Page 1 Paints: Spark Shade-Card Executive Summary Market data BSE SENSEX 27,274 Nifty 8,235 Date Jan 09, 2015 Spark Shade-Card: 3QFY15 – ‘Flying colors’ In our endeavor to keep pace with the ever evolving Indian paints sector, we publish our 3QFY15 edition of our quarterly update on the sector - ‘Spark Shade-Card’. As almost all the key listed participants in the sector maintain utmost secrecy on the vital business details, we have to rely heavily on our channel checks aka ‘Scuttlebutt notes’ and media inputs to keep abreast with the key developments in the sector. Hence, we believe that a structured effort like ‘Spark Shade-Card’ could not only help us paint a coherent picture on the paint industry but also update the investor community on the current trends and emerging long term themes. Our Key thoughts on the sector post interaction with Industry participants - (1) Decorative Paints – Driven by improving consumer confidence and burgeoning repainting demand, volume growth expected to be robust for all paint players. We believe lower commodity cost has enabled several players to roll out lucrative offers to distributors, we decipher that majority of promotional activities have been below the line this quarter. We understand that the premiumization trend gained further momentum across product categories in 3QFY15. Offtakes across Tier 1/2/3 towns witnessed good traction. (2) Industrial Paints – Though business sentiment has improved, growth in industrial paints seems to be a mixed bag. Passenger car and white goods volumes are expected to increase in high single digits; however infrastructure activity remains largely subdued. Pricing power continues to be feeble, better economies of scale to lead margin expansion in medium to long term. Online is just for ‘marketing’– Though several paint players initiated tie-ups with online commerce participants, we understand that it was primarily for marketing purposes rather than establishing online as a long term distribution channel partner. Our interactions with industry participants and understanding on the sector leads us to believe that the distribution moat of decorative paints cos. would remain untouched by the online retailing wave in the same way as it survived the modern retail wave India witnessed in the last decade. We however continue to closely monitor trends on this front. How do we see the current quarter revenue momentum shaping up for the coverage paint companies? Akzo Nobel India (AKZO): ~8-9% volume growth in the decorative paint segment along with recovery in the industrial paints to lead to ~12% yoy revenue growth. Operating margins to expand despite higher royalty payment on account of higher gross margins. PAT to be impacted by other income vagaries. Watch out: Trends in decorative paints, margin expansion initiatives. Asian Paints (APNT): Decorative segment to report double digit volume growth-~14% growth on the back of improved revenue momentum and a high base effect. Margins to expand backed by higher gross margin. Watch out: Comments/ guidance on - demand outlook, raw material prices (TiO2 in particular), new acquisitions (home decor) and their performance. Berger Paints (BRGR): ~14% increase in deco paints volume offtakes coupled with ~4-5% favourable price mix in decorative paints in addition to robust growth in subsidiaries to lead to good revenue growth. Expanded revenue base to drive margin expansion. Watch out: Hindupur plant production status, product-mix changes, rural-urban offtakes and raw material scenario. Kansai Nerolac (KNPL): Driven by improved auto volumes and signs of revival in Industrial cycle, KNPL revenues are expected to grow at ~21% yoy. We also understand from our channel checks that KNPL has rolled out several initiatives in the decorative paints segment, which should lead to the company recording robust growth in decorative paints too. Subdued base quarter performance coupled with lower raw material cost to lead to operating margin expansion. Watch out: Comments/ guidance on demand outlook across business verticals, pricing power in the automotive paints business Stock Calls: AKZO - Add , APNT – Add , BRGR - Add, KNPL– Buy Stock Performance (%) Company 1m 3m 12m Asian Paints 2.1% 27.1% 64.9% Berger Paints 13.8% 17.6% 109.1% Akzo Nobel India 3.4% 14.4% 65.2% Kansai Nerolac 4.6% 8.8% 79.5% Sensex -4.1% 1.8% 34.9% TEJASH SHAH [email protected]+91 22 4228 8155 GNANASUNDARAM S [email protected]+91 44 4344 0062 MADHAV PVR [email protected]+91 44 4344 0061 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Tejash Shah [email protected]+91 22 4228 8155 Gnanasundaram S [email protected]+91 44 4344 0062 Madhav PVR [email protected]+91 44 4344 0061
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Page 1
Paints: Spark Shade-Card
Executive Summary
Market data
BSE SENSEX 27,274
Nifty 8,235
Date Jan 09, 2015 Spark Shade-Card: 3QFY15 – ‘Flying colors’ In our endeavor to keep pace with the ever evolving Indian paints sector, we publish our 3QFY15 edition of our quarterly
update on the sector - ‘Spark Shade-Card’. As almost all the key listed participants in the sector maintain utmost secrecy on
the vital business details, we have to rely heavily on our channel checks aka ‘Scuttlebutt notes’ and media inputs to keep
abreast with the key developments in the sector. Hence, we believe that a structured effort like ‘Spark Shade-Card’ could not
only help us paint a coherent picture on the paint industry but also update the investor community on the current trends and
emerging long term themes.
Our Key thoughts on the sector post interaction with Industry participants - (1) Decorative Paints – Driven by improving
consumer confidence and burgeoning repainting demand, volume growth expected to be robust for all paint players. We
believe lower commodity cost has enabled several players to roll out lucrative offers to distributors, we decipher that majority
of promotional activities have been below the line this quarter. We understand that the premiumization trend gained further
momentum across product categories in 3QFY15. Offtakes across Tier 1/2/3 towns witnessed good traction. (2) Industrial
Paints – Though business sentiment has improved, growth in industrial paints seems to be a mixed bag. Passenger car and
white goods volumes are expected to increase in high single digits; however infrastructure activity remains largely subdued.
Pricing power continues to be feeble, better economies of scale to lead margin expansion in medium to long term.
Online is just for ‘marketing’– Though several paint players initiated tie-ups with online commerce participants, we
understand that it was primarily for marketing purposes rather than establishing online as a long term distribution channel
partner. Our interactions with industry participants and understanding on the sector leads us to believe that the distribution
moat of decorative paints cos. would remain untouched by the online retailing wave in the same way as it survived the
modern retail wave India witnessed in the last decade. We however continue to closely monitor trends on this front.
How do we see the current quarter revenue momentum shaping up for the coverage paint companies?
Akzo Nobel India (AKZO): ~8-9% volume growth in the decorative paint segment along with recovery in the industrial paints
to lead to ~12% yoy revenue growth. Operating margins to expand despite higher royalty payment on account of higher gross
margins. PAT to be impacted by other income vagaries. Watch out: Trends in decorative paints, margin expansion initiatives.
Asian Paints (APNT): Decorative segment to report double digit volume growth-~14% growth on the back of improved
revenue momentum and a high base effect. Margins to expand backed by higher gross margin. Watch out: Comments/
guidance on - demand outlook, raw material prices (TiO2 in particular), new acquisitions (home decor) and their performance.
Berger Paints (BRGR): ~14% increase in deco paints volume offtakes coupled with ~4-5% favourable price mix in decorative
paints in addition to robust growth in subsidiaries to lead to good revenue growth. Expanded revenue base to drive margin
expansion. Watch out: Hindupur plant production status, product-mix changes, rural-urban offtakes and raw material scenario.
Kansai Nerolac (KNPL): Driven by improved auto volumes and signs of revival in Industrial cycle, KNPL revenues are
expected to grow at ~21% yoy. We also understand from our channel checks that KNPL has rolled out several initiatives in
the decorative paints segment, which should lead to the company recording robust growth in decorative paints too. Subdued
base quarter performance coupled with lower raw material cost to lead to operating margin expansion. Watch out: Comments/
guidance on demand outlook across business verticals, pricing power in the automotive paints business
Though far-away from historical peaks, GDP certainly on uptrend…
Source: GOI, Spark Capital
…real estate activities though fairly subdued
Source: FICCI real estate sentiment research, Spark Capital
0
50
100
150
200
250
300
Mar-
09
Jun-0
9
Sep-0
9
Dec-0
9
Mar-
10
Jun-1
0
Sep-1
0
Dec-1
0
Mar-
11
Jun-1
1
Sep-1
1
Dec-1
1
Mar-
12
Jun-1
2
Sep-1
2
Dec-1
2
Mar-
13
Jun-1
3
Sep-1
3
Dec-1
3
Mar-
14
Jun-1
4
Sep-1
4
Dec-1
4
New Launches Absorption Rate
9.5 8.7
9.2 9.9
7.5 6.5
6 5.1 5.4 5.2
4.7 4.8 4.4 4.8 4.7 4.7 5.7 5.3 5.2
0
2
4
6
8
10
12
YoY GDP growth Quarterly
…while decorative paints continue to enjoy unabated pricing power.
Source: Bloomberg, Company, Spark Capital
Pent Up demand to drive passenger car offtakes…
Source: SIAM, Company, Spark Capital
Macro Indicators
GDP on the recovery path, expected to grow
~5.3% in 3QFY15
Real Estate activity especially in the
residential sector stuttering as demand
continues to be elusive
90
100
110
120
130
140
150
Sep-0
8
Dec-0
8
Mar-
09
Jun-0
9
Sep-0
9
Dec-0
9
Mar-
10
Jun-1
0
Sep-1
0
Dec-1
0
Mar-
11
Jun-1
1
Sep-1
1
Dec-1
1
Mar-
12
Jun-1
2
Sep-1
2
Dec-1
2
Mar-
13
Jun-1
3
Sep-1
3
Dec-1
3
Mar-
14
Jun-1
4
Sep-1
4
Dec-1
4 0
50,000
1,00,000
1,50,000
2,00,000
2,50,000
3,00,000
3,50,000
Nov-1
2
Dec-1
2
Jan-1
3
Fe
b-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug
-13
Sep
-13
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Fe
b-1
4
Mar-
14
Apr-
14
May-1
4
Jun-1
4
Jul-14
Aug
-14
Sep
-14
Oct-
14
Nov-1
4
Passenger car production
Page 5
Paints: Spark Shade-Card
…coupled with stable currency expected to offer cushion to margins
Source: Bloomberg, Spark Capital
…crude oil prices also show a similar trend
Source: Bloomberg, Spark Capital
TIO2 prices on a downtrend…….
Source: Bloomberg, Spark Capital
Sequentially lower domestic diesel prices…
Source: Bloomberg, Spark Capital
Raw Material Basket Painting a Pleasant Picture
150
170
190
210
230
250
270
290
Jan-1
1
Mar-
11
May-1
1
Jul-11
Sep-1
1
Nov-1
1
Jan-1
2
Mar-
12
May-1
2
Jul-12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep-1
3
Nov-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep-1
4
Nov-1
4
Jan-1
5
TiO2 (INR/Kg)
TIO2 prices lower by ~14% yoy and
~3% qoq basis on account of lower
crude prices and subdued demand
35
40
45
50
55
60
65
Jan-1
1
Mar-
11
May-1
1
Jul-11
Sep-1
1
Nov-1
1
Jan-1
2
Mar-
12
May-1
2
Jul-12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep-1
3
Nov-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep-1
4
Nov-1
4
Jan-1
5
Diesel (INR/Lit)
Domestic diesel prices are
sequentially lower by ~7% 45
50
55
60
65
Jan-1
1
Mar-
11
May-1
1
Jul-11
Sep-1
1
Nov-1
1
Jan-1
2
Mar-
12
May-1
2
Jul-12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep-1
3
Nov-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep-1
4
Nov-1
4
Jan-1
5
INR/USD
Rupee Vs USD – Flat on a YOY basis.
0
1000
2000
3000
4000
5000
6000
7000
8000
0
20
40
60
80
100
120
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
INR
/Barr
el
US
D/B
arr
el
USD/Barrel INR/Barrel
Crude prices down ~23% on a $
and INR terms led by excess
supply in the global markets
Page 6
Paints: Spark Shade-Card
Major filings by the paint companies on the exchanges
Date Category Announcement
Asian Paints
22 Dec 2014 Update on Statutory
Auditor
Asian Paints Ltd has informed BSE that the Board of Directors of the Company, at its meeting held on December 20, 2014, on the
recommendations of the Audit Committee, have decided that M/s. B S R & Co., LLP, Chartered Accountants, remaining Statutory Auditor of the
Company shall continue to act as a sole Statutory Auditor till the conclusion of the next Annual General Meeting.
22 Oct 2014 Acquisition completion
Signed a Share Purchase Agreement and other definitive agreements and documents to acquire 51% stake in Kadisco (the “Acquisition"). The
Acquisition is subject to approval of the regulatory authorities in Ethiopia. The consideration for the Acquisition will be disclosed on closing and
completion of the Acquisition. This Acquisition will enable the Company to expand its international footprint.
Berger Paints
31 Dec 2014 Fixes Record Date for
Stock Split
Berger Paints India Ltd has informed BSE that the Company has fixed January 09, 2015 as the Record Date for the purpose of sub-division of Equity
Shares of face value of Rs. 2/- into Equity Shares of face value of Re 1/- fully paid up.
04 Nov 2014 Change in Directorate
Berger Paints has informed that the Board of Directors have appointed Mrs. Rishma Kaur and Mr. Kanwardip Singh Dhingra as Directors in
wholetime employment with effect from December 01, 2014 as a part of succession plans. Mrs. Rishma Kaur would be designated as National
Business Development Director - Retail and her appointment would fulfill the requirement to have at least one Lady Director on the Board. Mr.
Kanwardip Singh Dhingra would be designated as National Business Development Director - Industrial.
04 Nov 2014 Stock Split
Berger Paints India Ltd have finalised and approved the sub-division of the Company’s Equity Shares of nominal value of Rs. 2 each into Equity
Shares of nominal value of Re. 1/- each, fully paid up and consequently, alter the Memorandum and Articles of Association of the Company and for
that purpose, take steps to obtain approval of the shareholders by means of Postal Ballot / E- Voting.
Akzo Nobel India
08 Oct 2014 Resignation Akzo Nobel India Limited has informed the Exchange that Mr Robert Molenaar, Non-Executive Director, has resigned from the Board of the
Company, w.e.f. September 09, 2014.
Kansai Nerolac
14 Oct 2014 Reply to clarification
sought by the exchange
Kansai Nerolac Paints Ltd. (KNP) is associated with Flipkart in an endeavor to engage the consumer with its range of products online. We have also
offered a discount for the festive season on booking the painting service. Given the sensorial nature of the category, which is predominantly Do It For
Me, KNP does not envisage this move as material change in the company's nature of business. Association with Flipcart is mere marketing
association to promote our brand.
12 Oct 2014 Clarification sought from
Kansai Nerolac Paints Ltd
The Exchange has sought clarification from Kansai Nerolac Paints Ltd with respect to news article appearing in Business Standard & ZEE News on
October 13, 2014 titled "Kansai Nerolac ties up with Flipkart for festive season."
Kansai Nerolac India Report Date CMP (Rs.) TP (Rs.) Recommendation
10/Dec/14 2,000 2,315 Buy
27/Oct/14 1,937 2,224 Buy
24/Jul/14 1,630 1,730 Add
14/May/14 1,248 1,327 Add
06/Feb/14 1,175 1,124 Reduce
17/Jan/14 1,137 1,088 Reduce
11/Nov/13 1,175 1,088 Reduce
11/Oct/13 1,152 1,044 Reduce
30/Jul/13 1,175 1,044 Reduce
06/Jun/13 1,288 1,049 Sell
24/Jan/13 1,090 896 Sell
31/Oct/12 945 849 Reduce
05/Sep/12 900 820 Reduce
Page 13
Paints: Spark Shade-Card
Spark Disclaimer
Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and
infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We
have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of
time.
Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered
with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure
advisory services.
This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should
be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of
companies referred to in this document.
Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies
referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This
document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published,
copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in
any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital
and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to
a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This
material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.
Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this
document. Spark Capital , its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or
deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit
investment banking or other business from, any company referred to in this report.
This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark
Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information.
Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective
directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents
or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or
damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of
or reliance on this report.
Disclaimer
Page 14
Paints: Spark Shade-Card
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,
Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of interest statement APNT AKZO BRGR KNPL
Analyst financial interest in the company No No No No
Group/directors ownership of the subject company covered No No No No
Investment banking relationship with the company covered No No No No
Spark Capital’s ownership/any other financial interest in the company covered No No No No
Associates of Spark Capital’s ownership more than 1% in the company covered No No No No
Any other material conflict of interest at the time of publishing the research report No No No No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last
twelve months:
Managing/co-managing public offering of securities
Whether Research Analyst has served as an officer, director or employee of the subject company covered No No No No
Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No No No No
Analyst Certification of Independence
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research
analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
Additional Disclaimer for US Institutional Investors
This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under
the Securities Exchange Act of 1934, as amended) only by Decker and Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act
of 1934, as amended). Decker and Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in
the research material may do so through Decker and Co. All responsibility for the distribution of this report by Decker and Co, LLC in the US shall be borne by Decker and Co,
LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital
Advisors (India) Private Limited or Decker and Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should
satisfy yourself before reading it that Decker and Co, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment
to you under relevant legislation and regulations;