also modernised its older plants.
Berger has set up two new plants one in Hindupur for decorative paints
and the other in Jejuri for powder coatings in FY15. The company
continues to increase capacity in its existing plants. Further, Kansai has
expanded capacity in existing plants and doubled its depots in the past
five years.
12| IDFC SECURITIES
20 April 2016
Paints
Constant innovation to improve product/service offerings
Innovation is the key

differentiator between
organised and
unorganised players
Leading paint companies in India try to provide better product/service

offerings through constant innovation. For industrial customers, too, the
companies, through leveraging international tie-ups and relationships, offer
enhanced technologies. As a result, such players have increased their
competitive advantage over smaller players, posting ahead-of-industry
growth. We believe innovation is a key differentiator that has increased the
gulf between larger, more resourceful paint companies and smaller,
regional and unorganised players.
Exhibit 17: Strong focus on innovation and technology
Innovation
Asian Paints
Berger paints
Express Painting
service
Kansai Nerolac
Low VOC, lead free
paints
Colour next - trend

predictions
Prolinks division
HD impressions range
Colour idea stores
WeatherCoat
Allguard
Silicone Technology
Nerolac homestylers
Introduction of small cans
Colour consultancy
Akzo Nobel
Dulux
website
Dulux
visualizer
Nerolac colorstylers
ED technology for Ecoats
Signature stores
Established distribution Entry barrier for unorganised players

Larger organised players expand their dealership network by 5-7%
annually. This includes adding new dealers and penetrating into existing
dealerships. As typically, a mid-sized paint dealer houses only two brands,
a new player faces entry barriers from distribution perspective.
We expect APNT and Berger Paints to add 1,500-2,000 dealers and 5001,000 dealers per annum respectively, which should increase their
competitive advantage.
Exhibit 18: APNT dominates the dealer network.
Exhibit 19:
.though further scope to expand distribution
(nos)
Akzo
Nobel
13%
Kansai
Nerolac
20%
Dealer network
70,000
52,500
Asian
paints
47%
35,000
17,500
Berger
20%
13| IDFC SECURITIES
0
Asian
paints
Berger
Kansai
Nerolac
Akzo
Nobel
Total
network
20 April 2016
Paints
Decorative paints Play on urban consumption

The ~Rs290bn decorative paints industry has benefited from the
consumption boom in India over the past decade. A reduction in repainting
cycle, increased preference for branded products and uptrading to
emulsions from distempers have been the key growth triggers. Also, as
new projects-led demand is only 15% of the total demand from the
decorative paints segment, this segment has witnessed lower cyclicality in
terms of growth.
Exhibit 20: Decorative paints Segmental break-up
Others
11%
Primer/Thinner
11%
Emulsion
35%
Distemper
13%
Enamel
30%
Top four players have grown profitably

On an aggregate, the top-four players in the paint industry have posted
revenue/PAT CAGR of 15%/16% over FY11-16E. Given that the top-two
players have a higher share of the decorative segment in their overall sales,
their PAT CAGR over FY11-16E has been even sharper at 18% on similar
revenue growth.
This growth came despite multiple challenges in the macro environment
for the decorative paints industry in the past five years consumer growth
slowdown, steep input cost inflation (over FY12-15) and recently, steep
deflation coupled with a rural growth slowdown. In the staples businesses,
these factors led to increased competition and consequently, variance in
profit growth.
Exhibit 21: Revenues CAGR at 15% over FY11-16E
(Rs bn)
Exhibit 22: PAT CAGR at 16% over FY11-16E
Top 4 players sales
(Rs bn)
30
300
250
25
200
20
150
15
100
10
50
Top 4 players PAT
0
FY11
FY12
FY13
FY14
FY15
FY16E
FY11
FY12
FY13
FY14
FY15
FY16E
We believe fundamental growth drivers remain intact for the decorative

segment. Further, increasing premiumisation trend is a major positive
going forward. Additionally, the top players in the decorative segment
enjoy a major incumbent advantage, led by a stable competitive order and
rising competitive advantage (on increased scale/innovation).
14| IDFC SECURITIES
20 April 2016
Paints
Exhibit 23: Decorative paints CAGR at 16% over FY10-15
(Rs bn)
Decorative paints
350
280
210
140
70
0
FY10
FY11
FY12
FY13
FY14
FY15
Industrial paints Leveraging technology &

relationship
India is at a nascent stage in the industrial coatings market. Globally, the
industrial coatings segment forms ~58% of the paints market as against
~30% (~Rs110bn) in India. This is primarily due a smaller share of the
protective/powder coatings segments.
We expect the industrial

paints segment to grow in
double-digits, led by
consistent growth in
consumer facing segments
(auto/white goods)
The ~Rs110bn industrial paints segment in India has grown on the back of
increasing demand from the auto segment, white goods and industrial
machinery businesses. These segments, in turn, will be boosted by greater
leverage to urban demand and triggers such as the Seventh Pay
Commission/OROP. The segment is completely B2B in nature and is prone
to business cycles, depending on industrial/economic growth. Further,
most of the sub-segments are dominated by larger players that have
access to specialised technology and can incur high capital expenditure.
Additionally, leveraging international relationships is also a key driver for
gaining share. As a result, all of the top-four paint companies in India are
either controlled by a global parent or have certain global affiliations.
Exhibit 24: Industrial coatings Key segments and respective user industries
Industrial coatings
Automotive
Powder
Protective
Two wheelers Metal furniture & fixtures Construction
Marine
Coil
Offshore vessels
Roofing
Agri equipment
Deep Sea/Coastal ships
Building
Material handling
Domestic appliances
Glass coatings
Four wheelers
Appliances
Oil & gas
CV
Auto components
Automotive
Containers
Aerospace
Leisure crafts
Auto Refinish
General Industrial

Exhibit 25: Industrial paints Segmental break-up
Others
15%
Powder
Coatings
15%
Auto
45%
High
performance/
Protective
25%
15| IDFC SECURITIES
20 April 2016
Paints
In the past few quarters, a recovery in auto/white goods demand had
resulted in improved growth for the segment. However, recovery in the
protective coatings segment has been modest as capex-led sectors such
as oil & gas, metals & mining and capital goods are yet to witness a
substantial recovery.
Exhibit 26: Recovery in consumer durable demand
(%)
Exhibit 27: Pick-up in passenger car sales volumes

Total Passenger Vehicles (nos - LHS)
Consumer Durables
80
Volume growth (RHS)

3.0
30%
2.3
20%
1.5
10%
0.8
0%
0.0
-10%
16| IDFC SECURITIES
YTD16
FY15
FY13
FY14
FY12
FY11
FY10
FY09
FY08
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
-40
FY07
-10
FY06
20
FY05
50
20 April 2016
Paints
FMCG versus Paints Key differentiators and disrupters

Key disrupters Patanjali and e-commerce
Over the past two years, Patanjali has emerged as an herbal alternative in almost every FMCG
category, thereby disrupting organised FMCG players. The company's ever-expanding product
portfolio and lower pricing will ensnare share in certain categories and limit margin expansion for
existing organised FMCG players.
Additionally, e-commerce has impacted the way consumers shop, especially in general
merchandise/fashion segments. E-retail and online ordering/home delivery applications have
particularly disrupted the market in the past two years. Physical retailers (Shoppers Stop, Future
Group, Trent, Lifestyle, etc.) and strong QSR companies (Dominos, McDonalds, KFC, etc.) have been
affected the most. Therefore, such disrupters remain key concerns for these industries.
However, the paints industry has no such disrupter. Entry barriers for new competition are high
in terms of matching the pricing, service and distribution strength. Also, given that the ultimate
purchase in decorative paints is made by the painter on most occasions, alternate modes of
distribution are unlikely to exist in this industry.
Steep discounts by e-tailers
Disruptive pricing Key brands versus Patanjali
Category
Discount to key competitor brands
Almond hair oil
13-17%
Toothpaste
15-16%
Honey
32%
Detergents
22-28%
Marie Biscuits
16%
Deflation Intense competition limits profit growth potential

In the past 18 months, FMCG companies have benefitted from significant raw material gains on
account of lower crude prices. However, a large part of this has been passed on to consumers as
companies endeavoured to stay competitive and retain market share.
An analysis of Hindustan Unilevers (HUL) soaps and detergents segment suggests that in 9MFY16,
segment EBIT growth stood at 3.4% FY16 witnessed the highest crude price decline since 2009.
Further, HUL posted adjusted PAT growth of 3.9% during this period. This was on account of price
cuts/promotions of over 10% in the segment to defend its market shares against price warriors.
In contrast, the top-four paint companies posted 22% PAT growth over 9MFY16. MRP cuts, in
two rounds, stood at only 2-3%.
Sharp deceleration in EBIT growth
Resultant profitability remained weak
Soaps & Detergents EBIT growth
30.0%
Adj PAT growth
17| IDFC SECURITIES
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q4FY14
Q3FY16
0.0%
Q2FY16
-10.0%
Q1FY16
5.0%
Q4FY15
0.0%
Q3FY15
10.0%
Q2FY15
10.0%
Q1FY15
15.0%
Q4FY14
20.0%
Q1FY15
20.0%
20 April 2016
Paints
Increased discounting Taking a hit on margins to post competitive LTL growth

Physical retailers had to opt for longer end-of-season sales to stimulate demand and compete with ecommerce players. Similarly, QSR companies had to run frequent discount schemes to stimulate
demand in this environment. This impacted the margins for companies such as Shoppers Stop, Titan,
Jubilant Foodworks, etc.
For paint companies, discounts to dealers remain at 12-15% of MRP.
Shoppers Stops gross margins have come off
as have EBITDA margins for Jubilant Foodworks
Shoppers Stop Gross margins
Jubilant Foods EBITDA margins

14.0%
42.0%
40.0%
13.0%
38.0%
12.0%
36.0%
11.0%
34.0%
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
10.0%
Q4FY14
32.0%
Paints continue to outshine Staples

In the past five years, top-10 listed consumer staples companies by revenue (ex-ITC) have posted
revenue CAGR of 14% respectively. In contrast, top-four paint companies have posted revenue CAGR
of 17% respectively. The paint industry witnessed accelerated growth trajectory, led by lower
penetration and higher pricing power versus the more competitive staples business. Going forward,
we expect major paint companies to continue to outshine consumer staples and consequently,
command premium multiples.
Paint industry (top-four players) has outperformed domestic FMCG revenue growth
FMCG
Paints
35.0%
25.0%
15.0%
5.0%
-5.0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
18| IDFC SECURITIES
20 April 2016
Paints
Financial analysis
Volume growth trajectory resilient
We factor in 13.5%, 14%,

12% and ~6% volume
CAGR for APNT, Berger
Paints, KNPL and Akzo
Nobel India respectively
With demand environment remaining challenging, consumer companies

have struggled to maintain healthy volume growth in FY16. However, the
top three paint companies have been more resilient, maintaining doubledigit volume growth in the domestic business, especially in FY16. We
expect the double-digit volume growth momentum to accelerate going
forward as the macro environment gradually improves, external injections
boost growth and companies drive their own innovation/distribution
expansion led initiatives. We factor in 13.5%, 14%, 12% and ~6% volume
CAGR for APNT, Berger Paints, KNPL and Akzo Nobel India respectively.
Exhibit 28: Paints Volume growth resilient in a challenging environment
Asian paints
Berger
Kansai Nerolac
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16 a standout year; expect healthy profit growth to continue

Over FY12-15E, top-four players posted a PAT CAGR of 8-14%, backed by
modest volume growth, continued premiumisation, and price increase-led
operating leverage. FY16, however, has been a standout year as companies
have benefitted from a steep fall in crude oil prices, benign titanium
dioxide prices and no major pricing cuts. As a result, over 9MFY16,
earnings growth for the top-three players has been in the range of 28%33%, while Akzo Nobel Indias earnings have grown 6%, impacted by weak
volume growth and negative operating leverage. We believe that H1FY17
will also benefit from lower RM cost-led margin expansion. However, post
that, we expect key earnings growth drivers to be volume growth and
mix/scale benefits. We factor in FY16-18E earnings CAGR of
20.1%/29.7%/19%/13.1% for APNT, Berger Paints, KNPL and Akzo Nobel
India respectively.
Exhibit 29: We expect earnings CAGR to improve over FY16-18E
FY12-15
FY16-18E
25%
19%
13%
7%
1%
-5%
Asian Paints
Berger Paints
Kansai Nerolac
Akzo Nobel India
19| IDFC SECURITIES
20 April 2016
Paints
Valuations and view Premium justified

Generally, the industry believes that paint companies deserve a significant
discount over consumer staples companies given their discretionary nature
and lower return profile. However, valuations of top staples companies and
top paint companies globally suggest that this discount is only 10% at an
average and has steadily narrowed down. Further, top eight listed paint
companies globally have delivered an 18% return CAGR as against 9% for
top-10 listed consumer staples names in the past five years.
Globally, growth is higher for coatings versus staples sector. However, the
industrial coatings segment form 58% of overall revenues, which lend
higher cyclicality to it, thus partially justifying the narrow discount over
global staples companies. In contrast, Indian paints industry is still heavily
skewed towards the decorative segment, which constitutes 70% of the
industry. Since this is a consumer facing segment, it lends greater growth
visibility to the industry versus global counterparts. Further, return ratios
of Indian paint companies are far healthier than their global counterparts.
Exhibit 30: Valuations Paint companies versus staples companies globally
CMP
Mcap
(US$)
(US$ bn)
EPS CAGR
PE (x)
EV/EBITDA (x)
CY15-17E (%) CY16E CY17E
RoE (%)
CY16E
CY17E
CY16E
CY17E
Global Paints
Ppg Industries
117
31.1
10.6
18.6
16.7
12.0
11.2
32.0
32.8
Akzo Nobel
65
18.3
3.9
15.5
14.7
8.1
7.6
15.1
15.0
Sherwin-Williams
298
27.5
12.8
24.0
21.5
14.7
14.2
113.8
108.0
Valspar Corp
107
8.5
8.8
22.0
19.7
13.7
12.9
40.5
45.0
Kansai Paint
1,980
4.9
14.9
21.2
19.9
10.9
9.4
9.2
8.7
Nippon Paint Holdings
2,864
8.5
(56.9)
26.7
24.9
9.8
8.8
6.8
7.1
Axalta Coating Systems
30
7.2
18.8
24.7
20.3
10.8
9.6
23.3
22.3
Akzo Nobel
65
18.3
3.9
15.5
14.7
8.1
7.6
15.1
15.0
H.B. Fuller
45
2.3
13.3
17.7
16.0
9.4
8.5
14.2
14.5
20.7
18.7
10.8
10.0
30.0
29.8
21.2
19.7
10.8
9.4
15.1
15.0
13.3
58.0
63.6
Mean
Median
Global Staples
Pepsico Inc
104
150.7
5.9
22.1
20.4
14.0
Colgate-Palmolive
72
63.9
4.0
25.9
23.8
15.8
14.8
624.6
376.8
Coca-Cola
47
201.7
1.8
23.9
22.6
18.5
18.0
32.0
35.5
Procter & Gamble
83
225.2
1.0
23.0
20.6
14.9
14.4
16.5
19.4
Nestle Sa
73
242.2
5.0
21.6
20.1
14.4
13.5
16.2
16.6
Danone
64
47.7
7.0
21.0
19.4
12.8
11.8
14.5
14.7
Unilever
3,298
142.0
5.
22.1
20.6
14.3
13.3
34.4
31.7
British American Tobacco
4,245
114.0
9.6
18.4
17.0
17.0
16.1
74.9
71.5
Reckitt Benckiser Group
6,895
70.0
11.5
25.0
23.0
17.9
16.5
28.0
28.3
Mean
22.5
20.8
15.5
14.6
99.9
73.1
Median
22.1
20.6
14.9
14.4
32.0
31.7
Source: Bloomberg estimates
20| IDFC SECURITIES
20 April 2016
Paints
We initiate coverage on the paints sector with a positive bias
We have an Outperformer
rating for APNT/Berger
Paints and a Neutral rating
for KNPL/Akzo Nobel
India.
Currently, average multiples of top-10 FMCG companies (ex-ITC), at 30.6x

FY18E earnings, are at marginal premium to top-four paint companies
multiples (at 29.0x FY18E earnings). Given lower penetration, stronger
growth, a consumer-centric model, pricing power and a stable competitive
order, we believe Indian paint companies are likely to command a premium
versus FMCG peers in the medium-to-long term. We initiate coverage on
the paints sector with a positive bias. We have an Outperformer rating for
APNT/Berger Paints and a Neutral rating for KNPL/Akzo Nobel India
based on our DCF valuation technique.
Exhibit 31: Valuations Domestic paint companies versus domestic staples plays
Indian Staples
CMP
Mcap
(Rs)
(Rs bn)
EPS CAGR
EV/EBITDA
PE
FY16-18E (%) FY17E FY18E
FY17E
RoE
FY18E FY17E FY18E
Indian Staples
Colgate-Palmolive
852
231.6
13.3
34.3
29.5
21.3
18.4
62.9
60.3
Dabur India
267
470.1
16.3
32.3
28.1
26.4
22.5
32.9
32.1
1,352
460.5
20.4
32.8
28.3
24.3
20.8
24.1
23.6
904
1956.4
15.8
40.5
35.1
28.5
24.4
115.9
120.5
ITC
336
2699.8
9.4
25.4
23.1
17.2
15.6
30.2
30.6
Jyothy Laboratories
308
55.8
3.2
27.2
29.0
21.7
18.7
25.1
22.9
Godrej Consumer
Hindustan Unilever
Marico Industries
253
327.0
20.4
37.6
31.8
25.4
21.4
35.0
33.7
Nestle India
6,036
582.0
16.0
43.1
38.1
26.1
23.0
45.3
44.7
Britannia Industries Ltd*
2,845
341.4
19.6
33.8
28.3
22.7
19.2
48.7
44.7
996
226.2
22.5
37.2
30.5
25.2
21.3
37.6
40.1
6,002
252.4
24.6
Emami Ltd*
GSK Consumer Healthcare*
31.5
27.4
24.2
21.0
30.2
29.5
Mean
34.2
29.9
23.9
20.6
44.4
43.9
Median
33.8
29.0
24.3
21.0
35.0
33.7
Paints
Akzo Nobel
1,345
64.5
13.1
27.2
23.4
16.8
14.0
21.7
23.1
Asian Paints
886
849.7
20.2
38.3
31.3
24.9
20.4
33.7
34.0
251
174.0
29.7
39.3
29.7
22.5
17.6
27.8
30.4
304
163.9
19.1
Berger Paints
36.8
31.5
23.0
19.7
18.9
19.5
Mean
35.4
29.0
21.8
17.9
25.5
26.7
Median
37.5
30.5
22.8
18.7
24.7
26.8
Source *Bloomberg estimates, IDFC Securities Research
21| IDFC SECURITIES
20 April 2016
Paints
Key risks
Pick-up in volume growth not as per expectations
We are factoring a 13.5%/14%/12.5%/6% volume CAGR for APNT/Berger
Paints/KNPL/Akzo Nobel India respectively over FY16-18E. These
estimates are higher than what these companies achieved in FY16 or over
FY12-15. We estimate an improving macro to aid volume growth. A slowerthan-expected pick-up
in volume growth could impact our
revenue/earnings growth assumptions going forward.
Mix improvement elusive

Though we are factoring in a marginal increase in price/mix for players (13%), a negative mix (higher sales of distempers and putty versus enamels
and emulsions) could impact realizations, consequently affecting gross
margins and in turn industry profitability. However, even if this trend plays
out, it would only be for the short term as premiuimisation is a key longterm consumer theme across industries/categories.
Increased competitive intensity among top players

So far, leading players have maintained competitive order in terms of
pricing and promotions, hence growing profitably. In the past, there have
been short periods of disruptions in terms of pricing by the odd
competitor. These, however, were never followed through for long. We
believe heightened competitive intensity remains a risk to an industry that
has not encountered long periods of disruptive pricing competition
previously.
Sharp spike in input costs

The pricing power of leading players in the industry has been maintained
during inflation with companies passing on price increases in the
decorative segment and negotiating with customers in the industrial
segment, albeit with a lag. We believe that sharp spikes in key inputs such
as crude oil, TiO2, MTO could result in near-term margin contraction,
especially in the industrial segment, wherein margin recovery comes with a
greater lag than the decorative segment.
22| IDFC SECURITIES
20 April 2016
Paints
Companies
23| IDFC SECURITIES
20 April 2016
Leading the pack!

OUTPERFORMER
Asian Paints (APNT) is the undisputed leader in the Indian organised
paint market, with 54% market share among the top-four players, ~2.5x
the size of the number two player. Armed with the widest decorative
product portfolio, a favourable decorative skew, distribution reach of
2.3x its next competitor and unmatched scale, APNT will continue to
gain market share in the next few years, resulting in ahead-of-industry
revenue CAGR of 15% over FY16-18E. The stock currently trades at 31x
FY18E earnings and can re-rate further given APNTs superior
growth/margin, and industry-leading return profile and cash flow
generation. We initiate coverage with an Outperformer rating APNT is
our top consumer large-cap pick.
20 April 2016
BSE Sensex: 25844
Sector: Paints
Stock data
CMP (Rs)
886
Mkt Cap (Rs bn/USD m)
849.7 /12,832
Target Price (Rs)
1,015
Change in TP (%)
NA
14.6
Earnings change (%)

FY16E
FY17E
FY18E
Bloomberg code
APNT IN Equity
1-yr high/low (Rs)
Volume trajectory set to improve further: APNT has an unmatched

distribution infrastructure, covering ~35,000 dealers and remains a
preferred choice with presence across segments/price points. This
coupled with capacity expansion, product launches, brand investments
and innovative marketing strategies have set the stage for improved
volume trajectory. We factor in 13.5% volume CAGR over FY16-18E
versus 7.7% over FY12-15. Moreover, long-term structural drivers
reduction in repainting cycle, increased urbanisation and rising first-time
paint consumers remain intact.
Margin/earnings visibility higher versus peers: APNT derives ~90% of its
sales from the high-margin decorative segment. Further, within the
decorative segment, the company is well placed to ride the
premiumisation trend, led by a strong premium portfolio. These together
with pricing power and stable input costs provide margin visibility to
APNT. Moreover, with expected recovery in industrial/international
businesses, we expect APNTs FY16-18E EBITDA/PAT CAGR at 19%/20%.
927/693
6-mth avg. daily volumes (m)
1.1
6-mth avg. daily traded value

(Rsm/USDm)
986.6/14.9
Shares outstanding (m)
959.2
Free float (%)
47.2
Promoter holding (%)
52.8
Price performance relative & absolute

Asian Paints
Sensex
Premium valuations to sustain: APNT enjoys strong competitive

advantage versus peers in terms of market share, product portfolio and
infrastructure. Moreover, the companys earnings visibility is higher
versus peers, not only in paints but also in the broader consumer sector.
These together with industry-leading return profile and strong cash flow
generation indicate that the stocks premium valuations will sustain. We
initiate coverage with an Outperformer rating and a DCF-based price
target of Rs1,015, translating into 36x FY18E target earnings.
Key valuation metrics
Year to 31 Mar
Net sales (Rs m)
110
105
Adj. net profit (Rs m)

100
95
3-mth
6-mth
1-yr
APNT Equity
5.4
1.2
9.5
BSE Sensex
5.6
(5.6)
(9.1)
(%)
FY15
141,828
FY16E
155,846
FY17E
177,455
FY18E
206,769
27,145
12,288
14,227
18,773
22,187
Shares in issue (m)
959
959
959
959
959
Adj. EPS (Rs)
12.8
14.8
19.6
23.1
28.3
10.3
15.8
32.0
18.2
22.3
PE (x)
69.1
59.7
45.3
38.3
31.3
Price/ Book (x)
21.0
17.9
15.0
12.4
10.2
EV/ EBITDA (x)
42.7
38.2
29.3
24.9
20.4
RoE (%)
33.1
32.4
36.1
35.5
35.8
40.4
38.1
43.4
43.4
44.1
% change
90
Apr-14
FY14
127,148
RoCE (%)
Harit Kapoor
Mehul Desai
91-22-662 22649
91-22-662 22640
INITIATING COVERAGE
Asian Paints
Asian Paints
INVESTMENT ARGUMENT
APNT, the largest paint company in India, has maintained its
dominance in the Indian market via successfully expanding its
presence across products/geographies.
In FY16, APNT scripted volume growth recovery after three
challenging years. Also, FY17 onwards, we expect stronger volume
pick-up, led by continued investments in innovation/distribution and
favourable macro environment. Consequently, we estimate
consolidated revenue CAGR at 15% in FY16-18E.
We estimate FY16-18E margin to improve 110bp, implying a PAT
CAGR of 20%, led by APNTs improved mix (favouring the highmargin decorative segment), unmatched pricing power, continued
premiumisation and scale benefits.
We expect APNTs premium valuations (31x FY18E earnings) to
sustain given its improved growth trajectory and long-term structural
tailwinds.
We initiate coverage on APNT with Outperformer and a DCF target
price of Rs1,015. The company is our top large-cap consumer pick.
Asian Paints Standing tall

Undisputed leader in organised paints market
APNT maintained
industry-leading growth,
translating into strong
earnings quality
APNT dominates the Indian paint market, with 54% share of the top-four
players, ~2.5x the number two player. Over the past 10 years, the
companys sales, EBITDA and PAT have grown at CAGR of 19%, 21% and
23% respectively. Moreover, the company maintained industry-leading
growth, translating into strong earnings quality. This was led by improved
market share (from ~42% in FY05 to ~54% in FY15) and gross
margin/EBITDA margin expansion of 200bps/270bps over FY05-15.
Improved mix/scale benefits as well as low working capital and return
ratios akin to consumer staples companies further aided growth. Over
FY16-18E, we expect APNT to outperform the industry with 15% revenue
CAGR, led by domestic volume CAGR of 13.5%. We expect FY16-18E
margins to expand 110bps, resulting in EBITDA/earnings CAGR of
19%/20%.
Promoter driven but professionally managed

APNT was founded in 1942 by four professionals, Mr Champaklal Choksey,
Mr Suryaknat Dani, Mr Chimanlal Choksi and Mr Arvind Vakil. In 1997, Mr
Champaklal Choksey sold 8%, while other three promoters still hold 53% of
the stake. Currently, the erstwhile promoters who hold almost equal stake
in the company are at non-executive positions. Moreover, the third
generation of the promoter family holds an executive role in some
divisions Mr Manish Choksi heads the international business, the home
improvement segment and IT, while Mr Jalaj Dani heads the supply chain
for Indian decorative division, chemicals business and HR. However, the
company is professionally managed MR KBS Anand (MD and CEO since
2012) joined APNT in 1978 and has since then, held various roles in sales &
marketing division.
25 | IDFC SECURITIES
20 April 2016
Asian Paints
Exhibit 32: APNT History and key milestones
Major
modernisation
programme
undertaken to
streamline
production
facilities
1945
1985
1974
Incorporated as
Asian Oil and
Paint Company
Pvt. Ltd
Promoted 4 JVs
in South Pacific,
Fiji, Tonga, Nepal
and S.I. Ltd
1994
1990
Set up unit at
Patancheru for
the manufacture
of 15,000 MT of
paints and
enamels.
Proposed to set
up a 5th plant at
Maharashtra.
Enters JV with
Asian PPG
Industries for
automotive paint
products
1998
1996
Capacity
expansion at
each of its plants
in Ankleshwar,
Patancheru and
Kasna.
Revamped their
international
operations.
Acquired Berger
International,
Singapore,
2002
launched `Asian
Paints Colour
World' &
exclusive
showrrom
Tie up with
Dupont USA to
co-brand the
Royale range of
Emulsions with
Teflon
2004
Launches paint
solution for kids
Entered into 2nd

JV with PPG
Industries.
2010
2009
2013
2011
Increased
capacity in Tamil
Nadu,
commercialised
phase 1 at
Rohtak
Signed a MoU to
set up a
manufacturing
facility for paints
and
intermediates in
AP
2015
Completes
acquisition of
Sleek Group &
enters into
binding
agreement with
Ess Ess

Exhibit 33: Revenue CAGR of 19% over FY05-15
Net sales (Rs bn - LHS)
Exhibit 34: EBITDA CAGR of 21% over FY05-15
YoY (% - RHS)
FY15
FY14
FY13
0.0%
FY12
0.0
FY11
0.0%
FY10
0.0
FY09
22.5%
FY07
6.0
FY08
7.5%
FY05
40.0
EBITDA (Rs bn - LHS)
FY06
45.0%
FY15
12.0
FY13
15.0%
FY14
80.0
FY12
67.5%
FY11
18.0
FY10
22.5%
FY09
120.0
FY07
YoY (% - RHS)
90.0%
FY08
24.0
FY06
30.0%
FY05
160.0
Exhibit 35: Steady improvement in profitability over the years

Gross margins (% - LHS)
EBITDA margins (% - RHS)
46.0
20.00
43.0
15.00
40.0
10.00
37.0
5.00
0.00
34.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Revenue mix and pricing power better versus peers

APNTs revenue mix is
tilted more towards the
high-margin decorative
segment
The Indian paint industry can be divided into two broad segments,
Decorative paints and industrial paints. However, ~70% of the demand
emanates from the decorative segment, with the industrial segment
accounting for a meagre 30%. Further, the industrial segment is marred by
its more cyclical nature (as automotive paints segment forms ~45% of
industrial demand and is directly linked to the macro economy) and lower
pricing power (given its B2B nature).
20 April 2016
Asian Paints
Though all the four top players are present in both the segments, APNTs
revenue mix is tilted more towards the attractive decorative segment. The
segment accounts for 93% of the companys domestic revenues (industrial
paints contribute only 4-5%). In contrast, the industrial segment accounts
for 20%, 45% and 40-45% of revenues for Berger, Kansai Nerolac (KNPL)
and Akzo Nobel respectively.
Exhibit 36: APNT has higher share of decorative business versus peers
Decorative paints
(%)
Industrial paints
100.0
75.0
50.0
25.0
0.0
Aggregate
Asian Paints
Berger
Kansai Nerolac
Akzo Nobel
As a result, APNT significantly outperformed the industry/peers over

FY08-10, clocking in standalone revenue CAGR of 22% versus 12%, 14% and
1% for Berger, KNPL and Akzo Nobel respectively. APNTs peers were
largely impacted by a slowdown in industrial/automotive paints segments.
Also, APNTs standalone EBITDA margin rose by 340bps versus 40bps,
50bps and 210bps increase for Berger, KNPL and Akzo Nobel respectively.
Consequently, despite the economic slowdown impacting the overall paint
industry, APNT stood tall underpinned by a higher share of decorative
segment and wider product portfolio. These in turn led to better revenue
visibility and pricing power versus peers (with higher exposure to industrial
paints).
Aggressive capacity expansion to aid supply chain efficiencies

APNT increased its capacity by 60% in FY13 to ~1mtpa at present, 2x its
nearest competitor. The company is doubling its capacity at its Rohtak
plant from 0.2mtpa to 0.4mtpa and has guided for Rs7bn capex for FY16.
Moreover, to meet demand in South/East markets, the company is setting
up facilities in Karnataka and Andhra Pradesh. Further, APNT has signed a
Memorandum of Understanding (MoU) with the Andhra Pradesh
government and plans to invest Rs17.5bn in phases to build a
manufacturing unit with capacity of 0.4m KL annually. These investments
will enhance its supply chain efficiencies and boost future growth.
Exhibit 37: Strong focus on building scale
(mt)
Capacity
1,400,000
1,050,000
700,000
350,000
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E
20 April 2016
Asian Paints
Decorative segment Maintaining dominance

APNT, the second largest paint company in Asia and the eleventh largest
coatings company globally, has maintained its dominance for the past 47
years in the domestic decorative paints segment. We believe, APNT will
continue to sustain this leadership, led by the following factors:
Wide and most complete product portfolio

Within the decorative segment, APNTs product portfolio straddles across
sub-segments, and different consumer requirements/price points. The
company is present in interior paints (distempers, emulsions), exterior
paints, metal finishes (enamel) and wood finishes segments.
Exhibit 38: APNTs product portfolio/key brands
Category
Brand
Variant
Interior paints
Royale
Royale luxury
440
Royale Shyne
502
Royale Matt
520
Royale Aspira
600
Apcolite
270
Tractor
Exterior paints
Apex
Price quotes(Rs/ltr)
149
Apex Ultima
370
Apex exterior emulsion
280
Apex Duracast
Apex tile guard
Ace emulsion
Metal finishes
178
Royale
Royale Luxury
440
Apcolite
Premium gloss
280
Tractor
Strong distribution network
APNT doubled its dealer

network from 17,000
dealers to 35-37,000; the
company continues to add
1,500-2,000 dealers
annually
Usually, distribution infrastructure (expansion within existing/new dealers)

is a big entry barrier in the paints industry. Expansion within existing
dealers is difficult as limited retail space and bulky nature of paints restrict
the dealers ability to place multiple tinting machines and base colour
shades for different brands. Moreover, the dealers must have
industry/product knowledge as their role in the purchase decision is higher
versus FMCG products.
However, APNT enjoys significant competitive advantage given its
extensive distribution network. In the past 10 years, the company doubled
its dealer network from 17,000 dealers to 35-37,000 currently; it continues
to add 1,500-2,000 dealers annually. Moreover, the dealer reach of number
2/3 players at ~15,000 is less than half of APNTs reach, indicating its
brand/distribution strength.
Consequently, APNT is a preferred partner among paint dealers, aided by
strong brand equity, and presence across segments/price points. Further,
APNT has sustained its leadership in the paint industry, with ability to
penetrate further to gain market share.
20 April 2016
Asian Paints
Exhibit 39: Significant competitive edge given extensive dealer network
(nos)
Dealer network
70,000
52,500
35,000
17,500
0
Asian paints
Berger
Kansai Nerolac
Akzo Nobel
Total network
No compromise on brand investments

Over FY05-15, APNTs A&P spends have grown at a CAGR of 22%, the
highest among peers. Moreover, huge scale benefit provides it with
enough headroom to back its brands (A&P spends are 3x the number two
player). Lower presence in capex-intensive industrial segment (~5% of
consolidated revenues) also boosts its ability to aggressively back its
decorative portfolio.
Exhibit 40: No compromise on A&P spends
A&P spends (Rs m - LHS)
Exhibit 41:
Cash Discount (Rs m - LHS)
(% to sales - RHS)
7,000
6.0%
5,250
4.5%
3,500
3.0%
Lower cash discounts show pricing power

(% to sales - RHS)
6,000
4.8%
5,000
4.7%
4,000
4.7%
3,000
4.6%
2,000
FY15
FY14
FY13
FY12
FY11
FY10
4.5%
FY09
0
FY08
4.6%
FY07
FY15
FY14
FY12
FY13
FY11
FY10
FY09
FY08
FY07
FY06
0.0%
FY05
1,000
FY06
1.5%
FY05
1,750
Pioneer in launching marketing initiatives

APNT has been a pioneer in launching aggressive strategies. The company
has rapidly installed tinting machines across its dealer network and
introduced paint cans/small packs to reach remote locations (to cater to
replenishment demand). Further, APNT has identified growth opportunities
in tier 2/3 cities and introduced its premium Royale range in such markets
(to tap premiumisation).
Effective communication strategy

APNT has been an iconic brand with a strong communication strategy.
Over the past 60 years, the companys communication has evolved vastly
from its mascot Gattu targeting larger mass-end home users to Har
Ghar Kuch Kehta Hai and Beautiful Home Guide campaigns, focusing on
dream homes. APNTs evolving communication strategy (to cater to
changing consumer needs and rising premiumisation) has been the key
reason behind its strong brand recall and consumer-connect.
20 April 2016
Asian Paints
Exhibit 42: Effective brand communication strategy
Year
Campaign/communication
Positioning
1954
Branding using mascot Gattu
Focus on value for money
1991
'Mera wala' campaign for Apcolite

Khushi Ke Rang - Celebrate with Asian Paints
campaign
Farewell to 'Gattu' from logo. Launch of Har ghar
kuch kehta hai campaign
Focus on extensive range of colours

Focus on festivals with people painting houses in festive
season
1992
2002
2006
2012
2013
Focus on personality and emotions, making a dream home

With increasing importance of exterior emulsion paints, focus
on durability of paints
Wah Sunil babu campaign

Campaign on two brothers teaching tricks of
painting
Revives 'Har ghar kuch kehta hai'
Launch of 'beautiful homes guide

Keep walls same even when address changes
Increasing penetration through innovation

APNT has always strived to increase penetration and improve its overall
consumer connect through innovation. In 1998, the company introduced
tinting systems, a paint dispenser that allows customers to mix base
shades to get a particular shade. Installation of tinting machines improves
the overall inventory management for the dealer, who can then provide
over 1,000 shades to the customers even with lower number of SKUs.
Moreover, this improves dealer retention as these machines are brand
specific and require space, which limits addition of multiple machines at
the same outlet.
APNT has significantly ramped up its Colour World network (dealers with
tinting machines) ahead of its peers, from ~848 stores in FY00 to 32,500
currently, covering 90% of its dealer network.
Exhibit 43: Steady expansion in APNTs Colour World network
(nos)
Colour Worlds
35,000
28,000
21,000
14,000
7,000
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY03
FY01
FY00
Further, APNT has improved its consumer connect through launching

innovative concepts such as signature stores, colour idea stores, home
solutions, samplers etc. With increasing consumer involvement in the paint
buying decision, APNTs strategy is to enhance overall customer
experience, provide complete home dcor solution and further strengthen
its brand equity.
20 April 2016
Asian Paints
Exhibit 44: Colour Idea Store expansion
(nos)
Colour idea stores
300
240
180
120
60
0
FY11
FY12
FY13
FY14
FY15
FY16

Exhibit 45: Innovations in service delivery
Innovation
Colour Next
Special
effects/textured
paints
Signature stores
Service
Predicting colour trends by comprehensive trend mapping
exercise conducted across India with inputs from experts
Creative texture paints with special effects for interior and
exterior requirements
Exploring colour ideas to get colour consultancy by experts

Shop in shop format wherein customers can browse through
Colour ideas store
painted/textured panels/new colours and finishes. In-store
consultancy and visualiser also available.
End-to-end painting service, involving expert advice, on time
Home solutions
completion and superior finish
Colour consultancy@ Offers expert colour consultants to provide advice on colours and
Home
designs at home (Ezy Colour/Colour Shastra)
Volume trajectory likely to improve
Backed by long-term
structural drivers, volume
trajectory is likely to
improve
Historically, APNT has maintained industry-leading growth on robust

volume growth. Over FY04-12, the company posted mid-to-high teen
volume growth, which moderated to mid-to-high single digit over FY13-15,
impacted by weak urban/rural demand. However, with long-term
structural drivers intact, we believe, the volume trajectory is likely to
improve. Key drivers for this change will be:
Product launches to drive growth

Over the years, APNT has launched new products to adapt to the changing
market trend. Moreover, with adequate brand investments and innovative
marketing strategies, the company has established strong consumer
connect and brand recall.
APNT has increased premiumisation and added products (increased
primer/putty range; entry into waterproofing), thereby plugging gaps in its
portfolio. Further, we expect, new launches to accelerate going forward
with continued premiumisation.
20 April 2016
Asian Paints
Exhibit 46: APNT consistently expanding its product range
Year
Launches
FY06
Royale Play
Apex Ultima
Utsav
FY07
Luxury Ultra Gloss Enamel

Expansion of Royale Play range
FY08
Royale Metallics and variants
FY10
Royale Shyne
Launch of Royale & Royale Shyne with Teflon surface protector
Dholpur textured finish
FY11
Water based wood finishes

New textured finishes - Duracast Pebbletex and Crosstex
FY13
Water proofing products (smart care) launched
FY14
Apcolite advanced
Royal Aspira
Expansion of smart care range
Soft Launch of wallpapers - Nilaya
FY15
Royale WB Enamel
Royale Matt
2X Primer cum Putty
Primero Primer
Unmatched distribution infrastructure

APNT has an unmatched distribution infrastructure, covering ~35,000
dealers. Also, the company remains a preferred choice for paint dealers
with presence across segments/price points. However, there is ample
headroom to further expand network, market share and overall volumes as
the total dealer universe in India stands at ~65,000 dealers at present.
Exhibit 47: Strong focus on dealer expansion
(nos)
Dealer Network
40,000
30,000
20,000
10,000
0
FY01
FY07
FY15
FY16
Potential for improvement in paint usage levels

Improved paint usage
levels to benefit APNT, the
market leader with strong
brand equity/distribution
Indias per capita paint consumption remains low at 2.5kgs compared with
other developing markets (China: ~6-7kg, Asia-Pacific: 5-6kg) Though
current demand has been impacted by weak macro economy, long-term
structural drivers (reduction in repainting cycle, increased urbanisation and
rising first-time paint consumers) are intact. This should improve paint
usage levels and APNT, the market leader with strong brand
equity/distribution, will be a key beneficiary.
20 April 2016
Asian Paints
APNT to gain market share from unorganised segment

Over the past 15 years, the share of the unorganised segment in the
domestic paint industry declined from 45% to 35%. Going forward, we
expect this trend to sustain as demand for branded products continues to
improve with rise in disposable income and increased involvement of
consumer in the buying decision. APNT is well placed to tap this
opportunity given its brand leadership, increased presence in tier 2/3 cities
and scale benefits versus the unorganised segment.
Industry-leading margin profile to sustain

The domestic paint industry is oligopolistic in nature with APNT being a
clear market leader (a competitive ratio of 2.5x). This gives it an edge over
its peers in terms of scale, raw material procurement, distribution and
pricing. Historically, APNT has taken judicious pricing actions and
maintained its EBITDA margins at 16%+, the highest in the industry.
Further, the following factors are likely to result in sustained industryleading margin profile for APNT:
Strong volume growth led by price leadership
Benefits of lower RM costs

have reflected in APNTs
EBITDA margin
improvement
Through FY09-12, despite strong price hikes to pass on input cost inflation,
APNT registered double-digit volume growth, clearly reflecting its pricing
leadership and brand loyalty. Moreover, the industry has strong pricing
discipline, with peers following the pricing action of the market leader.
Even in the past 18 months, APNT reduced the MRP by 4% (2% each in two
tranches), which was followed by other players, in spite of the steep
reduction in crude oil prices. Though discounts to the trade have increased
by 2-3%, the benefits of lower RM costs have reflected in EBITDA margin
improvement, ahead of consumer staples companies.
Exhibit 48: Pricing power evident in revenue growth and profitability
Volume growth
30.0%
Price/mix growth
23.0%
16.0%
9.0%
2.0%
-5.0%
FY10
FY11
FY12
FY13
FY14
FY15
Well placed to ride the premiumisation trend

APNT is well placed to ride the premiumisation trend in the paint industry,
led by a strong premium portfolio, with high-margin emulsions
contributing +50% to its decorative business. Moreover, the company is
seeing a steady shift in its image to a complete home dcor
service/solution provider from a paint product manufacturer. APNT has
achieved this shift through innovative strategies (signature stores, colour
idea stores, home solutions) and focussing on premiumising the overall
product delivery.
20 April 2016
Asian Paints
Exhibit 49: Premiumising within emulsion range
Scale benefits to boost margins going forward

With likely improvement
in volume, scale benefits
should kick in
Over FY06-12, APNTs revenues grew at 20%+ annually, gross margins

declined by 130bps, while EBITDA margin rose by 180bps, indicating its
operating leverage benefit due to its large scale. Moderation in volume
growth over FY12-15 and significant capacity addition in FY13 resulted in
muted margin expansion due to higher fixed costs. However, with likely
improvement in volume trajectory, scale benefits should kick in, thereby
boosting EBITDA margins going forward.
Exhibit 50: Reduction in fixed costs as percentage to sales
Staff cost (% to sales)
Manufacutring expenses (% to sales)
General expenses (% to sales)

10.0%
7.5%
5.0%
2.5%
0.0%
FY05 FY06 FY07 FY08 FY09 FY10
FY11
FY12
FY13
FY14
FY15
International businesses Recovery on cards

APNTs international businesses the Caribbean, Middle East, Asia, South
Pacific and Africa contribute ~13% to its consolidated revenues. Growth
for the international business has moderated in the past two years due to
global slowdown, adverse currency movements and political turmoil in key
markets.
The international business

should gradually recover
led by stabilisation in
Egypt, where APNT is the
number two player
However, we expect the international business to gradually recover led by

stabilisation in Egypt, where APNT is the number two player, and recovery
in South Asian markets (Bangladesh and Nepal). The consolidation of
recently acquired Kadisco in Ethiopia (where margins are equivalent to the
Indian decorative business) and expansion in newer markets are additional
growth drivers. Moreover, APNT is focusing on creating business
infrastructure in international markets by expanding reach, plugging
portfolio gaps, improving service quality and building capacity. The
company has plans to set up a manufacturing facility in Indonesia with
24,550MT capacity, which should cushion growth rates in the current
challenging environment.
20 April 2016
Asian Paints
Exhibit 51:
Geography-wise revenue break-up

Africa
1%
South Pacific
7%
Asia
31%
Caribean
12%
Middle East
49%

Exhibit 52: Performance of key subsidiaries
Rs m
Sales
EBITDA
EBITDA margins
Key subsidiaries
FY14
FY15
FY14
FY15
FY14
Asian Paints Bangladesh
2197
2690
221
232
10.1%
FY15
8.6%
Asian Paints Nepal
1375.0
1570.1
261.3
246.0
19.0%
15.7%
SCIB chemicals
4686.9
4285.6
543.2
426.8
11.6%
10.0%
Berger paint Jamaica
1879.2
2220.2
38.9
54.8
2.1%
2.5%
Industrial segment Growth drivers aplenty

APNT has presence in the domestic industrial coatings business, through
two 50:50 joint ventures with PPG Inc. of the US. PPG (formerly Pittsburgh
Plate Glass) is the largest coatings company globally. One of the JVs is
primarily operated by PPG, while the other is operated by APNT.
PPG AP JV (78% of industrial segment revenues): The JV caters to

automotive OEM, marine and packaging segments and enjoys
leadership in the auto refinish business. It is second only to Kansai in the
auto OEM business.
AP PPG JV (22% of the sales): The JV caters to non-automotive
industrial coating segments such as protective coatings, powder
coatings and road marking paints.
Sales from the industrial JV have grown at a 9% CAGR over FY13-15, while
PAT has increased 4x, led by a 360bp improvement in operating margins.
APNT continues to see healthy growth in the refinish business and plans to
leverage PPGs technological expertise. Further, given its strong
relationships with European/US car makers, growth in the auto OEM
business should accelerate. Also, macro injections will drive auto OEM
growth, which will benefit the JV as well. Additionally, a pick-up in
industrial capex going forward could add drivers to the JVs growth.
Exhibit 53: PPG Colour Global leader in coatings
Global
General
PPG
Architecture
coatings
Industrial
Industry
48.0
35.0
Size($bn)
Global Position
1
1
2
Protective &
Marine
Refinish/
Collision
Auto
OEM
Packaging
Aerospace
13.0
7.0
9.0
3.0
1.0
20 April 2016
Asian Paints
Exhibit 54: Industrial JV performance Sales
Exhibit 55: Industrial JV performance EBITDA margin
Sales (Rs mn)
EBITDA (Rs m- LHS)
6600.0
EBITDA margins (RHS)
400.0
7.0
300.0
5.3
5700.0
200.0
3.5
5250.0
100.0
1.8
6150.0
4800.0
0.0
FY13
FY14
FY15
0.0
FY13
FY14
FY15
Home improvement and dcor Long road ahead

In 2012, APNT announced plans to consider opportunities in home
improvement. Consequently, the company acquired Sleek International in
2013 and ESS ESS Bathroom Products Pvt. Ltd. in 2014.
Sleek International: APNT forayed into the modular kitchen segment in

Aug-13 by acquiring a 51% stake in Sleek International for Rs1.2bn. Sleek
International has a pan-India presence with retail network of more than
30 showrooms, including shop-in-shops and 250+ dealers.
ESS ESS Bathroom Products Pvt. Ltd: APNT entered into the bathroom
fittings business in June-14 through acquiring ESSs front end sales
business (including brands, network and sales infrastructure).
Water proofing and adhesives: APNT ventured into the waterproofing
business in FY13 through launching its brand Smartcare. The company
entered the branded adhesive business in the retail segment through a
distribution arrangement with Henkel, the leading solution provider for
adhesives globally. It launched three products under the Loctite brand
Loctite Quick, Loctite Rapid and Loctite Tough. Loctite, largely present
in the industrial business, has now been extended to the retail market in
certain regions of the West markets through a cobranding initiative. The
strategy is to leverage APNTs strong dealer network to penetrate the
retail segment. Currently, the segment is dominated by Pidilite with
70%+ market share.
Exhibit 56: Sleek International Performance below expectations
PAT (Rs m)
Sales(Rs m)
0.0
1,400
1,050
-45.0
700
-90.0
350
-135.0
-180.0
FY14
FY15
FY14
FY15
20 April 2016
Asian Paints
Both the home dcor and bathroom fitting segments are largely
unorganised in nature. Moreover, increased focus on home aesthetics,
rising income levels and urbanisation are expected to drive growth for the
segments. As a result, significant growth opportunities for branded
products exist.
While current demand remains weak and overall contribution of the
segments to profitability is not relevant, we believe long-term growth
potential is immense. APNT can leverage its strong distribution network
and aggressive marketing initiatives to tap this opportunity, thereby
creating newer avenues for growth.
Financial analysis
Revenue trajectory to remain strong
We estimate APNTs
consolidated revenues to
grow at a CAGR of 15% on
13.5% domestic volume
CAGR over FY16-18E
APNTs consolidated revenues have grown at a CAGR of 16.5% over FY1115, led by strong growth in the domestic business (FY11-15 volume CAGR
8.4%). Also, despite weak domestic demand environment, we expect
APNTs revenue trajectory to remain strong. Robust volume-led growth in
the decorative segment and recovery in international/industrial businesses
should further aid revenues. We estimate APNTs consolidated revenues to
grow at a CAGR of 15% on 13.5% domestic volume CAGR over FY16-18E.
We do not factor in a significant price/mix increase, which will be a
function of inflation going forward.
Exhibit 57: Volume CAGR of 13.5% over FY16-18E
9.0%
120.0
15.0%
350,000
4.5%
60.0
7.5%
0.0%
0.0
0.0%
FY16E
FY15
FY14
FY13
FY12
FY11
FY18E
700,000
FY17E
22.5%
FY18E
180.0
FY17E
13.5%
FY16E
1,050,000
FY15
YoY (% - RHS)
30.0%
FY14
240.0
FY13
YoY (% - RHS)
18.0%
FY12
1,400,000
FY11
Volume (nos - LHS)
Exhibit 58: Consolidated sales CAGR 15% over FY16-18E
Operating leverage, better international profitability to prop margin

Despite gross margin expansion of 190bps, APNTs consolidated EBITDA
has grown at a CAGR of 14% over FY11-15, with EBITDA margin declining
120bps over the same period. The growth was largely impacted by
increased fixed costs due to significant capacity expansion and weakness
in industrial/international businesses.
Operational performance
set to improve
However, in the past five quarters, gross margin expanded significantly,

aided by steep decline in input costs. With the input costs benefit already
in the base, we expect gross margin expansion to be lower versus that in
the past five quarters. However, we expect the operational performance to
improve, led by healthy growth in high-margin decorative segment and
improved industrial/international business profitability. We estimate
consolidated EBITDA to grow at a CAGR of 19% with an EBITDA margin
expansion of 110bps over FY16-18E.
20 April 2016
Asian Paints
Exhibit 59: EBITDA CAGR of 19% over FY16-18E
Exhibit 60: Steady margin expansion

Gross margins (LHS)
YoY (% - RHS)
44.0
33.0
37.5%
48.0
24.0
30.0%
45.0
18.0
42.0
12.0
39.0
6.0
36.0
0.0
22.5%
22.0

Exhibit 61:
FY18E
FY17E
FY16E
FY15
FY11
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
0.0%
FY11
0.0
FY14
7.5%
FY13
11.0
FY12
15.0%

Raw material break-up
Additives
15%
Packaging
material
17%
Pigments,
Extenders,
Minerals etc.
30%
Raw material
consumed
83%
Others
5%
Monomers
13%
Solvents
12%
Oils
5%
Resins
3%
Source: IDFC Securities Research, Company
We estimate standalone margins to expand by ~100bps over FY16-18E as

benefits from operating leverage start kicking in, led by improvement in
volume growth in the decorative paint business
Exhibit 62: Standalone EBITDA to grow at CAGR of 18.5% over FY16-18E
EBITDA
EBITDA margin
0.00
0.0
FY18E
6.0
FY17E
10.00
FY16E
12.0
FY15
20.00
FY14
18.0
FY13
30.00
FY12
24.0
FY11
40.00
Moreover, likely recovery in industrial capex as well as healthy pick-up in

the automotive segment should drive growth in the industrial coatings
segment. We expect revenues from industrial coating JVs to grow at a
CAGR of 15% over FY16-18E.
20 April 2016
Asian Paints
Exhibit 63: Industrial JV performance
Sales (Rs m)
EBITDA (Rs m)
FY13
FY14
FY15
FY16E
FY17E
FY18E
5410.9
5614.1
6376.2
7332.6
8432.5
9697.4
118.3
229.4
372.3
611.8
726.1
860.6
2.2
4.1
5.8
8.3
8.6
8.9
58.3
124.4
254.1
439.4
524.8
626.0
EBITDA margins (%)

PAT
Profitability of the international business is likely to improve with pick-up

in Nepal, Bangladesh, Egypt as well as contribution from the recently
acquired high-margin Ethiopia business. We estimate APNTs earnings to
grow at a CAGR of 20% over FY16-18E, aided by strong growth in the
decorative business and improved profitability in industrial/international
businesses.
Exhibit 64: Earnings to grow at a CAGR of 20% over FY16-18E
PAT (Rs bn - LHS)
YoY (% - RHS)
30.0
35.0%
24.0
28.0%
18.0
21.0%
12.0
14.0%
6.0
7.0%
0.0
0.0%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Working capital efficiency maintained despite expansion

APNT has the largest dealer network in India. However, its
debtor/inventory days are the lowest versus peers considering its
leadership and robust supply chain in the decorative segment. This clearly
indicates APNTs working capital efficiency. Further, despite planned
network expansion (1,500-2,000 dealer addition annually), we expect
APNT to maintain its efficient working capital structure.
Exhibit 65: Net working capital days best in class
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Debtor
Days of revenue
28
30
33
32
30
30
30
30
Creditors
42
48
48
50
40
38
38
38
Inventory
62
61
61
59
58
58
58
58
Loans & advances
10
12
11
12
14
15
16
16
Other CL
20
26
29
27
26
26
25
23
Net working capital
28
30
33
32
30
30
30
30
Industry-leading return ratios to sustain

APNT has maintained a strong return profile led by consistent earnings
growth (backed by dominance in the decorative segment) and efficient
working capital management. Given that capacity expansion can be
comfortably funded through internal accruals and that profitability and
dividend pay-out ratios will only steadily improve, we expect APNTs
RoCE/RoE to improve from 38%/30.6% in FY15 to 44%/35.8% in FY18E.
20 April 2016
Asian Paints
Exhibit 66: Industry-leading return profile
(%)
ROE
Exhibit 67: Healthy dividend pay-out

(%)
ROCE
Dividend payout
46.0
60.0
42.0
45.0
38.0
30.0
34.0
15.0
FY18E
FY17E
FY16E
FY15
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
FY14
FY11
FY13
0.0
FY12
FY11
30.0
Cash flow generation strong to fund capex requirements

APNT has invested significantly in expanding capacities, both in India and
internationally. In the next few years, the company plans to expand
capacity in Haryana, Andhra Pradesh, Karnataka and Indonesia. We factor
in Rs17.3bn capex over FY15-18E, which will be invested in various capacity
expansion projects. Nevertheless, with operating cash flows of ~Rs72bn
estimated over FY16-18E, capex requirements, however aggressive, will be
comfortably funded.
Exhibit 68: Capex of ~Rs17.3bn over FY15-18E
Exhibit 69: Strong cash generation to fund capex
(Rs bn)
(Rs bn)
30.0
Capex
9.0
CFO
FCF
24.0
6.0
18.0
12.0
3.0
6.0
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
0.0
FY11
0.0
Valuation and view

We believe structural growth tailwinds exist for the Indian paints industry.
As a result, volume growth will likely be ahead of other broad consumer
industries such as staples and alcoholic beverages. Further, headwinds
faced by some other industries (staples: higher competitive intensity and
increased penetration; retail: e-commerce threat; cigarettes and alcoholic
beverages: regulation-led issues) are absent for the paints industry.
Consequently, we believe broader paint industry players deserve premium
multiples versus other consumer segments.
APNT enjoys superior
metrics market share,
distribution, product
portfolio, volume growth,
EBITDA margin and return
ratios
APNT remains at the forefront of the paint industry. We believe APNT is

the best large-cap proxy to play on rising urbanisation in India with ~90%
of its revenues coming from the decorative segment (80% India; ~10%
international, the highest among peers). Also, superior metrics (market
share, distribution, product portfolio, volume growth, EBITDA margin and
return ratios) and the relentless push to get back to mid-teen revenue
growth underpin our view.
20 April 2016
Asian Paints
Initiate with Outperformer; APNT is our top large-cap pick

Given structural growth prospects of the industry and strong predictability
of cash flows for larger players, we value paint companies using DCF. Our
DCF-based target price for APNT is Rs1,015, implying 15% upside from the
current levels. This translates into a 36x FY18E target earnings. The stock
currently trades at 31x FY18E earnings, which, we believe, is not prohibitive
given APNTs superior growth and margin profile, even versus consumer
staples businesses. Further, given APNTs higher growth visibility/stability,
we initiate coverage with an Outperformer rating the company is our top
consumer large-cap pick.
Exhibit 70: APNT FY18 DCF-based target price of Rs1,015
Rs m
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
FY28E
Sales
141,828
155,846
177,455
206,769
239,852
278,228
830,485
9.9%
13.9%
16.5%
16.0%
16.0%
14%
22,354
29,097
33,934
40,953
46,052
53,976
174,402
16%
19%
19%
20%
19%
19%
21%
Depreciation
-2,659
-2,969
-3,309
-3,649
-3,929
-4,209
-6,449
EBIT
21,392
28,220
33,217
40,522
45,241
53,384
177,088
Sales growth
EBITDA
EBITDA margin
Current tax
Capex
Change in WC
6,495
8,640
102,07
12,490
13,968
16,508
54,897
-3,844
-7,290
-5,000
-5,000
-4,000
-4,000
-4,000
-5111
-1,785
-2,801
-3,437
1,175
-2,015
-2,382
13,126
18,227
23,012
32,194
34,938
122,258
FCF
discount factor
PV of FCF (@ 12% WACC)
WACC
PV of projection period
12%
338,589
Terminal growth rate

Terminal value
5%
1,880,330
PV of terminal value
614,844
Exhibit 71:
1.0
0.9
0.8
0.3
23,012
Total Enterprise value
28,789
27,939
654,821
Net debt (Mar'18)
19,895
Equity value
DCF based value per share
(Rs)
# shares outstanding (m)
973,328
1,015
959
PEG lower compared with large-cap consumer staples
(x)
PEG
3.0
2.5
2.2
2.5
2.0
953,433
1.6
1.5
1.0
0.5
0.0
Asian Paints
HUL
ITC
20 April 2016
Asian Paints
Exhibit 72: Premium valuations to sustain
(X)
50
PE (x)
+ 1 Std. Dev.
Avg. PE
- 1 Std. Dev.
Exhibit 73: Five-year average EV/EBITDA at 22x

(X)
35
30
21
20
14
10
Avg. EV/EBITDA
- 1 Std. Dev.
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
28
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
40
EV/EBITDA
+ 1 Std. Dev.
20 April 2016
Asian Paints
Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Key ratios
FY15
FY14
127,148
141,828
FY16E
155,846
FY17E
177,455
FY14
FY15
FY16E
FY17E
EBITDA margin (%)
15.7
15.8
18.7
19.1
19.8
206,769
EBIT margin (%)
13.8
13.9
16.8
17.3
18.0
PAT margin (%)
FY18E
Year to 31 Mar
16.2
11.5
9.9
13.9
16.5
Operating expenses
107,169
119,474
126,749
143,521
165,816
RoE (%)
EBITDA
19,979
22,354
29,097
33,934
40,953
RoCE (%)
15.4
11.9
30.2
16.6
20.7
% change
Other income
1,342
1,697
2,093
2,592
3,218
Net interest
(422)
(348)
(348)
(290)
(232)
Depreciation
Pre-tax profit
Deferred tax
Current tax
2,457
2,659
2,969
3,309
3,649
18,442
21,044
27,872
32,927
40,290
351
(92)
5,364
6,587
8,640
10,207
12,490
12,727
14,549
19,232
22,719
27,800
Minorities
(440)
(322)
(458)
(533)
(655)
Adjusted net profit
12,288
14,227
18,773
22,187
27,145
Non-recurring items
(100)
(276)
Reported net profit
12,188
13,952
18,773
22,187
27,145
9.4
14.5
34.6
18.2
22.3
Profit after tax

Preference dividend
% change
FY18E
9.7
10.0
12.0
12.5
13.1
33.1
32.4
36.1
35.5
35.8
40.4
38.1
43.4
43.4
44.1
Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)
0.0
0.0
0.0
(0.1)
(0.2)
0.0
0.1
0.0
(0.3)
(0.5)
1.3
0.8
1.5
2.1
2.7
Dividend yield (%)
0.6
0.7
0.9
1.0
1.2
Valuations
Year to 31 Mar
FY14
FY15
FY16E
FY17E
FY18E
Reported EPS (Rs)
12.7
14.5
19.6
23.1
28.3
Adj. EPS (Rs)
12.8
14.8
19.6
23.1
28.3
PE (x)
69.1
59.7
45.3
38.3
31.3
Price/ Book (x)
21.0
17.9
15.0
12.4
10.2
EV/ Net sales (x)
6.7
6.0
5.5
4.8
4.0
EV/ EBITDA (x)
42.7
38.2
29.3
24.9
20.4
EV/ CE (x)
18.0
15.2
13.2
11.0
9.0
Balance sheet
As on 31 Mar (Rs
m)
FY14
FY15
FY16E
FY17E
FY18E
959
959
959
959
959
39,433
46,464
55,655
67,517
82,317
42,852
50,060
59,709
72,104
87,559
33,532
33,053
36,036
40,338
46,241
2,492
4,210
2,900
2,900
2,900
1,878
1,799
1,799
1,799
1,799
37,902
39,062
40,735
45,037
50,940
80,754
89,123
100,444
117,141
138,499
24,918
26,102
30,423
32,114
33,465
Investments
14,236
15,878
15,878
15,878
15,878
Cash
2,290
2,044
4,225
12,127
22,795
37,642
42,274
47,042
54,145
63,485
Paid-up capital
Preference capital
Reserves & surplus
Shareholders'
equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets
Other current assets

Deferred tax assets
Other non-current
assets
Net working capital
Total assets
1,669
2,825
2,876
2,876
2,876
6,400
11,265
15,231
25,935
40,039
80,754
89,123
100,444
117,141
138,499
FY14
FY15
FY16E
FY17E
FY18E
Net sales growth trend
Shareholding pattern
Cash flow
Year to 31 Mar (Rs
m)
Pre-tax profit
Depreciation
Chg in Working
capital
Total tax paid
Interest Received
Ext ord. Items
Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments
Debt raised/(repaid)
Interest Paid
Capital
raised/(repaid)
Dividend (incl. tax)
Other items
Net chg in cash
18,442
21,044
27,872
32,927
40,290
(2,457)
(2,659)
(2,969)
(3,309)
(3,649)
(2,494)
(7,173)
(3,185)
(3,819)
(5,166)
(5,364)
(6,587)
(8,640)
(10,207)
(12,490)
0
(100)
(276)
14,655
10,921
20,713
23,517
28,244
(2,815)
(3,844)
(7,290)
(5,000)
(5,000)
11,418
6,730
13,075
18,227
23,012
(11,279)
(1,642)
26
1,719
(1,310)
(422)
(348)
(348)
(290)
(232)
(5,904)
(6,981)
(9,203)
(10,325)
(12,345)
249
74
(381)
(5,077)
(246)
2,182
7,902
10,667
As of Dec 15
20 April 2016
Outshining peers
OUTPERFORMER
Berger Paints, previously a pure industrial-paints play, transformed
itself into a credible number two player in India, led by increased focus
on high-margin decorative segment. The transformation has resulted in
strong 19% earnings CAGR over FY10-16E. Moreover, we expect aheadof-industry growth to continue for Berger given its widened product
portfolio, continued dealer network expansion and incremental revenue
drivers in international/industrial businesses. We expect strong volume
growth, steady margin expansion and lower interest costs to drive
earnings CAGR to 30% over FY16-18E, ahead of peers. We value Berger
on DCF at Rs299, implying a 35x FY18E P/E, which, we believe, is fair
given its superior earnings growth. Initiate with Outperformer Berger
is one of our top mid-cap picks.
20 April 2016
BSE Sensex: 25844
Sector: Paints
Stock data
CMP (Rs)
251
174.0 /2,627
Target Price (Rs)
299
Change in TP (%)
NA
19.2
Earnings change (%)

FY16E
FY17E
FY18E
Bloomberg code
BRGR IN
1-yr high/low (Rs)
284/171
0.4

(Rsm/USDm)
89.7/1.4
693.5
Free float (%)
25.0
75

110
Berger Paints India
Sensex
105
Margin expansion to drive earnings growth: Berger outperformed APNT,

the market leader, with an EBITDA CAGR of 19.5% over FY11-15. Going
forward, we expect the outperformance to continue, aided by operating
leverage benefits and increasing contribution from premium paint
products. Moreover, higher growth in the industrial segment (post the JV
with Nippon Paints) and improved profitability of the international
business is likely to propel growth. We estimate FY16-18E consolidated
EBITDA to grow at a CAGR of 24% with margin expansion of 180bps.
Impressive performance warrants premium multiples: We expect
Bergers overall performance to be impressive with improved return
profile and FY16-18E earnings CAGR at 30%. Our DCF target price is
Rs299, implying a 35x FY18E P/E, which we believe is justified given
Bergers superior earnings growth trajectory and PEG ratio of less than 1.
Initiate with Outperformer Berger is one of our top mid-cap consumer
picks.
Year to 31 Mar
Net sales (Rs m)
FY14
38,697
FY15
43,221
FY16E
47,260
FY17E
54,440
FY18E
64,271
2,493
2,647
3,499
4,460
5,887
693
693
693
693
693
3.6
3.8
5.0
6.4
8.5
14.1
6.2
32.2
27.5
32.0
PE (x)
69.7
65.7
49.7
39.0
29.5
Price/ Book (x)
15.5
13.8
11.8
10.0
8.2
EV/ EBITDA (x)
41.3
34.9
27.5
22.4
17.5
24.0
22.2
25.6
27.8
30.4
21.3
22.2
27.3
31.9
37.1
100
Shares in issue (m)
95
Adj. EPS (Rs)
90
% change
85
Apr-14
(%)
Industry-leading revenue growth to continue: Over FY05-15, Bergers

standalone sales CAGR surged 17% on improved product and segment
mix, brand building, dealer network expansion and cost efficiencies.
Further, we believe this ahead-of-category growth should sustain, led by
increased focus on the premium decorative segment. Consequently, we
expect Bergers volume growth to surpass peers over FY16-18E,
translating into 16.6% consolidated revenue CAGR, ahead of peers.
3-mth
6-mth
1-yr
BRGR Equity
0.7
11.9
22.4
BSE Sensex
5.6
(5.6)
(9.1)
RoE (%)
RoCE (%)
Harit Kapoor
Mehul Desai
91-22-662 22649
91-22-662 22640
INITIATING COVERAGE
Berger Paints India
Berger Paints India
INVESTMENT ARGUMENT
Berger Paints, previously a pure industrial-paints play, transformed
itself into a credible number two player in India, led by increased
focus on the high-margin decorative segment.
Within the decorative segment, Berger grew ahead-of-industry
through successfully premiumising its portfolio, in the past five years.
We expect this outperformance to continue, led by increased
investments in manufacturing, distribution and communications as
also rising premiumisation.
These together with benign input cost should boost FY16-18E EBITDA
margin by 180bps, implying sector-leading PAT CAGR of 30%.
Bergers superior earnings growth and lower PEG are reflected in the
narrowing valuation gap (from 30% discount in FY13 to 10% currently)
with APNT.
We initiate coverage on Berger Paints with Outperformer and Rs299
DCF target price Berger is one of our top mid-cap consumer picks.
Berger Paints An overview

Promoter owned but professionally managed
Till 1991, several promoter level changes came to the fore for Berger Paints
in India (Exhibit 74). Finally, the Dhingra family acquired the company in
1991. Mr K.S Dhingra (a fourth generation) is today the Chairman of the
company and his brother, G. S. Dhingra is the Vice Chairman. Together, the
family owns 75% of the company.
However, traditionally Berger has been managed professionally and the
trend continues till date the promoter family is not part of the day-to-day
management. This trend, evident in all successful Indian consumer
companies, has led to: 1) a more efficiently run business, 2) better planning
for succession and 3) ability to attract better talent. Companies such as
Dabur, Marico, GCPL, Jyothy Labs etc. have all turned the corner and
improved their business metrics through adopting a professional
management. We believe a similar structure for Berger bodes well for its
long-term prospects.
Exhibit 74: Berger Key milestones
Bought over by
British Paints
(Holdings)
Limited.
1920
1947
Started as Hadfield's
(India) Ltd producing
ready-mixed stiff
paints, varnishes and
distempers
Name changed
to Berger paints
india ltd
1960
Acquired by
Celanese corp &
sold to BERGER
JENSON &
NICHOLSON
LTD in 1969
1983
Mr K S Dhingra &
Mr G S Dhingra
acquire
controlling stake
from UB group
1985-90
Strong portfolio
created with
brands - SILK,
RANGOLI,
LUXOL, BISON
1991
Merger of
Rajdoot paints, 2
paints facility
added to
portfolio
1996
Launch of
COLORBANK
TINTING
SYSTEM
1998
Acquisition of ICI
Indias Motors
and Industrial
business & Rishra
factory
2000
2001
Acquired Jenson
& nicholson,
Nepal
Acquisition of
100% stake in
Bolix, S.A.
POLAND
2007
Berger Paints
Overseas Ltd
commences
operation in
Russia
2008
Launch of Express
painting. Phase 1 of
Hindupur plant
commissioned
2013
2015
Acquisition of
architectural
business of
Sherwin Williams
Paints India
20 April 2016
Berger Paints India
Industry-leading growth to continue

Berger Paints is the second largest player in the domestic paint market
with 18% share in the organised market. The company, over the past five
years, has consistently outperformed the industry. This has been led by
increasing its share in the high-margin decorative segment and plugging
portfolio gaps (by making a strong play into premium emulsion paints).
Further, Berger has also invested aggressively in brands and
capacity/dealer network expansion.
Given Bergers impressive

track record and effective
execution, we expect
ahead-of-industry growth
to continue
Over FY05-15, Bergers consolidated sales have grown at 18% CAGR. Gross
margins over FY05-15 improved by 590bps on the back of improved mix,
cost efficiencies and input cost benefit (part of which was reinvested in
brand building). This resulted in EBITDA margin expansion of 200bps and
CAGR of 20% over FY05-15. Given Bergers impressive track record and
effective execution, we expect ahead-of-industry growth to continue.
Exhibit 75: Revenue CAGR of 18% over FY05-15

Exhibit 76: EBITDA CAGR of 20% over FY05-15

YoY (% - RHS)
EBITDA Margins (% - RHS)
14.0%
FY15
FY13
FY14
FY12
FY11
0.0%
FY10
0.0
FY09
0.0%
FY08
0.0
FY07
3.5%
FY06
1.5
FY05
6.0%
FY15
10.0
FY14
7.0%
FY13
3.0
FY12
12.0%
FY11
20.0
FY10
10.5%
FY09
4.5
18.0%
FY08
24.0%
30.0
FY07
40.0
FY06
30.0%
FY05
50.0
6.0
Steady improvement in profitability; converging with market

leader
We expect convergence
with APNT to continue as
scale/mix improvement
drives better
profitability/return
metrics
Over FY05-10, Bergers revenues grew at a CAGR of 15%, lower than

APNTs 21% as APNT made a bigger play into Bergers significant mass
market business. However, post FY11 Berger outperformed the category
growth, converging with the market leader. The companys standalone
sales grew at a CAGR of 18% versus APNTs 19% over FY10-15. The
standalone gross margin differential between Berger and APNT reduced
from 680bps in FY05 to 590bp/320bps in FY11/FY15. This was led by
increased premiumisation, aggressive advertising & promotion spends to
improve
brand
equity,
consistent
distribution
expansion
and
innovation/product launches to plug portfolio gaps. We expect this
convergence to steadily continue as scale/mix improvement drives better
profitability/return metrics.
20 April 2016
Berger Paints India

Exhibit 77: Revenue growth Berger versus APNT
(%)
Asian Paints
Exhibit 78: GMs Berger converging with APNT

Berger Paints
(%)
Berger Paints
Asian Paints
46.0
30.0
25.0
42.0
20.0
38.0
15.0
10.0
34.0
5.0
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY05
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY06
30.0
0.0
Decoratives Moving up the premium chain

Berger, when acquired by the Dhingra family in 1991, was primarily an
industrial paints company the share of decorative sales in its overall mix
stood at only 20%. Since then, the company has increased its decorative
share in the overall mix to ~80%.
Successful launches plug product portfolio gap

Berger regained market
share by plugging its
portfolio gap, especially in
the premium segment
Berger initially ventured into the economy segment. However, over FY0610, the companys revenue growth was lower than APNTs due to: 1) limited
presence in premium products (the segment was starting to pick pace),
and 2) loss of market share (APNT increased focus on the economy
segment). Nevertheless, Berger regained market share by plugging its
portfolio gap, especially in the premium segment.
Exhibit 79: Revenue growth over FY06-10 APNT versus Berger
(%)
Asian Paints
Berger Paints
30.0
20.0
10.0
0.0
FY06
FY07
FY08
FY09
FY10

Exhibit 80: New launches
Product
Key features
WeatherCoat Allguard
WeatherCoat Kool n
Seal
Premium Plus exterior emulsion with water repelling silicon

Two way advantage of sealing terrace cracks and cooling
interiors
Low VOC, low emission emulsion
Breathe Easy
and enamel paints
Over the past three years, Berger expanded its premium range in interior
and exterior emulsions segment, through launching variants of Breathe
Easy, Silk and WeatherCoat Allguard.
20 April 2016
Berger Paints India

Exhibit 81:
Premium product portfolio
Category
Segment
Brand
Variants
Interior
Designer Finishes
Silk
Silk Illusions Design Metallica

Silk Illusions Non Metallic
Silk Illusions Metallica
Silk Illusions Marble Finish
Interior Emulsion
Silk
Silk Luxury Emulsion
Easy clean
Exterior
Exterior Emulsion
WeatherCoat
WeatherCoat All Guard

WeatherCoat Longlife
WeatherCoat Smooth
WeatherCoat Tile Protektor
WeatherCoat Kool & Seal
Premium decorative focus to drive ahead-of-category growth
Focus on the premium

decorative segment to
help sustain Bergers
competitive positioning
Over FY11-15, Bergers revenue growth recovered to APNTs levels. Gross

margins improved 500bps, of which ~200bps was from an improved
product mix. We believe increased focus on the premium decorative
segment would help sustain Bergers competitive positioning and drive
ahead-of-category growth.
Exhibit 82: Revenue growth over FY11-15 APNT versus Berger
(%)
Asian Paints
Berger Paints
30.0
20.0
10.0
0.0
FY11
FY12
FY13
FY14
FY15
Aggressive advertising spends to back brands

Berger has been the most aggressive company among peers in backing its
brands advertising spends, as a percentage to sales, have increased by
350bps from 3.3% in FY05 to 6.8% in FY15. The company roped in Katrina
Kaif, a popular actor, as its brand ambassador in 2012, launching a
campaign, Experience silk on all your walls. With the launch of ultrapremium range under Silk in 2014, Berger further built on the existing
campaign, taking it higher with Experience richness of silk.
Exhibit 83: A&P as percentage of sales A comparison
(%)
8.0
Berger Paints
Asian Paints
Kansai Nerolac
6.0
4.0
2.0
0.0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
20 April 2016
Berger Paints India

Exhibit 84: Aggressive campaigns to promote the premium range under Silk
Moreover, cash discounts as a percentage of sales, have reduced from

4.5%+ in mid-2000 to ~4% currently, which clearly indicates Bergers focus
on creating brand equity rather than pushing sales through higher trade
margins. We believe these initiatives have boosted revenue growth and
market share gains in an otherwise sticky industry.
Exhibit 85: Cash discount as a percentage of sales has moderated
Cash Discount (%)
4.3
4.1
3.8
3.6
3.3
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Industrial segment Opportunities ahead

The industrial business accounts for 20% of Bergers sales. Within the
business, the company operates in three segments General industrials &
auto, protective and powder coatings, accounting for 9%, 9% and 2% of
sales respectively.
Protective coatings Market leader

Berger also provides
value-added services in
the protective coatings
segment
Berger is the market leader in the protective coatings segment, which is

currently seeing growth similar to the decorative segment. The segment
caters to a wide range of industries within core industrial and
infrastructure areas. Apart from a wide product range, Berger also
provides value-added services through its protection consultancy services.
Exhibit 86: Strong portfolio in protective coatings
Product
Application
Epilux FRX
Construction primer with corrosion resistance
Epilux superbuild Surface tolerant maintenance coating, used in structural steel and
ST
pipelines in refineries, chemical units, off-shore platform
Maintenance coatings for coating roof exteriors, bridge decks in
Epilux durebuild
coastal marine environments
Epimax GPE
Primer cum finish for coastal and offshore structures
Lumeros Heat
Coatings for steel structures exposed to temperatures up to 6000C
resistant coatings
20 April 2016
Berger Paints India
Incremental drivers Joint ventures with global players

Berger Becker Coatings: The subsidiary manufactures and sells coil
coatings and specialty paints. Becker is an international coatings group
with a leading position in its markets globally and presence in coil
coatings, industrial coatings, and consumer design finishes.
Exhibit 87: Key financials
Rs m
FY14
FY15
Net sales
2,801
2,730
EBITDA
EBITDA margins
175
213
6.2%
7.8%
BNB Coatings India Pvt. Ltd. is a joint venture (49:51) with Nippon Paint
Automotive Coating (NPAU) of Japan for manufacturing coatings for
plastic substrates of automobiles. In Nov-15, Berger Paints India and
NPAU agreed to further strengthen the capability of their JV, BNB
Coatings India Pvt. Ltd, by transferring some part of their businesses to
the JV. Berger will transfer three-wheeler and four-wheeler (passenger
cars and SUV) paint businesses to BNB, while Nippon Paints India will
transfer its four-wheeler (other than commercial vehicles, auto parts and
ancillaries) paint business. Nippon Paints (India) Pvt. Ltd and Berger
have their automotive coating manufacturing units in Bengaluru and
Howrah, respectively.
Though the quantum of the transferred revenue (from the standalone
business into the JV) is unknown, we understand that 9% of Berger Paints
standalone sales are from general industrial and automotive paints. Hence,
a part of this sum will be transferred to the JV.
The JV will have significant synergies from Nippons technology expertise,
low-cost formulations and customer relationship with Japanese auto
majors. Further, low-cost manufacturing by Berger India and increased
capacity will be additional positives. We believe the JV is will boost overall
automotive coatings business for Berger.
Exhibit 88: Revenues of BNB Coatings India
Net sales (Rs mn)
160
154
148
142
136
130
FY14
FY15
20 April 2016
Berger Paints India
International businesses Bright prospects

Bergers international business (in Poland, Nepal and Russia) accounts for
~6% of its consolidated sales.
Poland Long-term opportunities exist

About 60% of Bergers international business comes from the acquired
subsidiary, Bolix S.A. Berger acquired Bolix in Aug-08 for US$38.5m
(~Rs1.6bn); Bolix generated Rs1.9bn revenues at the time of the acquisition.
Bolix manufactures and markets external insulation and finishing systems
(EIFS) in Poland and other nearby markets. These systems provide exterior
walls of buildings insulation from adverse temperatures, thereby reducing
energy costs. The management has not been able to leverage this
technology in other markets, primarily India, and hence, revenues have not
grown for the business. However, with the business having 10%+ EBITDA
margins and long-term viability (with growing need for energy efficient
systems), these products can benefit in the long term.
Exhibit 89: Bolix sales largely flat
Sales(Rs bn)
2.0
1.5
1.0
0.5
0.0
CY09
CY10
CY11
CY12
CY13
CY14
Nepal Growth to recover from FY17

We expect growth to
recover from FY17, led by
impressive track record of
the Nepal business
Berger, through its wholly-owned subsidiary, Berger Jensen and Nicholson

(BJN) Nepal, has been operating in the decorative paints segment in Nepal
since 2000. The company is now the second largest paint company in
Nepal after APNT. In FY15, the entity posted revenues of Rs963m, EBITDA
margins of ~20% and PAT of Rs141m. Though the current year has been
impacted by the earthquake and political uncertainties in Nepal, we expect
growth to recover from FY17, led by the impressive track record of the
Nepal business (26% revenue CAGR over FY10-15).
Exhibit 90: BJN Nepal Strong revenue CAGR of 26% over FY10-15
Revenues (NPR mn)
1,200
900
600
300
0
FY11
FY12
FY13
FY14
FY15
20 April 2016
Berger Paints India
Russia Marginal business; sizeable potential

Currently, Berger has a marginal business in Russia (Rs67m revenues in
FY15). However, the company and the government of the Stavropol
Region, Russian Federation have entered into an MoU for conducting a
feasibility study on establishing an industrial coatings plant in Stavropol,
Russia. The company seeks to set up the plant so as to cater to the
demands of the industries in the region and elsewhere in Russia. We
expect this market to be marginal for Berger in the near term given its
current size and the Rouble crash. However, given the size of the Russian
industrial market (over 700,000tonnes), a long-term opportunity exists.
Exhibit 91:
Russia Small business with significant growth opportunity
80.0
60.0
40.0
20.0
0.0
FY11
FY12
FY13
FY14
FY15
Revenues (Rs mn)
Berger poised to tap the next leg of growth

New service offerings to strengthen brand equity
In Oct-15, Berger launched a new colouring initiative, Express Painting
(XP), to provide services of trained painters (equipped with mechanised
tools to colour residential units at no extra cost). XP services make the
overall process much faster (reducing time taken by 40%) and cleaner,
facilitating even coating versus the traditional manual method. The
company has set up 18 centres to train ~10,000 painters by Mar-16.
Moreover, a new series of XP Advanced paints has been launched for
application through this channel.
The strategy is to become an aggregator, create a huge inventory of
trained contractors and premiumise the overall painting process through
automated tools. The service, which was test-launched in West Bengal and
Kerala, has seen strong traction and a pan-India roll-out is in progress.
Moreover, Berger has a Prolinks division, a dedicated team focusing on
large construction projects and providing services such as paint audits,
technical support and complete inspection.
We believe aggressive marketing innovations such as express painting
would strengthen Bergers overall brand equity/position.
Exhibit 92: Express painting Assessing pros and cons
Pros
Cons
40% faster than traditional painting
Higher cost
Builds brand equity
No substantial differentiation
No mess during the process
Dealer push not visible yet
More professional service

20 April 2016
Berger Paints India
Further headroom for dealer expansion exists

Distribution is a major entry barrier and a key success factor for the
domestic paint industry. Berger with a pan-India network (160+ stock
points) has aggressively expanded its dealer network from ~10,000 dealers
in FY07 to ~15,000 currently.
Moreover, there is further headroom for expansion as of the total dealer
universe of 60,000, APNT reaches 35,000, more than double the reach of
Berger. Further, a dealer generally displays 2-3 brands in outlets
therefore, Berger can leverage its strong brands/wide portfolio to scale up
its distribution network not only through new dealers but also via existing
dealers (not housing Bergers products).
Exhibit 93: Steady dealer expansion
(nos)
Exhibit 94: Enough headroom to scale up network

(nos)
Dealer Network
15,000
16,000
12,000
12,000
40,000
30,000
10,000
8,000
20,000
4,000
10,000
0
FY07
FY13
FY16
0
Asian Paints
Berger Paints
Kansai Nerolac
Aggressive capacity expansion

Berger has aggressively built capacity, doubling it from ~0.25mtpa in FY12
to 0.5mtpa in FY15. With strong presence in North/East India, the company
is now looking to expand into West/South India. In Goa, Berger expanded
capacity of its water-based paint plant from 28,000tpa to 96,000tpa and
at Jejuri, Maharashtra, the company commissioned a powder coating plant.
Moreover, to cater to the South, Berger is setting up a facility at Hindupur,
Andhra Pradesh. Phase I of the project with 80,000tpa capacity was
commissioned in FY15 Berger would expand it to 320,000tpa over the
next 3-4 years. The company has doubled its gross block over the past
four years. Also, we do not expect further capex (apart from the Hindupur
project), as the current capex will service Bergers needs adequately.
20 April 2016
Berger Paints India

Exhibit 95: Steady expansion in capacity
Exhibit 96: Bergers manufacturing supply chain
Capacity (MT)
600,000
450,000
300,000
150,000
0
FY10
FY11
FY12
FY13
FY14
FY15
Gross margin expansion to continue on cost benefits
With low crude oil prices,

Bergers gross margin
expansion should continue
through H1FY17
In the past five years, Bergers standalone gross margins expanded by

550bp, owing to adequate price hikes taken during inflationary periods
and continued price/mix benefit (with the premium portfolio growing
significantly ahead of the mass portfolio). Further, over the past five
quarters, the benefits of lower crude oil prices (35-40% of the RM basket
across different material) have resulted in a much sharper gross margin
expansion (as high as 370bp in Q3FY16). With crude oil prices remaining at
US$35-40/bbl lows and no major price reduction, we expect Bergers
gross margin expansion trajectory to continue through H1FY17.
Over the past five quarters, on an average, 70% of the standalone gross
margin expansion has translated into EBITDA margin improvement. In the
past three quarters, the figure stood at a high ~90%. Given this trend, we
believe the improvement in gross margins provides adequate visibility for
Bergers near-term earnings growth.
Financial analysis
Strong volume-led revenue growth to continue
Bergers FY11-15 consolidated revenues/volumes have grown at a CAGR of
16.6%/10%, in line with the market leader, led by strong growth in the
decorative paints business. Further, we expect the company to outperform
industry growth, led by continued traction in the decorative paints market
share and improved international business performance. We estimate
Bergers consolidated revenues to grow at a CAGR of 16.6%, led by
domestic volume CAGR of 14% over FY16-18E.
20 April 2016
Berger Paints India

Exhibit 97: Volume CAGR of 14% over FY16-18E
Volume (MT - LHS)
Exhibit 98: Revenue CAGR of 16.6% over FY16-18E
YoY (% - RHS)
YoY (% - RHS)
7.5%
0.0%
0.0
0.0%
FY11
FY18E
20.0
FY17E
6.0%
FY16E
200,000
FY15
15.0%
FY14
40.0
FY13
12.0%
FY12
400,000
FY18E
22.5%
FY17E
60.0
FY16E
18.0%
FY15
600,000
FY14
30.0%
FY13
80.0
FY12
24.0%
FY11
800,000
Closing the gap versus APNT

Bergers consolidated gross margins improved by 400bps over FY11-15,
significantly higher than APNTs gross margin expansion of 190bps. The
outperformance was led by an improved product mix, increase in share of
premium products (emulsions) in the decorative paints business and a far
lower base versus APNT.
Further, in FY16, gross margin improvement has been strong at over
200bp, led by input cost benefits. We factor in a modest gross margin
improvement of 50bp over FY16-18E for Berger, led completely by mix
improvement in the portfolio. We believe there could be upsides to our
modest gross margin improvement estimates.
Exhibit 99: Improved mix to drive margin expansion
45.0
16.0
14.0
40.0
12.0
35.0
10.0
30.0
8.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
EBITDA margin expansion, a key earnings growth driver

Bergers consolidated EBITDA has grown at a CAGR of 19.5%, with EBITDA
margin expanding 110bps over FY11-15. The EBITDA margin expansion was
lower as part of the benefit was reinvested in brands (A&P spends rose by
~200bps over FY11-15). Resultant earnings grew at a CAGR of 15%, thereby
outperforming the overall industry growth.
We estimate consolidated
EBITDA to grow at a CAGR
of 24% with margin
expansion of 180bps, over
FY16-18E
We expect the outperformance to continue, aided by benefits from

operating leverage and higher contribution from premium paint products.
We estimate standalone margin to expand by ~160bps over FY16-18E.
Moreover, the profitability of the international business is likely to improve,
led by a recovery in Nepal business and steady Bolix performance. The
industrial business is expected to see higher growth on the back of an
uptick in the automotive coatings business post the JV with Nippon Paints.
We estimate consolidated EBITDA to grow at a CAGR of 24% with a
margin expansion of 180bps, over FY16-18E.
20 April 2016
Berger Paints India

Exhibit 100: FY16 EBITDA growth crude led; expect steady improvement hereon
YoY (% - RHS)
12.0
30.0%
9.0
22.5%
6.0
15.0%
3.0
7.5%
0.0
0.0%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Earnings growth ahead of peers over FY16-18E

Strong volume growth, steady margin expansion and lower interest costs
should drive earnings growth for Berger, ahead of peers. We estimate
Bergers earnings to grow at a CAGR of 30% over FY16-18E
Exhibit 101: Expect 30% PAT CAGR over FY16-18E
PAT (LHS-Rs bn)
YoY (% - RHS)
8.0
37.5%
30.0%
6.0
22.5%
4.0
15.0%
2.0
7.5%
0.0
0.0%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Working capital intensity to reduce over FY16-18E

Though Bergers working capital intensity is higher than APNTs, the
company has been able to reduce it over the past five years. Further, we
expect a steady reduction in working capital intensity, led by supply chain
efficiencies and higher growth in the decorative business. We factor in a
five-day reduction in net working capital days for Berger over FY16-18E.
Exhibit 102: Working capital intensity to gradually moderate
FY10
FY11
FY12
FY13
FY14
FY15 FY16E FY17E FY18E
Debtor
44
38
37
38
38
39
40
39
37
Creditors
42
39
40
41
45
48
46
45
44
Inventory
65
61
63
66
64
61
58
55
54
Loans & advances
10
10
13
13
10
Other CL
10
10
10
10
10
Net working capital days
68
60
61
66
60
53
51
48
46
20 April 2016
Berger Paints India
RoCE improvement evident given improving metrics

Despite higher earnings growth, Bergers return ratios have historically
been lower than APNTs on account of lower fixed asset turnover (3.8x for
APNT; 3x for Berger) and higher working capital intensity (51 days net
working capital for Berger; 24 days for APNT). We expect Bergers return
ratio gap with APNT to reduce led by: a) continued improvement in
profitability, b) reduction in working capital intensity and c) lower capex
requirements. We expect Bergers RoCE to cross 30% in FY18E versus the
low of ~20% in FY15.
Exhibit 103: We expect strong improvement in return ratios
(%)
ROE
ROCE
40.0
30.0
20.0
10.0
0.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Cash flow generation strong to fund capex requirements

We expect higher free
cash flow generation to
act as further re-rating
trigger for the stock
Berger almost doubled its capacity over the past five years from
~0.25mtpa in FY12 to 0.5mtpa in FY15. In line with its strategy of expanding
in South/West, the company is setting up a facility at Hindupur, Andhra
Pradesh (Phase 1 with 80,000tpa capacity has been commissioned). The
company plans to scale it up to 320,000tpa over the next 3-4 years, with a
total capex outlay of Rs5.5bn. Also, Berger is looking at setting up 0.1m KL
emulsion plant to meet the raw material requirement of the facility. We
factor in Rs4.5bn capex over FY16-18E that will be invested in Hindupur
capacity expansion project. However, with operating cash flows of ~Rs14bn
estimated over FY16-18E, capex requirements will be comfortably funded.
We expect the higher free cash flow generation to act as further re-rating
trigger for the stock.
Exhibit 104: Capex requirement to be modest

Capex (Rs bn)
Exhibit 105: FY16-18E CFO CAGR at 20%

(Rs bn)
3.0
6.0
2.5
4.5
2.0
CFO
3.0
1.5
1.5
1.0
0.0
0.5
0.0
-1.5
FY11
FY11
20 April 2016
Berger Paints India
Valuation and view

We believe structural growth tailwinds exist for the Indian paints industry
as a result, its volume growth will likely be ahead of other broad consumer
faced by some other industries (staples: intensifying competition and
higher penetration; retail: e-commerce threat; cigarettes and alcoholic
beverages: regulation-led issues) are absent for the paints industry. Hence,
we believe that broader paints industry players deserve premium multiples
to other consumer segments.
Berger has transformed itself into a credible number two player in the
industry with greater focus on the consumer end of the business
(decorative segment). This has resulted in strong 19% earnings CAGR over
FY10-16E. Given its widened product portfolio, continued expansion in
dealer network and incremental revenue drivers in international/industrial
businesses, we believe Berger (along with APNT) stands to gain the most
from the structural opportunity in the Indian paints industry.
Berger Paints, one of our top mid-cap consumer picks

Our DCF target price for Berger is Rs299, led by strong growth visibility
and healthy free cash flows this implies a 17% upside from the current
levels. The stock trades at 29.7x FY18E earnings, in line with mid-cap
consumer staples companies (such as Dabur, GCPL and Marico) for a
superior earnings profile of 30% CAGR over FY16-18E. Our target price
implies a 35x FY18E P/E, which, we believe, is fair given the superior
earnings growth trajectory. Initiate with an Outperformer Berger is one of
our top mid-cap consumer picks.
Exhibit 106: DCF-based target price of Rs299
Rs m
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
FY28E
Sales
43,221
47,260
54,440
64,271
75,197
87,981
272,834
9.3%
15.2%
18.1%
17.0%
17.0%
14%
5,107
6,440
7,865
9,924
11,761
13,937
47,584
12%
14%
14%
15%
16%
16%
17%
Depreciation
(925)
(1,014)
(1,113)
(1,212)
(1,309)
(1,407)
(2,187)
EBIT
4,542
5,778
7,152
9,252
10,828
12,970
46,761
Current tax
1,394
1,843
2,349
3,101
3,662
4,418
16,233
(1,265)
(1,500)
(1,500)
(1,500)
(1,500)
(1,500)
(1,500)
(28)
(836)
(1,160)
(1,028)
(1,107)
(1,316)
2,985
3,237
4,440
5,734
7,188
30,190
1.0
1.0
0.9
0.8
0.7
0.6
5,100
5,687
6,248
6,782
Sales growth
EBITDA
EBITDA margin
Capex
Change in WC
FCF
discount factor
WACC
12%
74,100
5%
Terminal value
427,214
132,498

Net debt (Mar'18)
Equity value
DCF based value per
share (Rs)
206,598
326
206,924
299
693
20 April 2016
Berger Paints India

Exhibit 107: Though P/E is in line with the industry
(x)
Exhibit 108: PEG is the lowest among peers

(x)
PE (FY18E)
35.0
2.0
28.0
1.5
PEG
21.0
1.0
14.0
0.5
7.0
0.0
0.0
Kansai
Nerolac
Akzo Nobel Asian Paint
Berger
paints
Kansai
Nerolac
Berger
paints
Exhibit 109: Five-year average P/E at 29.5x
Exhibit 110: Five-year average EV/EBITDA at 17.2x
(x)
50
PE (x)
+ 1 Std. Dev.
Avg. PE
- 1 Std. Dev.
(x)
30
30
18
20
12
10
Avg. EV/EBITDA
- 1 Std. Dev.
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
24
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
40
EV/EBITDA
+ 1 Std. Dev.
20 April 2016
Berger Paints India

Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Operating expenses
EBITDA
% change
Other income
Net interest
Depreciation
Pre-tax profit
Deferred tax
Current tax
Key ratios
FY15
FY14
FY16E
FY17E
FY18E
Year to 31 Mar
FY14
FY15
FY16E
FY17E
FY18E
EBITDA margin (%)
11.1
11.8
13.6
14.4
15.4
13.6
38,697
43,221
47,260
54,440
64,271
EBIT margin (%)
9.3
9.7
11.5
12.4
15.6
11.7
9.3
15.2
18.1
PAT margin (%)
6.4
6.1
7.4
8.2
9.2
34,384
38,113
40,820
46,575
54,347
24.0
22.2
25.6
27.8
30.4
4,313
5,107
6,440
7,865
9,924
RoCE (%)
21.3
22.2
27.3
31.9
37.1
16.2
18.4
26.1
22.1
26.2
0.4
0.3
0.2
0.1
0.0
360
360
352
401
540
(466)
(501)
(436)
(344)
(264)
Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)
1.0
0.9
0.6
0.3
0.0
0.1
1.2
1.3
1.7
2.3
Dividend yield (%)
0.4
0.5
0.7
0.8
1.0
707
925
1,014
1,113
1,212
3,499
4,041
5,342
6,809
8,988
92
85
RoE (%)
Valuations
914
1,309
1,843
2,349
3,101
Profit after tax
2,493
2,647
3,499
4,460
5,887
Year to 31 Mar
FY14
FY15
FY16E
FY17E
FY18E
Adjusted net profit
2,493
2,647
3,499
4,460
5,887
Reported EPS (Rs)
3.6
3.8
5.0
6.4
8.5
Non-recurring items
Adj. EPS (Rs)
3.6
3.8
5.0
6.4
8.5
Reported net profit
2,493
2,647
3,499
4,460
5,887
69.7
65.7
49.7
39.0
29.5
14.2
6.2
32.2
27.5
32.0
Price/ Book (x)
15.5
13.8
11.8
10.0
8.2
EV/ Net sales (x)
4.6
4.1
3.8
3.2
2.7
EV/ EBITDA (x)
41.3
34.9
27.5
22.4
17.5
9.8
9.2
8.7
8.0
7.0
% change
Balance sheet
As on 31 Mar (Rs
m)
Paid-up capital
Reserves & surplus
Shareholders' equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets
EV/ CE (x)
FY15
FY14
FY16E
FY17E
FY18E
693
693
693
693
693
10,514
11,913
13,997
16,752
20,559
11,207
12,606
14,690
17,445
21,252
7,764
7,686
8,755
9,871
11,342
6,235
6,096
4,795
3,795
2,795
538
579
579
579
579
204
192
250
250
250
14,742
14,552
14,378
14,495
14,966
25,949
27,158
29,069
31,939
36,218
9,971
10,311
10,797
11,184
11,472
Investments
907
1,345
2,140
2,140
2,140
Cash
1,841
1,698
1,230
1,761
3,121
13,218
13,734
14,831
16,783
19,414

Deferred tax assets
Other non-current
assets
Net working capital
12
71
71
71
71
7,295
7,745
7,305
8,672
11,192
25,949
27,158
29,069
31,939
36,218
Year to 31 Mar (Rs

m)
FY14
FY15
FY16E
FY17E
FY18E
Pre-tax profit
3,499
4,041
5,342
6,809
8,988
Depreciation
Chg in Working
capital
Total tax paid
(707)
(925)
(1,014)
(1,113)
(1,212)
Total assets
PE (x)
Revenue growth trend
Cash flow
(113)
(336)
(749)
(1,145)
(1,560)
(914)
(1,309)
(1,843)
(2,349)
(3,101)
Interest Received
Ext ord. Items

Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments
3,671
3,810
4,257
4,771
5,803
(2,964)
(1,265)
(1,500)
(1,500)
(1,500)
240
2,043
2,322
2,928
4,039
(799)
(438)
(795)
739
(140)
(1,301)
(1,000)
(1,000)
(466)
(501)
(436)
(344)
(264)
(722)
(1,360)
(693)
(1,396)
(1,679)
112
(249)
(429)
(143)
(468)
531
1,360
Interest Paid
Capital
raised/(repaid)
Other items
Net chg in cash
As of Dec 15
20 April 2016
The industrial leader; prone to cyclicality

NEUTRAL
Kansai Nerolac (KNPL), a 69% subsidiary of Kansai Paint Japan, is a
market leader in the industrial coatings segment and the third largest
player in the decorative paints business in India. The decorative
segment constitutes only 55% of KNPLs revenues versus 80% and 90%
for Berger and APNT respectively. With higher industrial mix and hence
B2B exposure, KNPLs pricing power, margin profile, earnings visibility
and return ratios will continue to be inferior compared with APNT and
Berger. Consequently, we factor in 14.7% revenue and 15.5% EBITDA
CAGR over FY16-18E. Moreover, the 20% surge in the stock price, in the
past three months, captures the medium-term upside. We initiate
coverage on KNPL with a Neutral rating.
20 April 2016
BSE Sensex: 25844
Sector: Paints
Stock data
CMP (Rs)
304
163.9 /2,476
Target Price (Rs)
313
Change in TP (%)
2.9
Earnings change (%)

FY16E
FY17E
FY18E
Bloomberg code
KNPL IN
1-yr high/low (Rs)
317/194
0.4

(Rsm/USDm)
105.9/1.6
538.9
Free float (%)
30.7
69.3

110
Sensex
105
Leader in industrial segment; challenger in decorative business: KNPL

enjoys pole position in the automotive paints segment. With improved
automotive demand, we expect the company to gain ground through
leveraging its strong OEM relationship, comprehensive product portfolio
and parents R&D expertise. However, within the decorative segment,
constant market share gains seem difficult given formidable competition
from the top two players. We expect consolidated revenue CAGR at
14.7% over FY16-18E.
Modest EBITDA margin expansion likely: While improved automotive
demand would aid revenues, gross margin expansion seems unlikely
given the B2B nature of the industrial segment (weak pricing power
versus the decorative segment). As a result, we believe, KNPL is likely to
hold on to FY16 gross margins and factor in modest EBITDA expansion
over FY16-18E. We expect KNPLs FY16-18E EBITDA/PAT CAGR at
15.5%/19%.
Stretched valuation given lower earnings visibility: KNPLs stock price
rose 2.4x in the past two years, led by a sharp 33% EPS CAGR over FY1416E. However, we expect growth to be lower over FY16-18E (EBITDA
CAGR just 15.5%) as most of the RM cost benefits are behind. Given the
inherent cyclicality and inferior operational metrics that the industrial
business brings, upsides from current valuations seem limited. We
initiate coverage with Neutral rating and a DCF target price of Rs313
(implied P/E of 32x FY18E).

Year to 31 Mar
Net sales (Rs m)
FY14
31,753
FY15
35,707
FY16E
38,787
FY17E
44,297
FY18E
51,041
2,080
2,741
3,672
4,463
5,208
539
539
539
539
539
3.9
5.1
6.8
8.3
9.7
17.4
31.8
34.0
21.5
16.7
31.5
Shares in issue (m)
100
Adj. EPS (Rs)
95
% change
90
Apr-14
(%)
KNPL Equity
BSE Sensex
PE (x)
3-mth
6-mth
1-yr
20.1
20.2
36.1
5.6
(5.6)
(9.1)
78.8
59.8
44.6
36.7
Price/ Book (x)
11.5
10.2
7.4
6.5
5.8
EV/ EBITDA (x)
46.9
37.7
26.7
23.0
19.7
RoE (%)
15.3
18.1
19.3
18.9
19.5
RoCE (%)
17.8
20.8
24.3
23.1
23.7
Harit Kapoor
Mehul Desai
91-22-662 22649
91-22-662 22640
INITIATING COVERAGE
INVESTMENT ARGUMENT
KNPL has leveraged its technology/relationships to emerge as the
largest industrial paints company in India with dominance in the
automotive paints category.
Recently, KNPL increased its focus in the decorative paints segment,
gleaning market share from Akzo India and smaller players.
KNPLs prospects in the industrial segment are attractive. However,
within the decorative segment, incremental market share gains seem
challenging given that the top-two players are well entrenched.
Valuations (at 31.5x FY18E earnings) seem stretched considering
lower earnings growth expectations and the inherent cyclicality
emanating from the industrial segment.
We initiate coverage on KNPL with a Neutral rating and a DCF-based
target price of Rs313.
Kansai Nerolac Paints An overview

Different mix Large presence in industrial paints segment
KNPL, a 69% subsidiary of Kansai Paint Co Ltd, Japan, is the third largest
paint company in India by revenues. Incorporated in 1920 and formerly
known as Goodlass Nerolac Paints, KNPL became a subsidiary of Kansai
Paint Co Ltd, Japan, when it acquired the balance 29% stake of the Tata
Forbes Group in the company. Unlike the top two players in the industry,
KNPL has a large presence in the ~Rs110bn industrial paints segment; this
segment accounts for ~45% of its revenues. By revenues, KNPL is the
largest industrial paints company in India.
Exhibit 111: KNPL Key milestones
Goodlass Wall Pvt. Ltd.
went public and established
itself as Goodlass Nerolac
Paints.
1920
1976
1957
Started as Gahagan
Paints and Varnish Co.
Ltd. at Lower Parel
Entered in technical
collaboration agreements
with Kansai Paint Co. Ltd,
Japan
1983
Became a part of Tata

Forbes Group on
acquisition by Forbes
Gokak
Renamed to Kansai Nerolac

Paints Ltd.
1999
Kansai Paint Co. Ltd.,

Japan took over the
entire stake of Tata
Forbes group
2006
Launch of experience zone.

Launched umbrella
campaign for exterior
paints & campaign for
Home painting services.
2012
Entered into JV with

Nepal Shalimar, to
acquire 68% stake in
Nepalese paint major.
2014
2015
Launch of new
impressions range
with HD technology
Effectively leveraging strong global parentage

Kansai Paints, Japan is one of the world's top-10 producers of paints and
coatings for the automotive, industrial, marine, decoration, and other
industries. In 1983, Kansai Paints Co Japan entered into technology
cooperation partnership with erstwhile Goodlass Nerolac Paints, part of
the Tata Group, and Japan's Nihon Tokushu Toryo. In 1986, Kansai Paints
acquired 36% of equity capital in Goodlass Nerolac Paints. As part of its
strategy to expand further in Asian markets, the company went on to
acquire the balance 29% stake of Tata Group in 1999, thereby gaining
majority control in Nerolac Paints.
20 April 2016

Exhibit 112: Kansai Japan: Indias sales share at 18%(FY10)
Asia
18%
Exhibit 113: .increased to 21% in FY15

Africa
12%
Africa
0%
Asia
20%
Japan
47%
India
18%
Japan
64%
India
21%
Exhibit 114: EBITDA contribution at 22% in FY10
Exhibit 115: Steady in FY15, but should move up in FY16
Asia
23%
Africa
0%
Africa
4%
Asia
24%
Japan
50%
Japan
55%
India
22%
India
22%
Strategic manufacturing locations

KNPL has four paint manufacturing plants in India at Jainpur (Uttar
Pradesh), Bawal (Haryana), Lote, Chiplun (Maharashtra), and Hosur (Tamil
Nadu) and a network of 94 depots. The plants are strategically located
close to its key original equipment manufacturer (OEM) clients, thereby
providing a competitive edge in terms of logistics, supply chain efficiency
and just in time service delivery.
Industrial segment Market leader
KNPL continues to remain

the market leader in the
industrial paints business
The industrial paints business is highly technology intensive compared with

the decorative paints segment. This acts as an entry barrier and a
competitive advantage for existing players. KNPL, via leveraging its
parents R&D support, innovations and relationships with global auto
OEMs, continues to remain the market leader in the industrial paints
business.
Robust client relationships

KNPLs parent, Kansai Japan has strong relationships with major global
automotive giants such as Suzuki, Toyota, Honda, etc. Further, most global
MNC players are present in India through their subsidiaries and considering
the strong R&D/technical backing of the parent, KNPL is the leading
vendor for the Indian subsidiaries of these global MNC players. Also, KNPL
is trying to extend its customers to American/European car majors. As per
our understanding, recently Volkswagen moved to KNPL from Asian PaintPPG, which is indicative of KNPLs strong expertise in this segment.
20 April 2016
Strategic tie-ups
In order to improve its overall service offerings through complimentary
technologies, KNPL has entered into various strategic tie-ups in the past.
Currently, KNPL has forged technical collaborations for niche technologies
with players such as Protech Canada (a leading player in powder
coatings), Oshima Kogyo (patent holder for heat resistant paint) and
Cashew Co. Japan. Technical assistance agreements with leading
international players in the coating industry further enhances KNPLs
ability to meet stringent international quality standards.
Exhibit 116: Strategic tie-ups
Company
Technology
Nihon Parkerizing
Body seal and under seal coatings
Valspar Corporation
Powder coatings
PPG International
High performance coatings.
Drew Chemicals Corporation Water and fuel treatment chemicals

Kansai Paints (Japan)
Technology support in architectural/Industrial coatings
Oshima Kogyo
Heat resistant paints
Cashew paints
Aesthetic interior paint for cars
Protech Oxyplast Canada

Powder coatings
Automotive segment Dominant player

Within the industrial segment, KNPL caters to the automotive, general
industrial, high performance and the powder coatings segments. However,
the automotive segment is the largest sub segment for KNPL, contributing
75% to its industrial business in revenue terms. Further, KNPL enjoys ~60%
market share in the automotive segment. KNPL is the leader in the powder
coating segment as well with a formidable 35%+ market share.
Key factors that drive KNPLs competitive advantage in the industrial
paints segment in India are:
Comprehensive portfolio
Complete technical
support from Kansai
Japan has helped drive
innovation for KNPL
KNPL offers a comprehensive painting portfolio to auto makers in India

starting from pre-treatment chemicals, electro deposition primers, and
intermediate coats/primer surfacers, to solid and metallic top coats, clear
coats and touch-up paints. Moreover, complete technical support from
Kansai Japan has helped drive innovation in the automotive segment.
Exhibit 117: Automotive segment Wide product portfolio
Product
Service/usage
Pre-treatment chemicals Improved paint bonding & corrosion resistance

ED technology (E-Coat)
Primer Surfacer
Top Coats
Clear Coats
Uniform coverage, less paint consumption, edge protection

Intermediate coat between E-coat and the topcoats.
Protection against UV ray
Providing colour, aesthetics and weather protection to the
coating system
Top layer in a paint system which provides resistance to
sunlight, weather,
Chemicals and biological materials
Touch-up/Auto refinish
paints
Small touch ups if the paint film is damaged.
Heat Resistant paints
Interior & exterior surfaces of motorcycle mufflers,

withstanding up to 600 degrees
Underbody paints/PVC
Imparts anti chipping and sound deadening properties.
Sealants
Rapgaurd Transit
Protection of automotive vehicles during transit from dust,
protection films
chemicals
20 April 2016
Strong clientele base

Within the automotive segment, KNPL has a large and marquee clientele in
the four-wheeler and two-wheeler space, comprising major auto players
such as Maruti Suzuki (MSIL), Honda, Toyota, Volvo, M&M, Bajaj Auto, TVS
Motors etc.
In-house R&D
KNPL has a well-equipped colour R&D centre at Lower Parel, Mumbai,
backed by Kansai Paint Co., Japan, catering to specific needs of the OEM
industry for newer shades and finishes. The colour development cell of
KNPL organises colour presentations at customer locations and follows it
up with development to standardisation. Kansai Paint Co Japan spends
1.5% of its global revenues on R&D, the benefit of which accrues to the
Indian entity.
Exhibit 118: R&D spend for Kansai Global has steadily increased from CY12
R&D expense (Yen bn - LHS)
% to sales (RHS)
5.6
4.0%
5.4
3.0%
5.2
2.0%
5.0
1.0%
4.8
0.0%
CY11
CY12
CY13
CY14
CY15

Exhibit 119: and so has India R&D expense
R&D expenses for India (Yen m)
350.0
280.0
210.0
140.0
70.0
0.0
CY11
CY12
CY13
CY14
CY15
Automotive industry Outlook healthy

We take a deeper look into the automotive industry in India to understand
KNPLs key user segment.
Growth for passenger cars to see an uptick

Crisil expects FY17 volume growth for passenger cars to see an uptick, led
by improved affordability (from lower interest rates, falling fuel prices and
some external factors such as the seventh pay commission and OROP payout). As per Crisil estimates, passenger cars are likely to grow a healthy 1315%, with utility vehicles (UVs) growing by 11-13% in FY17E.
20 April 2016

Exhibit 120: Passenger cars Volume growth pick-up to sustain
3.0
Total Passenger Vehicles (nos - LHS)
Volume growth (RHS)

30.0%
2.3
20.0%
1.5
10.0%
0.8
0.0%
0.0
-10.0%
FY06 FY07 FY08 FY09 FY10
FY11
FY12
FY13
FY14
FY15
Two-wheelers Scooters to outperform industry growth

Crisil expects motorcycles to grow at 9-11% in FY17E, while scooters with
17-18% growth would continue to outperform the industry growth. The
growth rate is based on normal monsoons, off a relatively low base. The
growth will likely be back ended with the first half being weak.
Exhibit 121: Two wheelers Growth to remain steady, though mix could change
Total Two wheelers (nos - LHS)
18.00
Volume growth (RHS)

30.0%
14.40
21.0%
10.80
12.0%
7.20
3.0%
3.60
-6.0%
0.00
-15.0%
FY11
FY12
FY13
FY14
FY15
Analysing a key clients prospects MSIL

MSIL is KNPLs largest automotive OEM client. As per IDFC Securities
Research, MSIL would continue to maintain ahead-of-industry growth in
FY17, led by double-digit volume growth. Moreover, incremental volumes
from launches (compact SUV Brezza) would aid overall volume growth.
Strong growth in MSILs

passenger cars volumes
would boost KNPLs
automotive paint segment
MSIL is well placed to benefit from the uptick in the passenger car
segment, given its robust product line-up and strong competitive position.
Also, the recent excise hike could result in a favourable shift towards the
small petrol car segment, which is MSILs strongest segment. The company
could be one of the biggest beneficiaries of the seventh pay commission.
As MSIL is the largest client of KNPL, strong growth in MSILs passenger
cars volumes would boost KNPLs automotive paint segment (Exhibit 13).
IDFC Research estimates a 14% volume growth CAGR for MSIL over FY1618E.
20 April 2016

Exhibit 122: Strong correlation between passenger car and KNPLs growths
Asian Paints
18.0
21.5
20.1
24.0
22.3
15.3
25.0
13.6
16.2
Berger Paints
19.5
19.3
14.5
16.2
16.5
23.8
25.9
13.5
15.6
11.5
11.7
Kansai Nerolac
15.7
21.1
8.0
4.1
24.1
24.6
21.6
10.2
11.4
12.5
Akzo Nobel
Passenger car volume
growth
16.2
1.4
4.7
-3.2
4.3
15.9
78.6
12.2
8.8
4.1
8.0
20.5
9.8
1.6
24.4
27.1
4.7
2.3
-5.6
5.1

Exhibit 123: MSIL to outperform industry volume growth
Maruti Sales volume (mn units - LHS)
Volume growth (RHS)
2.0
30.0%
1.6
21.0%
1.2
12.0%
0.8
3.0%
0.4
-6.0%
0.0
-15.0%
FY06
FY08
FY10
FY12
FY14
FY16
FY18E
Decorative paints Gaining ground

The industrial paint segment is a relatively low-margin business
considering its B2B nature and limited pricing power with the supplier.
KNPL derives 45% of its sales from the segment versus APNTs 5%,
Bergers 20% and Akzos 35%. As a result, KNPLs revenue growth has
been lower versus the top two players in the domestic paint industry.
KNPLs FY11-15 revenue CAGR stood at 13.5% versus 16% CAGR for APNT
and Berger Paints.
Exhibit 124: Revenue growth A comparison
(%)
Asian Paints
Berger Paints
Kansai Nerolac
30
25
20
15
10
5
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
20 April 2016

Exhibit 125: Lower decorative mix versus peers
(%)
120
90
Decorative
6.0
Industrial
20.0
45.0
40.0
55.0
60.0
Kansai Nerolac
Akzo Nobel
60
94.0
80.0
30
0
Asian Paints
(Domestic)
Berger Paints - Std
Till late 1990s, KNPL was recognised only as an industrial paints company.
However, a change in market dynamics due to the entry of global players
post liberalisation led to increased competition and low profitability for
KNPL. Consequently, the company, in 2000, increased its focus on the
decorative paints segment to offset the weakness in the industrial paint
segment. Moreover, to build its brand equity/product portfolio in the
decorative segment, KNPL ramped up its distribution network/supply
chain and focused on R&D and innovation.
Currently, KNPL is third largest player in the decorative paint segment
(55% of sales) with a market share of ~11% the company has undertaken
several initiatives to drive market share gains in the segment.
Unique product positioning

KNPL has created a unique
eco-friendly branding
Over the past 15 years, KNPL has created a unique eco-friendly branding
healthy home paints under Nerolac. Further, the launch of lead-free paints
in 2006 and low VOC products, ahead of competition, differentiated
KNPLs product offerings.
Exhibit 126: Marketing activities undertaken to build brand equity
Year
2000
2003
2010-11
Marketing campaign
Strong campaign through "Jab ghar ki raunak
sajani ho" jingle
Celeb led promotion, roped in Amitabh
Bachchan
Sharukh Khan roped in as new brand
ambassador
Positioning
Beauty
Colors
Healthy, eco-friendly home
paint
Improved product mix

KNPL improved its
decorative margins, thus
partially offsetting the
weakness in the industrial
segment
Five years back, KNPLs industrial margins were higher than decorative
margins as contribution from high-margin emulsion sales was low. In the
past 5-6 years, the company has increased its share of emulsion products
to 35% of decorative paint sales (from ~8-10%) Enamel accounts for 30%
while low-margin distemper now accounts for only ~10-12% of decorative
paint sales. With improvement in the overall product mix, KNPL improved
its decorative margins, thus partially offsetting the weakness in the
profitability of the industrial segment.
20 April 2016

Exhibit 127: KNPLs Decorative segment mix
Enamel
17%
Distemper
7%
Industrial
paints
45%
Decoratives
55%
Emulsions
19%
Others
12%
Improved product offerings through innovations

KNPL, through innovation in product/service delivery, has improved its
offerings in the decorative segment. Moreover, the company continues to
engage with influencers across the value chain through special
programmes such as Archedge for Architects and Painter Loyalty, thereby
leveraging its connect to drive growth.
Product innovations: KNPL has backed its key innovations with media
spends. Some key innovations are: i) High Definition Impressions HD
paints and Impressions Ideaz in the premium segment; ii) Low VOC
products for the eco-friendly paint range and iii) economy paints
under the Soldier brand (specially targeting the rural segment).
Exhibit 128: Key innovations

Brand
Impressions HD
Key remarks
High definition technology paints with Micro-Embedded Brightness
Boosters
Impressions Ideaz Designer wall finishes

Healthy home
paints
Soldier
Low VOC lead free products

New brand targeting rural segment
Statue paint
Economy emulsions for painting statues
Service delivery: KNPL has taken several initiatives in service delivery

to improve customer experience and provide value for money. The
company was also the first player to tie up with Flipkart for its
product/services. However, this arrangement is no longer active.
Exhibit 129: Evident focus on service delivery

Service format
Key comments
Impression Style Exclusive retail shops equipped with a workstation and trained
Zones
Nerolac Color
Stylers
Nerolac Home
Stylers
E-commerce
associates, which allow consumers to experiment with colours

Shop-in-shop format franchise stores
End-to-end professional painting services
First company to tie up with Flipkart, though this arrangement is no
longer active
20 April 2016

Exhibit 130: Engagement with influencers
Program
Key comment
Nerolac premium
Painter reward programme (health check-
painter
ups/insurance/scholarships)
Archedge
Architecture engagement, networking and loyalty program with

Focus on sustainability
Rangshala
Programme for painters to learn and grow with Nerolac
Other strategic initiatives

Capex plans
KNPL plans to set up a paint manufacturing unit at Sayakha Industrial
Estate in Gujarat at Rs3.5bn with 42,000MT annual capacity (can be
expanded in two phases). In July-15, the board approved a manufacturing
unit in Goindwal Sahib, Punjab (38,000MT/year capacity at Rs1.8bn capex).
A global R&D centre at Navi Mumbai (capex of Rs400m) was also
approved. All such initiatives are likely to further improve KNPLs
competitive positioning in the market.
Sale of Chennai land

In July-13, KNPL closed down its factory at Perungudi, Chennai as the unit
was old with outdated and unproductive machinery. Recently, the
company monetised the asset, with land sale (~15acres) to Brigade
Properties (formed by the Brigade Group and GIC Singapore) for Rs5.5bn.
The company plans to use part of the proceeds from the land deal for its
greenfield expansion.
JV with Maharaja Group

In Jan-15, KNPL entered into a JV agreement with Capital Holdings
Maharaja Pvt. Ltd., a group company in the Maharaja Group, at an
estimated total project cost of Sri Lankan rupees 650m. The equity
contribution of KNPL in this proposed JV would be 60%, amounting to
390m SLR (Rs184m). The Maharaja Group is a diversified group in Sri
Lanka with presence in businesses such as media, hardware, FMCG
products, etc. KNPL seeks to leverage the Maharaja Groups strong
presence in hardware outlets to tap the paint market in Sri Lanka.
Financial overview
Gross margin expansion to continue through H1FY17
KNPLs revenue growth/profitability is cyclical in nature versus peers given
the companys higher revenue contribution from the industrial segment.
Further, despite improvement in the decorative segment, KNPLs average
gross margins declined to ~33% from ~37% in FY05-10, largely impacted by
weakness in the industrial segment.
For KNPL, 55-60% of its raw materials are crude linked and titanium
dioxide accounts for 10% of the total raw material cost. In the past five
quarters, the benefit of lower crude oil prices and a pick-up in the
passenger car segment have resulted in sharper gross margin expansion
(630bp in Q3FY16 to ~38.9%). With benign titanium oxide prices and crude
oil remaining at steady US$40-45 levels, we expect the gross margin
expansion trajectory to continue through H1FY17.
20 April 2016

Exhibit 131: Gross margin over the past eight quarters
Gross margins
40.0%
37.5%
35.0%
32.5%
30.0%
Q4FY14
Q1FY15
Q2FY15 Q3FY15 Q4FY15
Q1FY16
Q2FY16 Q3FY16
Given the B2B nature of the industrial business, customers are likely to
demand lower pricing in an environment of deflation. Hence a
disproportionate increase in industrial margins is unlikely. Analysing
APNTs financials, we understand that the difference in industrial and
decorative gross margins can be as high as 800bp (difference between
standalone and JV profitability) with decorative margins being higher.
Hence, we believe that KNPL will do well to hold on to the gross margins
achieved in FY16. We factor in no expansion in gross margins for KNPL
over FY16-18E. Any improvement will only be a function of improved mix
of decorative paints versus industrial paints, only if industrial margins
remain healthy.
Exhibit 132: Raw material break-up
Pigments,
Extenders and
Resins
45%
Organic Acids
6%
Packaging
material
12%
Raw material
consumed
88%
Others
6%
Solvents, Oils
and Fatty Acids
31%
20 April 2016
We estimate FY16-18E revenue CAGR at 14.7%

Increased contribution
from the decorative
segment to act as a key
growth trigger
KNPLs FY11-15 standalone revenue CAGR stood at 13.5%, lower versus that
for APNT and Berger, largely on weakness in the industrial/automotive
paint segments. These segments account for ~45% of KNPLs sales. With
steady growth in automotive demand and MSIL (a key client), and inflation
led price increases, we expect KNPLs sales trajectory to improve. Further,
increased contribution from the decorative segment could act as a key
trigger (though a challenge given the strength of the top two players). We
estimate revenues to grow at a CAGR of 14.7% over FY16-18E.
Exhibit 133: Return of pricing and higher volume growth to drive revenues
YoY (% - RHS)
60.0
28.0%
45.0
21.0%
30.0
14.0%
15.0
7.0%
0.0
0.0%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
EBITDA margin expansion to be muted over FY16-18E

KNPLs gross margin has been lower versus peers due to higher share of
the low-margin industrial paint segment. Further, KNPLs FY10-15 gross
margin declined 240bps (against a rise for leading industry players) due to
an unfavorable revenue mix and pressure in the industrial paints business.
IN spite of the recent increase in gross margins, they remain 600-900bp
lower than peers owing to its industrial mix. We do not expect further
expansion from current levels as KNPL would have to pass on the input
cost benefit to OEMs in the automotive paints segment. Hence, operating
profit growth will not be very different from the companys revenue
growth trajectory. PAT growth will be higher given the additional other
income that will be generated from its recent land sale which fetched the
company Rs5.4bn. We estimate EBITDA/PAT CAGR at 15.5%/19% in FY1618E.
Exhibit 134: Consolidated EBITDA and EBITDA growth
YoY (% - RHS)
10.0
40.0%
8.0
30.0%
6.0
20.0%
4.0
10.0%
2.0
0.0%
-10.0%
0.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
20 April 2016

Exhibit 135: Margins rose in FY16; we expect modest increase hereon
50.0
20.0
40.0
15.0
30.0
10.0
20.0
5.0
10.0
0.0
0.0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E

Exhibit 136: Earnings CAGR at 19% over FY16-18E
PAT (Rs bn - LHS)
YoY (% - RHS)
6.0
40.0%
4.5
25.0%
3.0
10.0%
1.5
-5.0%
0.0
-20.0%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Working capital intensity to remain high

KNPLs working capital intensity has been the highest among the industry.
This has been on the back of higher contribution
from
the
industrial
segment, wherein inventory/debtor days are higher versus the decorative
segment. Going forward, we do not foresee substantial reduction in
working capital intensity as the revenue mix is unlikely to shift to
decorative significantly.
Exhibit 137: Working capital to remain high
Days of revenue
FY10
FY11
Debtor
50
45
Creditors
63
55
Inventory
53
61
Loans & advances
10
11
Other CL
Net working capital
FY12
FY13
FY14
FY15 FY16E FY17E FY18E
51
54
52
51
50
50
38
50
51
33
31
31
31
64
68
74
55
55
55
55
10
11
12
50
13
48
54
72
72
76
74
78
79
81
Source: IDFC Securities Research, Company
One-time dividend from land sale possible

Given that KNPL is a debt free company, Rs5.4bn received from the land
sale could result in a one-time dividend of Rs10. This along with normal
dividend could imply a 4% dividend yield. However, the management has
not alluded to the same at present.
20 April 2016
Improvement in return ratios to be gradual

Given KNPLs lower profitability and working capital metrics, return ratios
have also been lower than the market leader. We expect a gradual
improvement in return ratios, but the inherent nature of KNPLs business
will not allow its return ratios to reach the market leaders 45%+ levels.
Exhibit 138: Return ratios: Steady improvement, but touching APNTs levels unlikely
(%)
ROE
ROCE
40.0
30.0
20.0
10.0
FY17E
FY18E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
0.0
FY17E
FY18E

Exhibit 139: Steady improvement in operating and free cash flows
CFO
(Rs bn)
FCF
6.0
4.5
3.0
1.5
0.0
-1.5
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
Valuation & view

We believe structural growth tailwinds exist for the Indian paints industry.
As a result, volume growth will likely be ahead of other broad consumer
faced by some other industries (staples: intensifying competition and
higher penetration, retail; e-commerce threat, cigarettes and alcoholic
beverages; regulation-led issues in) are absent for the paints industry.
Hence, we believe that the broader paints industry players deserve
premium multiples to other consumer segments.
Valuations expensive given inherent cyclicality and financial

metrics
KNPLs stock price moved up 2.4x in the past two years, led by a sharp
uptick in earnings/volume growth off a low base and benign input costs
(33% EPS CAGR over FY14-16E). We expect growth to now be more
gradual as most of the RM benefits are behind. As a result, we factor in 19%
earnings CAGR over FY16-18E.
20 April 2016
Initiate with Neutral

We value KNPL on DCF and arrive at a target price of Rs313 (implying a
32x FY18E P/E). At the current market price, the stock trades at 31.5x
FY18E earnings, at a premium to Berger Paints and a marginal discount to
APNT. Given the inherent cyclicality and inferior metrics of the business,
we believe upsides from current valuations are limited, which is reflected in
our DCF valuation.
Though positives exist in the form of robust industrial paints segment and
increased decorative push, stretched valuations and the inherent cyclicality
of the business are key concerns. We initiate coverage on KNPL with a
Neutral rating. We recommend waiting for a better opportunity to enter
the stock and prefer APNT and Berger Paints at current levels.
Exhibit 140:
DCF based target price of Rs313
Rs m
Sales
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY28E
35,707
38,787
44,297
51,041
59,208
68,503
2,00,235
8.6%
14.2%
15.2%
16.0%
15.7%
14%
4,349
6,002
6,927
8,003
9,414
11,029
35,442
12.2%
15.5%
15.6%
15.7%
15.9%
16.1%
17.7%
(683)
(756)
(856)
(956)
(1,006)
(1,056)
(1,456)
4,044
5,401
6,563
7,659
9,000
10,658
35,454
1,283
1,728
2,100
2,451
2,970
3,517
11,700
(588)
(2,000)
(2,000)
(2,000)
(1,000)
(1,000)
(1,000)
(820)
(1,080)
(1,338)
(1,192)
(1,377)
(2,407)
1,608
2,238
2,826
4,844
5,820
21,803
1.0
0.9
0.8
0.3
4,325
4,639
1,12,320
Sales growth
EBITDA
EBITDA margin
Depreciation
EBIT
Current tax
Capex
Change in WC
FCF
discount factor
WACC
Terminal value
12.0%
57,381
5.0%
3,27,045
1,05,300

Net debt (Mar'18)
Equity value
DCF based value per share
(Rs)
1,62,681
6,250
1,68,930
313
539
20 April 2016

Exhibit 141: While P/E is in line with industry leader
(x)
Exhibit 142: PEG is the highest among top four players

(x)
PE (FY18E)
35.0
2.0
28.0
1.5
PEG
21.0
1.0
14.0
0.5
7.0
0.0
0.0
Kansai
Nerolac
Berger
paints
Kansai
Nerolac
Berger
paints
Exhibit 143: Five-year average P/E at 28x

PE (x)
Avg. PE
(x)
+ 1 Std. Dev.
- 1 Std. Dev.
40
Exhibit 144: Five-year average EV/EBITDA at 17x

EV/EBITDA
Avg. EV/EBITDA
(x)
+ 1 Std. Dev.
- 1 Std. Dev.
25
20
30
15
20
10
10
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
0
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
20 April 2016

Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Operating expenses
EBITDA
% change
Other income
Key ratios
FY15
FY14
31,753
35,707
FY16E
38,787
FY17E
44,297
FY14
FY15
FY16E
FY17E
EBITDA margin (%)
11.0
12.2
15.5
15.6
15.7
51,041
EBIT margin (%)
8.9
10.3
13.5
13.7
13.8
PAT margin (%)
6.5
7.7
9.5
10.1
10.2
RoE (%)
15.3
18.1
19.3
18.9
19.5
RoCE (%)
17.8
20.8
24.3
23.1
23.7
Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)
0.0
0.0
(0.2)
(0.2)
(0.2)
0.0
0.0
(0.7)
(0.7)
(0.8)
0.4
1.5
3.3
1.6
2.1
Dividend yield (%)
(0.4)
(0.5)
(0.7)
(0.8)
(1.0)
FY18E
11.4
12.5
8.6
14.2
15.2
28,259
31,358
32,785
37,369
43,038
3,493
4,349
6,002
6,927
8,003
8.9
24.5
38.0
15.4
15.5
278
378
155
492
611
Net interest
(18)
(9)
Depreciation
655
683
756
856
956
Pre-tax profit
FY18E
3,098
4,035
5,401
6,563
Deferred tax
229
105
108
131
153
Current tax
783
1,178
1,620
1,969
2,298
Valuations
2,087
2,752
3,672
4,463
5,208
Year to 31 Mar
FY14
FY15
FY16E
FY17E
FY18E
Reported EPS (Rs)
3.9
5.1
13.6
8.3
9.7
(7)
(11)
Adj. EPS (Rs)
3.9
5.1
6.8
8.3
9.7
2,080
2,741
3,672
4,463
5,208
78.8
59.8
44.6
36.7
31.5
Price/ Book (x)
11.5
10.2
7.4
6.5
5.8
EV/ Net sales (x)
5.2
4.6
4.1
3.6
3.1
46.9
37.7
26.7
23.0
19.7
9.8
8.8
6.5
5.7
5.0
Profit after tax

Preference dividend
Minorities
Adjusted net profit
7,659
Year to 31 Mar
Non-recurring items
3,658
Reported net profit
2,080
2,741
7,331
4,463
5,208
% change
(29.1)
31.8
167.5
(39.1)
16.7
PE (x)
EV/ EBITDA (x)

EV/ CE (x)
Balance sheet
As on 31 Mar (Rs
m)
Paid-up capital
Preference capital
Reserves & surplus
Shareholders'
equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets
FY14
FY15
FY16E
FY17E
FY18E
539
539
539
539
539
13,718
15,476
21,545
24,495
27,811
14,295
16,064
22,134
25,083
28,400
6,141
5,183
5,341
6,016
6,813
619
503
503
503
503
662
754
754
754
754
1,079
1,226
1,325
1,584
1,970
8,500
7,666
7,923
8,857
10,040
22,795
23,730
30,057
33,941
38,440
9,675
9,581
10,825
11,969
13,013
Investments
486
2,077
2,077
2,077
2,077
Cash
553
345
4,449
5,433
6,753
12,059
11,705
12,683
14,439
16,574

Deferred tax assets
Other non-current
assets
Net working capital
23
23
23
23
23
6,471
6,867
11,792
13,856
16,514
22,795
23,730
30,057
33,941
38,440
Year to 31 Mar (Rs

m)
FY14
FY15
FY16E
FY17E
FY18E
Pre-tax profit
3,098
4,035
5,401
6,563
7,659
Depreciation
Chg in Working
capital
Total tax paid
(655)
(683)
(756)
(856)
(956)
Total assets
Net sales trend
Cash flow
(890)
(604)
(820)
(1,080)
(1,338)
(783)
(1,178)
(1,620)
(1,969)
(2,298)
Interest Received
Ext ord. Items

Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments
3,658
1,991
3,091
7,474
4,628
5,365
(1,254)
(588)
(2,000)
(2,000)
(2,000)
719
2,493
5,474
2,628
3,365
41
(1,591)
(130)
(116)
(18)
(9)
694
912
1,261
1,514
1,892
(1,386)
(1,907)
(2,631)
(3,158)
(3,937)
(62)
(208)
4,105
984
1,320
Interest Paid
Capital
raised/(repaid)
Other items
Net chg in cash
As of Dec 15
20 April 2016
In rationalisation mode
NEUTRAL
Akzo Nobel India (Akzo), despite its strong parentage, has remained a
distant number four player in the domestic paints market with just ~11%
market share. Given the companys limited decorative range and its
current focus to rationalise the portfolio, we expect Akzos growth to
continue to lag peers. Consequently, we expect the company to post
just 13% earnings CAGR (19%/30% for APNT/Berger) over FY16-18E.
Though Akzo trades at a 20-25% discount to peers, we do not expect
this gap to reduce until growth visibility and operational metrics
improve. We initiate coverage on Akzo with Neutral rating and a DCFbased target price of Rs1,442.
20 April 2016
BSE Sensex: 25844
Sector: Paints
Stock data
CMP (Rs)
1,345
64.5 /974
Target Price (Rs)
1,442
Change in TP (%)
NA
7.2
Earnings change (%)
Underperformance to continue versus peers Akzo has underperformed

peers owing to a limited product range, especially in the decorative
segment, and given one-sixth the distribution reach of the market leader.
Moreover, lacklustre volume growth, lower capacity utilisation and higher
share of low-margin industrial segment will keep the companys
profitability significantly below peers. Also, given the higher cyclicality in
its product portfolio due to 40% of the business coming from the
industrial segment, we expect Akzo to be more prone to fluctuations in
profitability. We expect a 5-6% volume CAGR over FY16-18E which will
be significantly below peers.
FY16E
FY17E
FY18E
Bloomberg code
AKZO IN
1-yr high/low (Rs)
1,549/1,201

(Rsm/USDm)
16.2/0.2
48.0
Free float (%)
27.0
73

Akzo Nobel India
Sensex
110
105
despite presence of a favourable environment: The environment remains

favourable given improving consumer sentiment, Akzos strong global
parentage, lower raw material prices and the companys healthy cash
position. However, lack of urgency in re-engineering the global portfolio to
suit Indian needs and inability to use its cash position for accretive
acquisitions have led to continued underperformance in growth, which we
expect to continue through FY16-18E.
Valuation discount justified Initiate with Neutral: Despite Akzos strong
parentage, below-peer revenue CAGR of 11%, market share loss and
weaker margin profile would continue to drag medium-term earnings
growth. Given the inferior metrics versus peers, we believe the valuation
discount (20-27% to peers) is justified. Our DCF-based target price for
Akzo is Rs1,442, implying a 25.5x P/E on FY18E earnings. Initiate with
Neutral.

Year to 31 Mar
Net sales (Rs m)
Shares in issue (m)
100
Adj. EPS (Rs)
95
% change
90
Apr-14
(%)
PE (x)
3-mth
6-mth
1-yr
AKZO Equity
4.3
(3.3)
(4.8)
BSE Sensex
5.6
(5.6)
(9.1)
FY14
24,179
FY15
25,270
FY16E
27,053
FY17E
29,568
FY18E
33,049
1,502
1,836
2,069
2,274
2,647
47
47
47
47
47
32.2
39.3
44.3
48.7
56.7
(31.4)
22.2
12.7
9.9
16.4
23.7
41.8
34.2
30.4
27.6
Price/ Book (x)
7.4
6.8
6.3
5.7
5.2
EV/ EBITDA (x)
29.4
22.5
19.1
17.0
14.3
RoE (%)
15.4
20.8
21.5
21.7
23.1
RoCE (%)
12.6
19.4
22.5
25.7
28.0
Harit Kapoor
Mehul Desai
91-22-662 22649
91-22-662 22640
INITIATING COVERAGE
Akzo Nobel India
Akzo Nobel India
INVESTMENT ARGUMENT
Akzo Nobel India, a 73% subsidiary of Akzo Nobel, remains a distant
number four player in the Indian paints industry.
In the past two years, focus on improving profitability led to market
share losses to the top-three players. We expect this trend to
continue for Akzo until it achieves its stated 12% EBITDA margin
target.
We find Akzos premium positioning in the decorative paints segment
attractive. Also, the company is on track to achieve its profitability
target over FY16-18E, led by rationalisation of its portfolio.
However, Akzos inability to successfully leverage its parents
portfolio and a higher industrial mix are key concerns.
We believe Akzos steep 27% valuation discount to APNT is warranted
given the companys subdued growth visibility and inferior
operational metrics. We initiate coverage with Neutral and DCF target
price of Rs1,442.
Akzo India Underperformance to continue

A distant number four in India despite strong parentage
Akzo Nobel India is a 73% subsidiary of Akzo Nobel, one of the two largest
coating companies globally. The Indian entity, earlier ICI India, came into
Akzo Nobels fold when Akzo Nobel acquired ICI in 2008. Since then, Akzo
Nobel has consolidated its India entities (in 2011) into one listed entity,
which houses all its India coatings (decorative and industrial) and specialty
chemicals businesses. The company is in the decorative market through
the Dulux brand and has several brands catering to the industrial
segment.
Exhibit 145: Akzo India Key milestones since the companys inception
Commissioned polyester plant in
Thane(exited in 1993),paint &
rubber plant in Rishra(exited in
2005),urea facility in
Kanpur(exited in 1993), paint
plant in Hyderabad
1954-63
1964-74
Incorporated as Indian
Explosives Limited in West
Bengal, for manufacture of
commercial blasting
explosives, safety fuses
Set up Dulux color centre in

key markets.
Exited agrochem unit.
Commissioned surfactants
unit in Thane
1975-86
1987-95
Set up R&D centre in

Thane.
Established agrochemical &
pharma units (exited in
2002) in Chennai.
Amalgamated 3 ICI
companies
Set up R&D centre at

Banglore, Introduced 5 in 1
supergloss enamel, Dulux
weathershield max
1996-99
2000-09
Commissioned paint plants

in Thane & Mohali. Acquired
Courtaulds Coatings facility
in Bangalore
2010-14
Changed name to Akzo

Nobel, Merged 3 Akzonobel
companies to create
coatings powerhouse,
Commissioned water based
paint plant at Gwalior
20 April 2016
Akzo Nobel India

Exhibit 146: Akzos key brands in decorative/industrial paint segments
Akzo Nobel is present in over 80 countries, with ~200 production sites and
leadership in many markets. Two-thirds of its revenues are from the
coatings business, with one-third coming in from the specialty chemicals
business. In spite of its strong parentage, however, the India entity is only
the fourth largest coatings company in the country. Revenue-wise, the
company is just one-fifth the size of the largest player, APNT.
Exhibit 147: Akzo Global Segment-wise presence
Global
General
Akzo Nobel
Architecture
coatings
Industrial
Industry Size($
48.0
35.0
bn)
Global Position
2
1
1
Protective
& Marine
Refinish/
Collision
Auto
Packaging
OEM
13.0
7.0
9.0
3.0
1.0
Aerospace

Exhibit 148: Akzo India Share of revenues among top four players
Akzo
Nobel
11%
Kansai
Nerolac
16%
Asian Paints
56%
Berger
17%
20 April 2016
Akzo Nobel India
Revenue growth to lag peers

In 2011, when all three Akzo Nobel group companies in India were merged
with Akzo Nobel India, the managements vision was to achieve EUR1bn
(Rs60bn) revenues by 2015, benefitting from combined synergies.
However, in the next two years, Akzos revenue CAGR stood at 10%, lower
than the top two players, impacted by an industrial segment slowdown
and some share loss to the top two players in the decorative segment.
Also, EBITDA margins declined from 8.8% to 7.9% from FY12-14.
The managements target
is to achieve 12% EBITDA
margins by FY18
Since then, the focus has shifted to improving profitability, which is more a
global mandate now. Consequently, EBITDA margin improved to 10.3% in
FY15 and we expect it to rise to 11.3% in FY16. The managements target is
to achieve 12% EBITDA margins by FY18 and Akzo is likely to give up some
revenue growth to improve its product mix and gross margins. We believe,
for a distant number four player, achieving ahead-of-industry revenue
growth without conceding on profitability is likely to be a challenge. Over
the next 18-24 months, Akzos revenue growth should lag peers as focus
continues on profit improvement.
Exhibit 149: Revenue growth trajectory lower than peers

Asian Paints
(% yoy)
Exhibit 150: EBITDA margins have dipped since FY11
Berger Paints
Kansai Nerolac
(%)
Akzo Nobel
Asian Paints
Berger Paints
Kansai Nerolac
Akzo Nobel
20.0
85.0
65.0
15.0
45.0
25.0
10.0
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
5.0
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
-15.0
FY06
5.0
Higher cyclicality; lower margin profile after merger

Given higher cyclicality in
Akzos portfolio, we
expect the company to be
more prone to fluctuations
in profitability
Pre-merger, 20% of Akzos revenues came in from the industrial business,

specifically the vehicle refinish segment. However, post the merger, this
contribution increased to 40-45% from industrial sub segments such as
protective, metal (coil), marine, powder, protective and specialty coatings.
The EBITDA margin profile came off in FY12 to 8.8% from 12.1% pre-merger
as the entities were integrated led by lower margins in the industrial
business. The EBITDA margins have not yet recovered to FY11 levels and
given the higher cyclicality in its portfolio, we expect Akzo to be more
prone to fluctuations in profitability going forward.
Exhibit 151: Akzo Nobel India Revenue and EBITDA trajectory
Revenue growth`(% - LHS)
90.0
14.0
65.0
10.5
40.0
7.0
15.0
3.5
-10.0
0.0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
20 April 2016
Akzo Nobel India
.despite presence of favourable environment

Re-engineering needed to plug in India portfolio gaps
Within the decorative segment, historically, Akzo has been more
prominent in the premium segment with a 20% market share through its
brand Dulux. However, its overall share in the domestic market is ~11%.
Previously, Akzo, attempted to tap the mass distemper segment through
ICI Magik, though it failed to gain adequate traction.
Akzo is focusing on India
specific re-engineering to
introduce products at
competitive price points
Going forward, the parents portfolio offers scope for new

products/technology, but most products are over-engineered, in line with
US/European standards. Nevertheless, the management is focusing on
India specific re-engineering so that the products can be introduced at
competitive price points. However, we expect the benefits from new
product launches to be spread over the next 2-3 years.
Exhibit 152: Decorative paints Product range under Dulux brand

Exhibit 153: Focus on innovations and premiumisation
Capabilities in place to augment volumes

Akzo owns six plants in India one each in Mohali, Gwalior, Bengaluru and
Hyderabad and two near Mumbai. The companys current capacity is
~230m litres, implying ~70% capacity utilisation. Given that volume growth
is unlikely to exceed 10% annually, Akzo is unlikely to spend on major
capex in the next 18-24 months. Further, Akzos staff costs as a percentage
to sales are higher versus peers. On an absolute basis too, staff cost is
higher than that for Berger Paints/KNPL due to higher legacy salaries and
increased salary cost of the entities merged in FY12. We believe that at the
current opex level, Akzo can augment volumes by 50% in the long term.
However, in the medium term, higher operational costs and lower capacity
utilisations will keep profitability significantly below peers.
20 April 2016
Akzo Nobel India

Exhibit 154: Adequate manufacturing capabilities

Exhibit 155: Higher staff cost compared with peers
Staff cost (% to sales FY15)
9.00
6.00
3.00
0.00
Akzo Nobel
Asian Paints
Berger Paints
Kansai Nerolac

Exhibit 156: Strong gross margins due to premium mix
(% yoy)
Asian Paints
Berger Paints
Kansai Nerolac
Akzo Nobel
Exhibit 157: EBITDA margins however lag peers

(%)
Asian Paints
Berger Paints
Kansai Nerolac
Akzo Nobel
20.0
50.0
45.0
15.0
40.0
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
5.0
FY07
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
30.0
FY06
10.0
35.0
20 April 2016
Akzo Nobel India
Strong cash position Acquisitions a possibility

In FY15, Akzo had ~Rs4bn net cash (including marketable securities) on
books. Continued healthy operating cash generation and lower capex are
likely to result in increased cash pile once again. We estimate cash and
cash equivalents to be ~Rs6.5bn by FY18E end.
Excess cash can be
utilised for special
dividends and acquisitions
In FY13 and FY14, Akzo paid dividends of Rs80 and Rs75/share (170% and
230% dividend pay-out ratio) as cash pile had moved up to Rs9.5bn. In
FY15, however, the dividend payout normalised to 50%. We believe excess
cash can be utilised for: 1) a special dividend component, as was the case
in FY13/14 and 2) acquisitions. Acquisition targets in the decorative
segment are hard to find, but the industrial segment could offer some
opportunities (indigenous players that have created a niche in specific
segments).
Exhibit 158: Cash position expected to strengthen
Exhibit 159: Special dividends in FY13/14
Cash & CE (Rs bn)
DPS (Rs)
12.0
Special DPS (Rs)
90
9.0
60
6.0
30
3.0
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY18
FY17
FY16
FY15
FY13
FY14
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY06
0.0
Lower raw material prices to drive gross margins

We factor in 20bp gross
margin expansion over
FY16-18E
About 30-35% of Akzos raw material is crude linked and titanium dioxide
constitutes 13% of its total raw material consumed. Currently, titanium
dioxide prices are marginally lower versus last year levels. Further, the
benefits of lower RM prices have reflected in improved gross margins for
the industry and Akzo from Q3FY15. Assuming that crude oil prices stay at
current levels of US$40/bbl and led by continued rationalisation (to
improve mix), we expect gross margin expansion to sustain. Consequently,
we factor in 20bp gross margin expansion over FY16-18E.
Exhibit 160: Input cost scenario favourable
Exhibit 161: Raw material cost break-up

Titanium
Dioxide
13%
Raw material (% to sales)

64.0
60.5
Packing
materials
11%
57.0
53.5
Q3FY16
Q2FY16
Q1FY16
Q3FY15
Q4FY15
Q2FY15
Q1FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
Solvents
12%
FY06
50.0
Others
15%
Pigments /
Extenders
/ Tinters
15%
Resins
21%
Latex,
Monomers
13%
20 April 2016
Akzo Nobel India
Financial analysis
Revenue growth to pick up but still lag peers
Akzos FY13-16E revenue CAGR stood at 6.7%, 500bp lower than the
average for top-three paint companies in India, mainly due to lacklustre
volume CAGR (estimated at sub 2% over FY13-16E). However, we expect
volume growth to pick up in in the next two years (~6% volume CAGR in
FY16-18E) on three years of low base, lower rationalisation intensity and
benefits from macro injections. This would translate into 10.5% revenue
CAGR over the period. However, we believe growth will continue to lag
peers till the portfolio rationalisation is complete. Given Akzos recent track
record, we do not expect upsides to our revenue growth estimates.
Akzos growth will

continue to lag peers till
its portfolio rationalisation
is complete
Exhibit 162: Sales growth to pick up but lag peers

YoY (% - RHS)
35.0
100.0%
28.0
80.0%
21.0
60.0%
14.0
40.0%
7.0
20.0%
0.0
0.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
We expect FY16-18E PAT CAGR at 13%

Akzos global parent is targetting a 12% EBITDA margin for the Indian
entity, similar to Akzos pre-merger levels. A combination of improved mix
(on continued rationalisation) and better cost efficiencies should drive this.
We estimate EBITDA margin to rise from 11.3% to 12% over FY16-18E,
translating into 14% EBITDA CAGR over the same period. Given that the
increase in other income will be lower than EBITDA growth (lower cash
pile versus FY12 levels of Rs10.2bn and decreased yields), we factor in
FY16-18E PAT CAGR at 13%.
Exhibit 163: EBITDA growth to sustain at healthy levels
4.4
YoY (% - RHS)
40.0%
3.3
Exhibit 164: Steady improvement expected in margins

Gross margins (LHS)
7.0
1.1
10.0%
41.0
3.5
0.0%
38.0
0.0
FY17E
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
0.0
FY18E
44.0
FY16E
20.0%
FY15
2.2
FY14
10.5
FY13
47.0
FY12
30.0%
FY11
14.0
FY10
50.0
20 April 2016
Akzo Nobel India

Exhibit 165: We expect 13% PAT CAGR over FY16-18E
PAT (Rs bn - LHS)
YoY (% - RHS)
4.4
30.0%
3.3
12.5%
2.2
-5.0%
1.1
-22.5%
0.0
-40.0%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Lower capex to keep pay-out ratios healthy

Given insignificant volume growth in the past three years and lacklustre
growth outlook (volume growth to only rise to mid-single digit in the next
two years), Akzos current capacity is adequate to service current demand.
We factor in Rs1.5bn capex over FY16-18E. Lower capex and steady
working capital should keep dividend pay-out healthy. We factor in steady
pay-out ratio at 50% for the next two years.
Exhibit 166: Limited capex requirement over FY16-18E
Exhibit 167: Expect steady payout ratio going forward
(Rs bn)
(Rs bn)
Capex
2500
DPS
250.0
2000
182.5
1500
115.0
1000
47.5
500
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
-20.0
FY11
Special dividends could result in further RoCE accretion

Akzos RoCE has improved from 9.8% in FY10 to 22.9% in FY15 in spite of
EBITDA margin declining from 12.5% to 10.3% during the same period. This
was due to a reduction in the cash pile on the books as Akzo increased its
average pay-out ratio to 50% and issued special dividends (Rs60/share
each for FY13 and FY14). With limited capex requirements, improving
margin profile and steady dividend payouts, we expect steady RoCE
accretion to 28% in FY18E. Further, we estimate cash and cash equivalents
to increase from Rs4bn in FY15 to Rs6.5bn in FY18. Another round of
special dividends could result in further RoCE accretion going forward.
20 April 2016
Akzo Nobel India

Exhibit 168: Gradual improvement in Cash and CE
(Rs)
Exhibit 169: Strong payout likely to continue
Cash & CE
Dividend payout ratio (%)

250.0
10.0
8.0
182.5
6.0
115.0
4.0
47.5
2.0
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY18E
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY11
-20.0
0.0
Exhibit 170: Return ratios below peers; likely to improve

(%)
ROE
ROCE
40.0
30.0
20.0
10.0
0.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
20 April 2016
Akzo Nobel India
Valuation and view

We believe structural growth tailwinds exist for the Indian paints industry
consequently, its volume growth will likely be ahead of other broad
consumer industries such as staples/alcoholic beverages. Also, headwinds
faced by some industries (staples: intensifying competition and higher
penetration; retail: e-commerce threat; cigarettes and alcoholic beverages:
regulation-led issues) are absent for paints. Therefore, broader paints
industry players deserve premium multiples to other consumer segments.
Inferior metrics justify P/E discount; initiate with Neutral

An improvement in
volumes, market share and
profitability are re-rating
triggers until these play
out, we initiate with
Neutral
Akzo has been in rationalisation mode ever since all the Indian entities
were merged together. We believe lack of volume growth visibility
(assuming 5-6% volume growth in FY16-18E), market share loss, lower
EBITDA margin and inferior return ratios justify the significant P/E
discount for Akzo versus peers. Our DCF target price is Rs1,442, implying
25.5x P/E on FY18E earnings. We believe this valuation discount (20-25%
to peers) is justified. An improvement in volumes, market share and
profitability are re-rating triggers until these play out, we initiate with
Neutral.
Exhibit 171: Akzo India FY18 DCF target price Rs1,442

Rs m
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
FY28E
Sales
25270
27053
29568
33049
36850
41088
91987
7.1%
9.3%
11.8%
11.5%
11.5%
10%
2614
3054
3382
3959
4422
4931
12510
10%
11%
11%
12%
12%
12%
14%
Depreciation
-526
-569
-621
-675
-838
-1000
-1780
EBIT
2738
3103
3409
3965
4340
4773
12570
Sales growth
EBITDA
EBITDA margin
Current tax
Capex
Change in WC
887
1019
1120
1304
1432
1575
4148
-478
-750
-750
-750
-2500
-2500
-1000
FCF
-124
69
93
41
51
99
1764
2214
2665
1286
1749
9301
discount factor
WACC
12%
5%
Terminal value
132099
0.9
0.8
0.7
0.3
1144
1384
2658
43959
23203
1.0
2665
41067
64270
Net debt (Mar'18)
3050
Equity value
DCF based value per
share (Rs)
# shares outstanding
(m)
67321
1442
47

Exhibit 172: Akzo trades at discount to peers
(x)
Exhibit 173: PEG is highest in the industry

(x)
PE (FY18E)
35.0
2.0
28.0
1.5
PEG
21.0
1.0
14.0
0.5
7.0
0.0
0.0
Kansai
Nerolac
Berger
paints
Kansai
Nerolac
Berger
paints
20 April 2016
Akzo Nobel India

Exhibit 174: Five-year average P/E at 25x
(x)
45
PE (x)
+ 1 Std. Dev.
Avg. PE
- 1 Std. Dev.
Exhibit 175: Five-year average EV/EBITDA at 17.4x

(x)
25
27
15
18
10
Avg. EV/EBITDA
- 1 Std. Dev.
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
20
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
36
EV/EBITDA
+ 1 Std. Dev.
20 April 2016
Akzo Nobel India

Income statement
Year to 31 Mar (Rs
m)
Net sales
% growth
Operating expenses
EBITDA
% change
Key ratios
FY15
FY14
FY16E
FY17E
FY18E
FY16E
FY17E
FY18E
10.3
11.3
11.4
12.0
27,053
29,568
33,049
EBIT margin (%)
6.1
8.3
9.2
9.3
9.9
8.3
4.5
7.1
9.3
11.8
PAT margin (%)
6.2
7.3
7.6
7.7
8.0
22,260
22,656
23,999
26,186
29,090
RoE (%)
15.4
20.8
21.5
21.7
23.1
1,919
2,614
3,054
3,382
3,959
RoCE (%)
12.6
19.4
22.5
25.7
28.0
Gearing (x)
Net debt/ EBITDA
(x)
FCF yield (%)
(0.8)
(0.5)
(0.4)
(0.5)
(0.5)
(3.8)
(2.4)
(1.4)
(1.6)
(1.6)
1.7
2.3
2.4
3.0
3.6
Dividend yield (%)
5.6
1.5
1.6
1.8
2.1
1.8
36.2
16.8
10.7
17.1
650
618
648
681
Net interest
(15)
(15)
(15)
(15)
(15)
Deferred tax
FY15
7.9
25,270
567
Pre-tax profit
FY14
EBITDA margin (%)

24,179
Other income
Depreciation
Year to 31 Mar
437
526
569
621
675
2,034
2,723
3,088
3,394
3,950
97
30
435
857
1,019
1,120
1,304
Valuations
1,502
1,836
2,069
2,274
2,647
Year to 31 Mar
FY14
FY15
FY16E
FY17E
FY18E
Preference dividend
Reported EPS (Rs)
32.2
39.9
44.3
48.7
56.7
Minorities
Adj. EPS (Rs)
32.2
39.3
44.3
48.7
56.7
Adjusted net profit
1,502
1,836
2,069
2,274
2,647
PE (x)
41.8
34.2
30.4
27.6
23.7
Non-recurring items
27
Price/ Book (x)
7.4
6.8
6.3
5.7
5.2
Reported net profit
1,502
1,863
2,069
2,274
2,647
EV/ Net sales (x)
2.3
2.3
2.2
1.9
1.7
% change
(31.4)
24.0
11.0
9.9
16.4
29.4
22.5
19.1
17.0
14.3
5.8
5.0
5.7
5.1
4.6
Current tax
Profit after tax
EV/ EBITDA (x)

EV/ CE (x)
Balance sheet
As on 31 Mar (Rs
m)
Paid-up capital
Preference capital
Reserves & surplus
Shareholders'
equity
Total current
liabilities
Total debt
Deferred tax
liabilities
Other non-current
liabilities
Total liabilities
Total equity &
liabilities
Net fixed assets
Revenue growth & EBITDA margin trend

FY14
FY15
FY16E
FY17E
FY18E
467
467
467
467
467
8,011
8,733
9,560
10,470
11,529
9,464
11,542
10,027
10,937
11,996
11,647
8,521
8,838
9,541
10,517
143
161
161
161
161
121
109
109
109
109
11,911
8,791
9,108
9,811
10,787
21,375
20,333
19,135
20,748
22,783
5,331
5,283
5,464
5,593
5,668
Investments
500
500
500
500
500
Cash
722
601
1,124
1,973
3,050
14,804
13,944
12,043
12,677
13,560
18
3,879
6,024
4,328
5,109
6,093
21,375
20,333
19,135
20,748
22,783
Year to 31 Mar (Rs

m)
FY14
FY15
FY16E
FY17E
FY18E
Pre-tax profit
2,034
2,723
3,088
3,394
3,950
Depreciation
Chg in Working
capital
Total tax paid
(437)
(526)
(569)
(621)
(675)
213
(475)
(411)
(237)
(332)
(435)
(857)
(1,019)
(1,120)
(1,304)
0

Deferred tax assets
Other non-current
assets
Net working capital
Total assets
Cash flow
Interest Received
Ext ord. Items

Operating cash
flow
Capital expenditure
Free cash flow
(a+b)
Chg in investments
27
2,264
1,959
2,241
2,673
3,005
(1,163)
(478)
(750)
(750)
(750)
1,086
1,466
1,476
1,908
2,240
0
2,200
(47)
18
Interest Paid
Capital
raised/(repaid)
(15)
(15)
(15)
(15)
(15)
Other items
Net chg in cash
(4,354)
(3,884)
(954)
(1,058)
(1,163)
(6)
(63)
(135)
(121)
523
850
1,077
As of Dec 15
20 April 2016
Akzo Nobel India
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Within 0-5% (upside or downside) to Index
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Indulge in this finish

Target Price (Rs)

Potential from CMP (%)

Berger Paints India

Target Price (Rs)

Potential from CMP (%)

Kansai Nerolac Paints

Target Price (Rs)

Potential from CMP (%)

Akzo Nobel India

Target Price (Rs)

Potential from CMP (%)

We believe the Indian Paints industry is the best structural proxy to

Source: IDFC Securities Research

For Private Circulation only.

Important disclosures appear at the back of this report

INDULGE IN THIS FINISH

Domestic paint industry has grown at a CAGR of 17% over

Overall paint (Rs bn)

DECORATIVE PAINTS THE LIONS SHARE; ADRESSING A STRUCTURAL OPPORTUNITY!

Estimated number of households in India in 2021 assuming 2.5% growth (m)

Carpet area assuming 100sqft per person (sqft)

Estimated base case cost per sqft (Rs)

Total cost per house (Rs)

Total addressable Deco Paint size in 2021 (Rs m)

% of Painted households by 2021 (%)

Total Deco Paint size in 2021 (Rs m)

Total Deco Paint size assuming a 5 year repainting cycle (Rs m)

Current estimated Decorative Paint industry size in 2016 (Rs m)

Consequent growth CAGR likely in the next 5 years (%)

Estimated organized industry share in 2016 (assuming 65% share)

Estimated organized industry share in 2021 (assuming 70% stake)

5 year decorative organized industry CAGR

As does the earnings CAGR - FY05-15

Titanium Dioxide prices have remained stable

Brent Crude oil

And a similar beat on EBITDA growth as well

INITIATE COVERAGE WITH

Paints Direct beneficiary of economic growth

Nominal GDP growth

Source: Company, IDFC Securities Research

Source: Industry, IDFC Securities Research

Further, over the next decade, continued macro tailwinds, strong

Source :Industry, IDFC Securities Research

Growth more broad based given lower cyclicality

The remaining 70% is formed of decorative/architectural paints, more than

Source: Company, IDFC Securities Research

Macro tailwinds to boost growth

Long-term structural opportunity compelling

We expect the organised

The structural growth opportunity for the paints industry is compelling.

CAGR over 2011-2021 assumed (%)

Number of households in India in 2021 (m)

Number of persons in a household

Total Deco Paint size assuming a 5 year cycle (Rs m)

Decorative Paint industry size in 2016 (Rs m)

Growth CAGR likely in the next 5 years (%)

Estimated organized industry share in 2016(assuming 65% share)

Estimated organized industry share in 2016(assuming 70% share)

5 year decorative organised industry CAGR (%)

Source; IDFC Securities Research

Source: Company, IDFC Securities Research

OROP Another small impetus to growth