Kansai Nerolac Paints - Business...

Company Report Industry: FMCG

Amnish Aggarwal ([email protected]) +91-22-66322233

Gaurav Jogani ([email protected]) +91-22-66322238

Kansai Nerolac Paints

Spreading Colours All Around

April 11, 2016 2


Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents Page No.

Kansai Nerolac: Play on Consumption and Infrastructure ........................................ 4

Decorative Paints industry to grow at 14% CAGR ............................................................................. 5

Kansai focusing on branding and distribution to gain share ............................................................. 7

1) Investments in branding and consumer connect .................................................................... 7

2) Distribution reach and product endorsements ....................................................................... 9

3) Kansai has a wide portfolio, increases focus on entry level paints ........................................ 10

Kansai to gain from pick up in Industrial demand ........................................................................... 11

Automotive paints .................................................................................................... 12

Kansai has 60% market share in Auto OEM paints .......................................................................... 12

Automotive paints demand to grow in low teens ........................................................................... 12

Kansai to grow ahead of industry growth ....................................................................................... 13

Auto refinish segment ..................................................................................................................... 14

Other Industrial paints ..................................................................................................................... 15

Powder Coatings; 15% CAGR likely on durables and home improvement demand .................. 15

Performance coatings to grow at 19% CAGR ............................................................................. 16

General Industrial coatings to grow at 15% CAGR ..................................................................... 17

Industrial paints - emerging opportunities ............................................................... 18

Railways: Modernisation and transparent bidding to drive growth ............................................... 18

Road/ Infra: Increased outlay to improve demand ......................................................................... 18

Public Transport Authorities ............................................................................................................ 18

Building capacities to service Future demand .......................................................... 19

Financials and Valuations ......................................................................................... 20

Revenues to grow at 16.5% CAGR post FY16 .................................................................................. 20

Margins to expand on changing product mix and low crude oil prices ........................................... 20

Adj. PAT to grow at 30.9% in FY16, 18.8% CAGR over FY16-18 ....................................................... 21

Valuation Thesis: 15% discount to APNT, Accumulate .................................................................... 22

Q3FY16; 190bps margin expansion enables 28.6% PAT Growth ..................................................... 23


Company Report April 11, 2016

Rating Accumulate

Price Rs282

Target Price Rs288

Implied Upside 2.1%

Sensex 24,674

Nifty 7,555

(Prices as on April 08, 2016)

Trading data

Market Cap. (Rs m) 151,975.4

Shares o/s (m) 538.9

3M Avg. Daily value (Rs m) 134.6

Major shareholders

Promoters 69.27%

Foreign 9.51%

Domestic Inst. 6.54%

Public & Other 14.68%

Stock Performance

(%) 1M 6M 12M

Absolute 2.5 17.1 21.9

Relative 2.5 25.2 35.9

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2017 8.3 7.6 8.6

2018 9.3 9.8 -5.2

Price Performance (RIC: KANE.BO, BB: KNPL IN)

Source: Bloomberg

0

50

100

150

200

250

300

350

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

De

c-1

5

Feb

-16

Ap

r-1

6

(Rs)(Rs)

Kansai is a pure play on Paints demand in India, being the third largest player in

Decorative Paints (Nerolac), 40% share in Industrial paints and 60% share in

Automotive Paints. Kansai gains from technology and innovation of its parent

(Kansai Paints, Japan-71.3% stake) which lists in top 10 paint companies globally.

Kansai has launched “Little Master” to compete with ‘Tractor’ in the lower end

emulsions, thus, filling a portfolio gap. Kansai is improving efficacy of its

distribution as the proportion of dealers with Tinting machines will increase to 80%

by FY18 (41% in FY11). Product innovations, distribution and brand building will

enable 17.5% sales CAGR for Kansai post FY16.

Automotive paint sales should gain from 1) expected demand recovery 2) imbibed

service component in its OEM package and 3) new client additions, more so among

non-Japanese auto makers. Powder coatings offer immense scope once the

consumer demand for white goods and home improvement picks up. Kansai should

gain from emerging opportunities in Railways, State transport, Roads and

Infrastructure, given rising spends and introduction of e-bidding and payment

system. We estimate 17% sales CAGR in industrial paints post FY16.

Kansai is expected to post 30.9% PAT growth on 500bps gross margin and 250bps

EBITDA margin expansion in FY16. We expect margin expansion of 50bps in FY17

and a decline of 80bps in FY18 which would enable 25% PAT growth in FY17 and

12.5% in FY18. Kansai has ROCE of 25.8% and ROE of 18.4%, dividend payout of

33% and net cash of Rs6bn. Kansai trades at 30.4x FY18 EPS and trades at 15%

discount to Asian paints as against 20% discount in the last five years. We value

the stock at 31x FY18 EPS and arrive at a target price of Rs288. We initiate

coverage on Kansai Nerolac Paints with an ‘Accumulate’ rating.

Key financials (Y/e March) 2015 2016E 2017E 2018E

Revenues (Rs m) 35,491 38,204 44,167 52,327

Growth (%) 12.2 7.6 15.6 18.5

EBITDA (Rs m) 4,448 5,738 6,846 7,667

PAT (Rs m) 2,717 3,557 4,449 5,004

EPS (Rs) 5.0 6.6 8.3 9.3

Growth (%) 31.5 30.9 25.1 12.5

Net DPS (Rs) 1.4 1.8 2.3 2.6

Profitability & Valuation 2015 2016E 2017E 2018E

EBITDA margin (%) 12.5 15.0 15.5 14.7

RoE (%) 18.0 18.4 18.4 18.4

RoCE (%) 17.4 18.1 18.2 18.2

EV / sales (x) 4.3 3.9 3.4 2.9

EV / EBITDA (x) 34.2 25.7 22.2 19.8

PE (x) 56.0 42.7 34.2 30.4

P / BV (x) 9.5 6.7 5.9 5.3

Net dividend yield (%) 0.5 0.6 0.8 0.9

Source: Company Data; PL Research


April 11, 2016 4

Kansai Nerolac: Play on Consumption and Infrastructure

Kansai is a play on demand recovery in Decorative as well as in the Industrial paints.

The company is expected to be a major beneficiary of pick-up in the Industrial

demand being the market leader in automotive paints with 60% market share and

overall Industrial paints with 40% market share. Kansai has increased the share of

decorative paints in its sales mix (from ~50% in FY10 to ~55% in FY15) and is

gradually increasing distribution reach and dealers with tinting machines. Its

decorative paints portfolio has products straddling across various price points and

addressing multiple painting needs. Reduction in interest rates, bottomed-out rural

economy and revival in the infrastructure and capital goods space is expected to

increase demand for both Industrial and decorative paints.

Kansai is a player focused on paints, while other companies are diversifying into

Adhesives, Sealants, Waterproofing, Bath and Sanitary fittings and Kitchen. Focused

approach, technology back-up of parent in industrial paints, expanding distribution

in decorative paints and strong relationships with global automotive giants will

enable Kansai to record sustained growth in the coming years. The company,

therefore, emerges as a compelling play on revival in both Consumption demand and

Infrastructure development.

Exhibit 1: Kansai: Decorative paints are 55% of sales, Auto paints are 75% of Industrials

Decorative55%

Automobile75%

Other Industrial

25%

Industrial45%

Source: Company, PL Research


April 11, 2016 5

Decorative Paints industry to grow at 14% CAGR

Decorative paints account for over 70% share in Rs350bn Indian paint industry. Organized

players dominate with ~70% of the decorative market, while 30% share is accounted for by

unorganized players who are present in less technology intensive distemper segment.

Sustained Upgradation: Decorative paints include Enamels, Exterior emulsions, Interior

Emulsions, Primer, Distempers, Wall Putty and Wood coatings etc. Large organised players

have reduced focus on Distempers and are instead promoting economy range of emulsions,

given low margins in this segment. Paints Industry is witnessing sustained upgradation from

Distempers to Emulsions and premium emulsions in the past few years.

High Involvement Category: Paints industry has come a long way from being a low

involvement product to a high involvement product. Paints now occupy centre stage of home

decor as against earlier trend where painters used to dictate the brand, colour and type of

paint to be used in the residential buildings. Sustained investments in advertising, Tinting

machines, Consumer education and Signature stores have increased the consumer interest in

the category and boosted upgradation and growth.

Oligopolistic Industry: Paints industry is an Oligopoly as four major players have 92% of

organised market share. Decorative paints market in India is dominated by Asian Paints with

~52% market share, followed by Berger and Kansai, with 17% and 15% share, respectively.

Market leader Asian paints has focus on volumes and not on expanding gross margins which

has promoted healthy competition and focus on production and marketing efficiencies in the

Industry. Although global players like Sherwin Williams, Nippon, and Juton etc. have entered

the Indian market, existing players have strengthened their market share and dominance.

Exhibit 2: Asian paints controls 52% of organised share, Kansai has 15%

Asian paints

52

Berger Paints17

Kansai Nerolac

15

Akzo Nobel8

Others

8

Decorative Paints market share

Source: Industry Data, PL Research


April 11, 2016 6

Decorative paints to grow sales at 14% CAGR: The Indian paint industry has

benefited from a gradual shift in the consumer preference from traditional

whitewash to entry level distempers and higher quality paints like emulsions and

enamels. Decorative paints industry has grown sales at 16% CAGR in the past five

years. The major drivers for growth of the Decorative paint industry are 1) increased

urbanization and shift towards paints in rural markets 2) Rise in the disposable

income of the consumers 3) India’s per capita consumption at 1.3kg is lower by 55%

than SE Asia and 70% than China) 4) Reduction in repainting cycle from earlier level

of seven years 5) Aggressive marketing and enhanced distribution network 6)

Innovative products 7) Expected growth in housing construction, given Housing for

all and smart cities initiative of GOI.

Exhibit 3: Decorative market expected to grow at 14% CAGR

115 140

160 180

240

460

0

50

100

150

200

250

300

350

400

450

500

CY10 CY11 CY12 CY13 CY15 CY20

(Rs

bn)

Source: Akzo Nobel, PL Research

Exhibit 4: Decorative Paint Industry volumes have GDP multiplier of 1.6-2x

1.82.0

1.6 1.7 1.6

1.9

1.6

2.0

1.6 1.7 1.6 1.7

0.0

0.5

1.0

1.5

2.0

2.5

0.0%

5.0%

10.0%

15.0%

20.0%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Real GDP Gr Paint Industry Volume growth GDP Multiplier

Source: PL Research, Company Data


April 11, 2016 7

Kansai focusing on branding and distribution to gain share

Kansai is the no.3 player in decorative paints segment with ~15% market share under

the “Nerolac” brand. Decorative paints sales have grown at 15.7% CAGR in the last

five years which has increased its share in sales mix from 50% in FY10 to 55% in

FY15.

Kansai is looking at increasing its revenue from decorative paints given that 1)

decorative have higher margins than industrial paints and 2) decorative have higher

pricing power and low margin volatility than industrial paints. Decorative paints

provide relative margin stability during volatility in raw material prices. Kansai’s

portfolio mix is improving as the share of emulsions has increased from 20% to 38%

of sales even as the share of Enamels and Distemper has come off by 13%.

Exhibit 5: Emulsions have significantly increased share in decorative sales

20%

40%

15%

25%

38%

30%

12%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Emulsion Enamel Distamper Other

FY10 FY15


1) Investments in branding and consumer connect

Kansai has increased investments in advertising and brand-building initiatives to

enhance its brand image and improve consumer perception and appeal for its

products.

Kansai launched Nerolac Impressions with HD technology by using a 360 degree

campaign with its brand ambassador “Shahrukh Khan” and dedicated webpage

about the product. It also launched region specific TV campaigns for Andhra

Pradesh, Tamil Nadu and Kerala.

During the year, Kansai launched “U Can”, an initiative aimed towards further

reducing the impact of painting on the environment by recycling its paint cans

into attractive flower pots. The campaign garnered a thumping response from

the consumers with improved affinity with “Nerolac”.


April 11, 2016 8

Nerolac introduced QR codes in its shade cards and guides to enable the Nerolac

app users to flip through the entire range of colours and combos online. This has

made the visualization process much easier for the consumer enhancing their

home painting experience.

Nerolac tied-up with one of the leading interior magazines and “BBC Good

Homes” by launching a special “High-definition living” issue to give out home

decor tips on painting to directly reach out to the consumers.

Nerolac launched the Colour of the Year and Colour Trends 2015 to set the

trends for the New Year for consumer reference.

Nerolac further aligned its communication to reach out to the end user by

coming up with campaigns like ‘Wish in HD language of colours’. The campaign

allowed people to send messages and greet their friends, whereby, each

alphabet had a designated HD shade of Kansai assigned to it.

Kansai is investing gains from benign raw materials into advertising and marketing to

strengthen its Nerolac brand. The company’s ad-spends has increased by 50bps to

4.1% of sales over FY13- FY15 and is expected to increase to 5% in FY16.

We believe that Kansai is looking to increase its market share by increasing its

presence in South and East India where it has low market share. The company has

the product portfolio and is competitively priced to Asian paints. However, Asian

Paints has strong dealer connect, wide spread distribution network and brand

visibility. Increased brand visibility and endorsements can boost sales for Kansai.

Exhibit 6: Kansai’s adspend shows rising aggression in brand building

4.0 3.9 3.93.6

3.9 4.1

5.0 4.94.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY10

FY11

FY12

FY13

FY

14

FY15

FY16

E

FY17

E

FY18

E

Advertising % of Sales



April 11, 2016 9

2) Distribution reach and product endorsements

Breadth and depth of distribution has been one of the key advantages of Asian

paints, despite higher dealer incentives offered by its competitors. Kansai has been

increasing its distribution reach and adding depots and dealers steadily. Its

distribution network has increased from ~11000 dealers in FY11 to 15000 dealers in

FY15 and has installed 11000 tinting machines, which are owned by Kansai. The

proportion of dealers having tinting machines has increased from 40% in FY11 to

73% in FY15. We estimate an increase in the number of dealers to ~20000 with 80%

having a Tinting machine by 2018.

Kansai has initiatives to reach out and collaborate with “influencers" such as

interior decorators and architects. Product endorsement by the interior

decorators and painters goes a long way in increasing consumer confidence into

using “Nerolac” brand of products.

Kansai has entered into a tie-up with the e-commerce major, ‘Flipkart’, during

the festive season. The company provided an interactive consumer interface,

consumer offers and painting service. This broadened the distribution channel

and improved consumer interface, although the impact on sales is not

meaningful.

Kansai modified its painter reward program Nerolac Premium Painters (NPP) to

include benefits like sponsoring scholarships for the painters’ children and

accidental insurance for painters and their families selectively. Kansai expects

this to increase the painter’s affinity with Nerolac brand.

Exhibit 7: 73% of Dealers have Tinting machines in FY15 as against 41% in FY11

40.9

50.0 57.7

64.3

73.3 75.8 78.2 80.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0

5,000

10,000

15,000

20,000

25,000

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Dealer Network Tinting machines Tinting Machines %

Source: Company Data, PL Research


April 11, 2016 10

3) Kansai has a wide portfolio, increases focus on entry level paints

KNPL is using technological expertise of its parent Kansai in launching new products

like Nerolac Impressions HD Colour, Excel Rain guard (waterproofing to protect

against rainfall) and statue paint for coating statues. Kansai is looking to enter into

categories where it can create a niche for itself and have the first-mover advantage.

Kansai’s product portfolio straddles across various categories and price points. The

company’s Impressions and Pearl compete with Asian Paints ‘Royale’ and ‘Apcolite’

in the interior paints. It has Excel exterior paints which compete with Apex from

Asian Paints and Weather Coat from Berger.

Kansai has been weak in the economy segment of paints. The company has launched

“Little Master” in the economy paint segment to compete with Asian Paint’s “Tractor

Emulsion” which aims at upgrading the customer who is using Distemper to an

Emulsion-based paint. Little Master has been priced at 10-20% discount to its peers.

The company has introduced products in the coating space like High Solid metallic

base coats and clear coats, resulting in significant reduction in VOC (Volatile Organic

Compounds), paint consumption and improvement in productivity. Kansai also

introduced a new range of eco-friendly paints which are lead free and with low VOC.

Exhibit 8: Kansai’s products straddle across segments and price points in Decorative paints

Interior Paints Price range (Rs/ Liter) Kansai Nerolac Asian Paint Berger

Designer finishes 980-1049 Impressions- Hi Gloss enamel, Disney, Metallic Finish

Royale Play Silk Illusion range- Design Metallica, Metallica, Non-Metallica and Marble Finish

Enamels 240-450 Pearl Luster Finish Apcolite -Gloss and Satin Enamel, Royale Luxury Enamel

Premium Emulsion 430-600 Impression-24 carat, Eco clean Royale - Aspira, Shyne, Luxury Breathe Easy, Silk Luxury Emulsion

Emulsion 95-300 Little master, Beauty - Silver, Gold, Smooth Finish and Lotus Touch

Tractor, Apcolite - Advanced and Premium

Easy Clean, Rangoli Total care, Bison Emulsion

Distempers 50-90 Goody Synthetic Distemper, Beauty Acrylic Distemper

Tractor- Acrylic and Synthetic Jadoo Acrylic and Bison Distemper

Wall Putty 35-75 Nerolac Wall Putty Asian Paints Acrylic Wall Putty Bison Wall Putty and Happy Wall Acrylic Putty

Exterior paints

Acrylic Emulsions 120-460 Excel , Excel Total, Suraksha Range- Plus and Advanced

Ace and Apex range-Ultima and Protek

Wall Masta and Weather Coat range- Long life, Smooth and Allguard

Source: Industry, PL Research


April 11, 2016 11

Kansai to gain from pick up in Industrial demand

Industrial paints market is ~30% of the overall paint industry in India as against the

global average of 66%. Industrial paints are technology intensive due to which

domestic companies have tied up with global paint majors. Industrial paints can be

further sub-classified into 1) Automotive Coatings 2) Powder Coatings 3) High

performance coatings and 4) General Industrial paints. Industrial paint demand is

dependent on various industries such as Automobiles, Consumer durables and

Infrastructure spending on roads, railways, power plants etc. Industrial paints are

largely solvent-based resulting in higher fluctuation in profits due to changes in

Crude prices. Kansai is the market leader in Industrial paints with ~60% market

share. Industrial paints account for ~45% of its sales.

Exhibit 9: Leading Paint majors have global tie-ups in Industrial Paints

Company Foreign Collaboration Details

Kansai Nerolac

Kansai Paint (Japan) Architectural coatings, Process design and quality improvement

Oshima Kogyo (Japan) Technical assistance for manufacturing heat resistance coatings

Cashew (Japan) Technical assistance for coating products MICRON and their thinners

Asian Paints PPG Industries (US) PPG Asian Paints JV for auto OEM, refinish, and industrial coatings

Asian Paints PPG JV for non-auto industrial and powder coatings

Akzo Nobel India Akzo Nobel (Amsterdam) Akzo technology across segments of Decorative and Industrial Paints

Berger Paints India

DuPont Performance Coatings Technical license agreement for Automotive coatings

Becker Industrifarg (Sweden) Berger Becker Coatings JV (49% Berger stake) for coil coatings segment

Nippon Bee Chemicals Co. Ltd (Japan) J.V – BNB Coatings India Ltd for manufacture of coatings for plastic substrates


Exhibit 10: KNPL is present across most of the Industrial paint segments in India


Industrial Paints

Automotive

Automotive

refinish

Powder Coating

Performance

coating Protective

Coating

General Industri

al

Marine Coating

Coil Coating


April 11, 2016 12

Automotive paints

Kansai has 60% market share in Auto OEM paints

Automotive Paints is the largest segment in Industrial paints with a market size of

~Rs25bn. Kansai is the market leader in this segment with ~60% market share

followed by PPG Asian Paints with 20% and BASF with 10% share. Automotive paint

segment is a volume-driven business as Auto OEMs have an upper hand in price

negotiations. Price hikes come with a delay in case of sharp rise in raw material

prices impacting the margins. Automotive paints require technological capabilities

requiring domestic players to tie up with large global paint companies on one hand

and automobile majors on the other.

Exhibit 11: Kansai has 60% share of the automotive paints market

Kansai Nerolac

60

PPG Asian paints

20

BASF10

Others

10

% Automotive Paints Marketshare


Automotive paints demand to grow in low teens

Automotive paint demand has a direct correlation with the automobile sector

volume growth. Automotive industry witnessed pressure on volumes in FY15 and

FY16 due to 1) weak rural demand due to two successive weak monsoons 2) damage

to winter crop due to untimely rains 3) Little increase in MNREGA allocations and 4)

Mining ban in a few states impacted demand for commercial vehicles. We expect the

auto volumes to pick up in FY17 led by 1) expectations of normal monsoon post two

bad years 2) pick-up in Infrastructure development and economic growth and 3)

improved urban demand led by OROP and pay commission benefits. While the high

growth rates of ~26% witnessed between FY10 & FY11 might not be visible in the

near term, automotive paints are expected to grow in low teens and by 16.7% CAGR

over FY15-20.


April 11, 2016 13

Exhibit 12: Automotive paints (OEM) likely to grow at 16.7% CAGR over FY15-20

11 12 13 15

18

39

0

5

10

15

20

25

30

35

40

45

FY10 FY11 FY12 FY13 FY15 FY20

(Rs

bn)

Source: Akzo Nobel Presentation, PL Research

Kansai to grow ahead of industry growth

Kansai’s sales from automotive segment have grown at a CAGR of 11.6% in the last

five years as against 7% growth in Auto Industry volumes during the same period.

Kansai has increased market share from 55% to 60% and gained rising acceptance

amongst non-Japanese companies and brands. Kansai is likely to be a big beneficiary

of any revival in the growth rates of the Automobile industry and will grow at a rate

higher than Industry average led by 1) Technological advantage 2) New client

additions & strong relationships 3) Using service as differentiator and 4) Timely

capacity additions.

Technological Advantage: KNPL gets technology support from Kansai Paint (Japan)

on a continuous basis which enables it to remain ahead of competition. The

company was a pioneer in introducing Cathodic Electro-Deposition (CED) coatings

developed for Maruti Suzuki and has recently introduced latest generation CED

primers with enhanced corrosion protection and reduced consumption. It has also

introduced Multi metal coatings and Mar & scratch resistant clear coats and other

products aimed at reduced consumption and increased durability.

New client additions and Strong relationships: Kansai Paints’ technological

superiority and strong relationships with the global auto majors has ensured its

dominance in the Indian automotive segment. Kansai had huge advantage as

Japanese majors like Suzuki, Honda, Toyota, Mazda and Nissin etc. have strong

market shares in Passenger Cars, UVs, Bikes, and Scooters in India. However, the

company has been able to make strong inroads across all players which have added

new dimensions to its growth. Kansai had been able to garner 80% volumes from the

new auto assembly line additions after 2013 enabling it to grow ahead of the

industry. Long-term strategic relationships with the major Auto OEMs and new client

additions will enable Kansai to grow ahead of the industry and gain share in the

coming years as well.


April 11, 2016 14

Exhibit 13: Auto Paints; Kansai to grow at 15.5% CAGR post FY16

3.2

25.4 26.6

13.7

2.04.0

8.3 9.2 12.510.2

0.8

12.6

23.214.6

8.610.8

14.5

8.0

15.0 16.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY09

FY10

FY11

FY12

FY

13

FY

14

FY

15

FY16

E

FY17

E

FY18

E

Auto volume growth % Kansai Auto sales growth %


Using service as a differentiator: Kansai is taking auto painting to a different level

with service involvement from being a mere supplier of paints. The company has

deputed its technical workers with auto OEMs on their shop floor. This inculcates an

element of service in the auto paints business. This initiative has been helpful in

reducing inventory levels at the customer place; bring down painting cycles, quick

response to any client needs and resolving painting and finishing issues of vehicles.

This initiative will go a long way in maintaining strong relationship with the customer

and help it in retaining edge over its competitors.

Timely Capacity additions: Kansai is putting up a new plant in Gujarat with a

capacity of 42000 MT which would be used for Industrial paints; we believe that with

many automotive companies now operating in Gujarat, it will help Kansai to cater to

those companies and meet expected increase in demand.

Auto refinish segment

Market for Auto refinish is estimated to be ~Rs10bn with major players being Kansai,

PPG Asian paints, Akzo Nobel and BASF. PPG Asian Paints is the market leader in this

segment as it had acquired ICI’s auto refinish business. Auto refinish segment

reflects growth specific to used car sales and repair services. Revival in Auto sales

can further boost growth with a lag. Auto refinish segment has been growing at 20%

CAGR as:

Growth in auto insurance is fuelling demand for refinish paints and coatings as

increasing number of consumers have insurance claim for accidents.

Emergence of Multi-Shop Operators (MSO) chains in the service and repairs

segment is prompting consumers to opt for better services and vehicles; this is

propelling the demand for refinish coatings


April 11, 2016 15

Pessimism in the economy in the recent past changed consumer’s preference

towards used cars over new cars.

Kansai is in a good position to capitalize on this opportunity, given its technological

capabilities and product portfolio. The company has created a separate division for

the Auto refinish segment and is gaining good traction in the last 2-3 years.

Kansai has introduced Retan PG ECO Hybrid system in the super premium segment.

Kansai has developed high solid technology for both solvent and water borne

refinishing systems which has high adhesion, lower baking time and 25% lower paint

consumption. It has been approved by some major Auto OEMs for their vehicles

which would boost its demand in the coming years.

Other Industrial paints

Other Industrial paints are ~12% of Kansai’s sales and 25% of the total industrial

paints sales of the company. It consists of segments like Powder coatings,

Performance coatings and other Industrial coatings like Marine coatings, coil

coatings etc. Kansai is market leader in most of these segments and will benefit from

any revival in Industrial capex cycle.

Powder Coatings; 15% CAGR likely on durables and home improvement demand

Powder coating paints market is Rs14bn and is expected to grow at 15% CAGR over

FY15-20. Powder coating paints have application in White goods, Auto components,

Furniture and home improvement industry. High performance Powder coating is

amongst the fastest growing industrial coatings segments, given the toughness,

corrosion/ scratch resistance and finish of the products.

Exhibit 14: Powder coatings finds application in White goods, auto components, Furniture and electrical industry

White Goods Auto Components Furniture Electrical Industry

Air Conditioners Air Filter Housing, Brake Capillaries Commercial Furniture Fans

Washing machines Motorcycle Frames, Steel Wheels, Seat Frames Domestic Furniture Light Fixtures

Microwave Owens Bright Trim Molding, Engine Mirror Housings Electrical Panels

Refrigerators Bumper bars, Door Handles


Kansai is the market leader in the powder coating segment for white goods industry.

Its esteemed customers include Godrej, Whirlpool, Samsung, Blue Star, Daikin,

Voltas, Haier, Videocon, Siemens, Havells and Hitachi etc. Kansai has also

strengthened its position in the auto component industry.

Kansai has acquired new range of products through technology tie-ups with Protech,

Canada which will enable it to enter new segments. It now has the technology to

address niche segments like Super Durable powders & Functional powders like pipe

coating which would enable it to cater to rising demand for premium products.


April 11, 2016 16

Cooling inflation, OROP and benefits of pay commission will increase disposable

income thus increasing consumption demand and higher growth in powder coatings.

Exhibit 15: Durables and Home Improvement to enable 15% CAGR sales growth

6 7 8

10

14

28

0

5

10

15

20

25

30


(Rs

bn)


Performance coatings to grow at 19% CAGR

Performance Coatings are Rs33bn segment and have grown at 13% CAGR in the past

five years. Core sectors like Power, Oil and Gas, OEM, Mining, Infra and SME are

major contributors to this segment. Performance and other industrial coatings are a

play on the revival of increased spending on infrastructure in the economy.

Government has announced an additional investment of Rs700bn in infrastructure

over 2016-17 along with its intention to set-up a national Investment and

infrastructure fund to ensure flow of money in the sector.

Exhibit 16: Performance Coatings

Infra

10

Power19

O&G13

OEM

19

Mining & Oth

12

SME

27



April 11, 2016 17

Kansai operates in power, floor coatings, petrochemicals and infrastructure

segments in the high performance coatings segment of paints. It includes heavy

coatings for plants, refineries, distribution stations, floor covering for industrial and

commercial purposes, paints for flyovers, airports, ports, Metros etc

Exhibit 18: Performance coatings to grow at 19% CAGR over FY15-20

18 20 23 24

33

78

0

10

20

30

40

50

60

70

80

90


(Rs

bn)


General Industrial coatings to grow at 15% CAGR

General Industrial coatings segment is Rs18bn in size and is likely to grow at 15%

CAGR. Kansai is present in this segment in State Transport segment, Agriculture,

Glass coatings, material handling, security equipment and other industrial products.

Exhibit 19: Industrial Coatings application Industries

Industrial Coatings Usage

State Transport Bus Body System

General Industrial Prefabricated Buildings, Sewing machines, Bicycles, Generators, Containers, Fans, Gas Cylinders, Helmets, , TV Cabinets, Barrel Coatings

Agriculture tractors, seeders, balers, fertilizer spreaders, Mowing and plowing equipment, harvesters

Glass Coatings Cosmetics, Perfumes, Brewery, Mirror Backing

Material Handling Casting Body, Machine Lifter

Security Equipment Coatings Fire resistant Cabinets, Safe Deposit Lockers, ATM Safes, Strong Doors


General Industrial coatings have very large and diverse customer base and are used

by large number of players even in the SME segment.

Exhibit 17: High Performance coatings usage

High performance Coatings

Usage

Power Heavy Duty coatings for plants

Floor Coatings

Industrial/ Commercial warehouses, Shop floors, Pharmaceuticals, power, lab floors

Infrastructure Flyover, Airports, metro, Ports, Sky Buses

Petrochemicals Refineries, Distribution Station, Transmission Lines



April 11, 2016 18

Industrial paints - emerging opportunities

Railways: Modernisation and transparent bidding to drive growth

Kansai started bidding for Railway tenders on improved transparency and ease of

doing business post new government assumed power in 2014. The company is well

placed to gain from growth opportunity in Indian Railways as:

Railway ministry has made a budgetary allocation of Rs1200bn in FY17 as against

Rs480bn in FY14, a part of which will flow to improvement in existing stations

and maintenance of Rolling stock and assets which will increase demand for

paints.

Kansai has acquired fresh approvals for Coaches from Research Design and

Standards Organization (RDSO) and made successful trials for high-end

Polyurethane paints for Premium coaches; this will boost sales in coming years.

Japan is making huge investments in modernisation of Indian Railways which

would provide increased business to Japanese companies. Kansai would be a

beneficiary in paints as it is subsidiary of Kansai Japan.

Road/ Infra: Increased outlay to improve demand

GOI has announced an allocation of Rs970bn for roads sector in FY16-17 budget.

Improvement in ordering, tender pipeline and traffic growth in the Indian Road

sector is expected to open up new opportunities for the paint companies by way of

Road marking and central divider, Flyovers, bridges

Side and Centre grills to protect them from corrosion

Beautification of the areas surrounding infrastructure projects

Public Transport Authorities

Increased focus on creating good public transport system, improved road

infrastructure and increased transparency in the tendering process has opened up

new opportunity for organised sector companies like Kansai to increase sales to state

road transport corporations. The opportunity could arise from:

Repainting of the existing fleet of Buses

Modernization of Bus terminals and Bus stands

Creation of Restaurants and other amenities for the Passengers


April 11, 2016 19

Building capacities to service Future demand

Kansai has five manufacturing facilities spread across Lote in Maharashtra, Bawal at

Haryana, Jainpur in UP and Chennai and Hosur in Tamil Nadu with installed capacity

of 350K tones in FY15. It is setting up two plants - one in Gujarat and other in Punjab

and an R&D centre in Vashi near Mumbai. Kansai will meet the capex requirements

with the help of internal accruals and Rs5.4b from sale of surplus land at Chennai.

1) Gujarat plant will have a capacity of 42000 MT with a capex of Rs3.5bn which

would be used for Industrial paints and will also help in meeting the demand for one

of its key customer Maruti which has a plant coming in the nearby region.

2) Punjab plant will have a capacity of 38000 MT with a capex of Rs1.8bn which

would be for decorative paints. The Punjab plant will have a VAT benefits for a

period of 10 years.

3) Kansai is setting up an R&D unit at Vashi near Mumbai at a cost of Rs400m.

New manufacturing units are expected to be operational in phases within a period of

two years i.e. by the end of FY18. Kansai’s units are strategically located near key

automobile and consumption markets across India. New units will help in reducing

freight cost, reduce delivery time and improve service levels to its depots and

dealers. The company current capacity utilization stands at ~67-70%, upcoming

capex plans will help it to meet the increase in demand.

Exhibit 20: Kansai is adding two units at Gujarat and Punjab which would increase capacity to 430k Tones

Production (Paints – All Types) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

Total Capacity 307,300 270,000 330,000 350,000 350,000 350,000 390,000 430,000 470,000

Production 190,023 195,000 220,000 230,000 243,800 273,056 314,014 357,976 408,093

Growth 16.3% 2.6% 12.8% 4.5% 6.0% 12.0% 15.0% 14.0% 14.0%

Capacity Utilisation 86.1% 72.2% 66.7% 65.7% 69.7% 78.0% 80.5% 83.3% 86.8%



April 11, 2016 20

Financials and Valuations

Revenues to grow at 16.5% CAGR post FY16

Kansai’s revenues have grown at a CAGR of 14% between FY11-FY15; share of

decorative paints in the overall sales has increased from ~52% in FY11 to 55% in

FY15. Decorative paints have grown at a CAGR of 15.7% in the last five years as

compared to automotive paints which grew at 11.6% due to relatively slower growth

in automotive volumes. We do not expect significant changes in sales mix in the

medium term as both decorative and industrial paints are expected to grow in the

same range. Industrial paints growth will be led by economic revival, decorative

paints will see improved sales mix due to shift towards higher end premium

emulsions and enamels. We have assumed revenues to grow by 7.5% in FY16 and at

17% CAGR over FY16-18 as the impact of increase in volume growth and price

deflation gets adjusted from FY17.

Exhibit 21: Sales Break-up (Rs m)

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Decorative paints 12,777 16,228 18,472 20,464 22,863 24,463 28,377 34,053

YoY gr. 31.6% 27.0% 13.8% 10.8% 11.7% 7.0% 16.0% 20.0%

Industrial Total 12,033 13,824 15,113 16,743 19,087 20,614 23,758 27,681

YoY gr. 21.5% 14.9% 9.3% 10.8% 14.0% 8.0% 15.3% 16.5%

Automotive paints 9,180 10,518 11,419 12,651 14,263 15,404 17,715 20,549

YoY gr. 23.2% 14.6% 8.6% 10.8% 14.5% 8.0% 15.0% 16.0%

Non Automotive 2,853 3,306 3,694 4,093 4,824 5,210 6,044 7,132

YoY gr. 16.4% 15.9% 11.8% 10.8% 17.9% 8.0% 16.0% 18.0%

Total Sales 24,810 30,052 33,585 37,208 41,950 45,077 52,136 61,733

YoY gr. 26.5% 21.1% 11.8% 10.8% 12.7% 7.5% 15.7% 18.4%


Margins to expand on changing product mix and low crude oil prices

Nearly two-third of Kansai’s raw materials (Pigments, extenders, solvents,

monomers, packaging) are directly or indirectly linked to Crude leading to volatility

in margins due to fluctuation in crude prices. The company’s gross margins declined

from a high of 37.2% in FY10 to 32% in FY13 as crude oil prices saw a sharp increase

from an average price of US$69.8/ barrel in FY10 to US$110.5 in FY13. This is more

so as the input cost increase is passed on with a lag in automotive paints. We note

that OEM nature of automotive paints business limits its pricing power as it is not

able to fully pass on the price increase, thus, impacting margins in the short term.

Kansai’s gross margins will get a boost from 1) shift in sales mix in favour of higher

margin decorative paints from 52% in FY11 to 55% in FY15 and 56% by FY18 and 2)

shift in the mix of decorative paint sales from low priced Distempers and Emulsions


April 11, 2016 21

to Premium Emulsions and enamels. This, coupled with decline in the prices of key

crude-linked inputs, will enable 500bps expansion in gross margins in FY16. We

expect margins to further increase to 38.7% in FY17 before it starts to taper off

gradually. We estimate 250bps increase in EBITDA margins to 15% in FY16 and

further increase to 15.5% by FY17 as adspend peak out. We estimate 110bps decline

in gross margins and 80bps decline in EBITDA margins in FY18.

Exhibit 22: Tio2 prices are down 5% YoY, trend benign

14.7

-6.0

-15.6

-7.6-5.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

TiO2 - YoY Price Change%

Source: Bloomberg, PL Research

Exhibit 23: HDPE prices are down ~5% QoQ and YoY

75780

99930101461

68226

91437

70931

400005000060000700008000090000

100000110000

No

v-1

2Ja

n-1

3M

ar-1

3M

ay-1

3Ju

l-1

3Se

p-1

3N

ov-

13

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4Ja

n-1

5M

ar-1

5M

ay-1

5Ju

l-1

5Se

p-1

5N

ov-

15

HDPE (Rs/ton)


Adj. PAT to grow at 30.9% in FY16, 18.8% CAGR over FY16-18

We estimate revenues for Kansai to grow at 17% CAGR from FY16-F18 led by revival

in demand across segments and phase out impact of price cuts.

Exhibit 24: Gross margins to peak in FY17, Est PAT CAGR of 18.6% over FY16-18

2014 2015 2016E 2017E 2018E

Net Sales 31,640 35,491 38,204 44,167 52,327

YoY gr. 12.2% 7.6% 15.6% 18.5%

Gross Profit 10,301 11,846 14,673 17,092 19,651

Gross Margin 32.6% 33.4% 38.4% 38.7% 37.6%

EBIDTA 3,621 4,448 5,738 6,846 7,667

EBITDA Margin 11.4 12.5 15.0 15.5 14.7

EBITDA Growth 22.8% 29.0% 19.3% 12.0%

Interest 5 0 - - -

Depreciation 650 677 710 852 1,002

PBT from operations 2,967 3,771 5,028 5,994 6,665

Other income 103 218 210 558 705

Profit before tax 3,070 3,989 5,238 6,552 7,370

Tax 1,004 1,272 1,682 2,103 2,366

PAT 2,066 2,717 3,557 4,449 5,004

Growth 31.5% 30.9% 25.1% 12.5%

EPS (Rs) 38.3 5.0 6.6 8.3 9.3



April 11, 2016 22

EBITDA is expected to grow by 29% in FY16 and 15.6% CAGR over FY16-18 as margins

would peak out in FY17 and decline by 80bps in FY18. We expect higher contribution

from other income to profits as it will increase from Rs210m in FY16 to 705m by

FY18. We estimate PAT growth 25% in FY17, and a reduced growth of 12.5% in FY18

due to contraction in margins.

Valuation Thesis: 15% discount to APNT, Accumulate

We expect ROE and ROCE at 18.4% and 25.8%, respectively and Dividend payout of

33%+. Kansai has strong balance sheet with net cash of Rs2bn in FY15 which should

increase to Rs8.8bn by FY18 enabled by internal accruals and sale of land. Kansai has

a few more land parcels including the one in Lower parel, Mumbai which can fund

growth and improve cash position in future.

Kansai currently trades at 30.4XFY18 EPS and 15% discount to 12 month forward P/E

of Asian Paints. Kansai has traded at a discount of 30% to APNT in last 10 years and

20% in the last 5 years on 12 month forward P/E. We expect the discount to narrow

down further given strong growth outlook across segments. We value the company

at 31xFY18 EPS and arrive at target price of Rs288. We initiate coverage on the stock

with an ‘Accumulate’ rating.

Exhibit 25: Kansai traded at 20% discount to APNT in past 5 years

29.6

9.023.0

38.6

47.7

39.0

10.6

3.2

20.8

38.8

32.4

0.0

10.0

20.0

30.0

40.0

50.0

Ap

r-0

7

Dec

-07

Aug

-08

Ap

r-0

9

Dec

-09

Aug

-10

Ap

r-1

1

Dec

-11

Aug

-12

Ap

r-1

3

Dec

-13

Aug

-14

Ap

r-1

5

Dec

-15

APNT Kansai


Exhibit 26: Kansai trades at premium to average and median P/E

32.8

38.8

20.5

22.5

3.20.0

10.0

20.0

30.0

40.0

50.0

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

P/E (x) Peak(x) Avg(x)

Median(x) Min(x)



April 11, 2016 23

Q3FY16; 190bps margin expansion enables 28.6% PAT Growth

Net sales for Q3FY16 increased 8.7% to Rs9.7bn aided by 15% volume growth due to

late Diwali and festival season. Gross margins expanded by 570bps to 39.1% as sharp

fall in crude oil prices aided margin expansion despite price cuts. EBITDA margin

increased 190bps as 340bps increase in other expenses and 45bps increase in staff

cost curtailed input cost gains. EBITDA grew by 26.1% YoY to Rs1.36bn. PBT

increased 32% YoY to Rs1.25bn as other income increased by 55%. Adj. PAT grew

28.6% to Rs844mn as tax rate increased by 190bps to 32.7%.

Exhibit 27: Q3FY16 Result Overview (Rs m)

Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%)

Net Sales 9,681 8,903 8.7 9,713 29,392 27,372 7.4

Gross Profit 3,788 2,970 27.5 3,725 11,164 9,064 23.2

% of NS 39.1 33.4 38.3 38.0 33.1

Other Expenses 2,424 1,888 28.4 2,186 6,770 5,608 20.7

% of NS 25.0 21.2 22.5 23.0 20.5

EBITDA 1,365 1,082 26.1 1,539 4,394 3,456 27.1

Margins % 14.1 12.2 15.8 15.0 12.6

Depreciation 169 171 (1.1) 170 507 509 (0.5)

Interest - - 0 0 0 -

Other Income 59 38 54.9 61 185 160 15.6

PBT 1,255 950 32.1 1,430 4,072 3,107 31.1

Tax 411 293 40.2 461 1,319 994 32.7

Tax rate % 32.7 30.8 32.2 32.4 32.0

Adjusted PAT 844 657 28.6 969 2,753 2,113 30.3


Exhibit 28: Late Diwali has boosted volumes in Q3FY16

56.5

14 14.1

5.5 5.2

12.5 11.515.5

2.5 3.1 2.6 2.5 2.5 2.5

-4.3

-6.3-6.8

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

0

5

10

15

20

Volume Growth (%) Realization Growth (%)


Exhibit 29: Benign input costs enable 570bps, EBIDTA 190bps

30.731.5 32.8 33.2 33.4 33.9 36.5 38.3 39.1

10.6 10.9 12.7 13.0 12.2 12.3 14.9 15.8 14.1

20.1 20.6 20.1 20.2 21.2 21.7 21.6 22.5 25.0

0.0

10.0

20.0

30.0

40.0

50.0

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Gross Margin EBITDA Margin Overheads



April 11, 2016 24

Exhibit 30: ROEs have remained around 20%

23.221.4 21.8

18.3

15.3

18.0 18.4 18.4 18.4

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

FY1

0

FY1

1

FY1

2

FY1

3

FY14

FY1

5

FY1

6E

FY1

7E

FY18

E

ROE


Exhibit 31: Kansai average ROCE has been 25%

29.828.4 28.9

24.220.9

24.5 25.6 25.8 25.8

10.0

15.0

20.0

25.0

30.0

35.0

FY1

0

FY1

1

FY1

2

FY1

3

FY14

FY1

5

FY1

6E

FY1

7E

FY18

E

ROCE


Exhibit 32: Inventory mgt has shown improvement

75

9094 94

99

91

79

89 90

60

70

80

90

100

110

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Inventory days


Exhibit 33: Debtors have been ~49days of sales

52

4948

50 5049

47

49 49

45

47

49

51

53

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Debtor Days


Exhibit 34: KNPL is paying faster to its suppliers

106 105

88

78 78

66

54

6568

50

60

70

80

90

100

110

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Payable days


Exhibit 35: Dividend payout to sustain around mid thirties

32.5

39.536.4

32.2 33.6 33.6 33.0 33.6 33.6

20.0

25.0

30.0

35.0

40.0

45.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

Dividend Payout Ratio



April 11, 2016 25

Income Statement (Rs m)

Y/e March 2015 2016E 2017E 2018E

Net Revenue 35,491 38,204 44,167 52,327

Raw Material Expenses 23,644 23,531 27,075 32,676

Gross Profit 11,846 14,673 17,092 19,651

Employee Cost 1,433 1,825 2,111 2,476

Other Expenses 5,965 7,110 8,135 9,508

EBITDA 4,448 5,738 6,846 7,667

Depr. & Amortization 677 710 852 1,002

Net Interest — — — —

Other Income 218 210 558 705

Profit before Tax 3,989 5,238 6,552 7,370

Total Tax 1,272 1,682 2,103 2,366

Profit after Tax 2,717 3,557 4,449 5,004

Ex-Od items / Min. Int. — 8,606 — —

Adj. PAT 2,717 3,557 4,449 5,004

Avg. Shares O/S (m) 538.9 538.9 538.9 538.9

EPS (Rs.) 5.0 6.6 8.3 9.3

Cash Flow Abstract (Rs m)

Y/e March 2015 2016E 2017E 2018E

C/F from Operations 3,117 8,462 5,080 5,186

C/F from Investing (2,178) (2,689) (7,713) (3,388)

C/F from Financing (1,147) (1,284) (1,595) (1,791)

Inc. / Dec. in Cash (208) 4,489 (4,227) 8

Opening Cash 549 341 4,830 602

Closing Cash 340 4,830 602 610

FCFF 2,382 3,019 810 3,094

FCFE 2,229 2,913 710 2,985

Key Financial Metrics

Y/e March 2015 2016E 2017E 2018E

Growth

Revenue (%) 12.2 7.6 15.6 18.5

EBITDA (%) 22.8 29.0 19.3 12.0

PAT (%) 31.5 30.9 25.1 12.5

EPS (%) 31.5 30.9 25.1 12.5

Profitability

EBITDA Margin (%) 12.5 15.0 15.5 14.7

PAT Margin (%) 7.7 9.3 10.1 9.6

RoCE (%) 17.4 18.1 18.2 18.2

RoE (%) 18.0 18.4 18.4 18.4

Balance Sheet

Net Debt : Equity — (0.2) — —

Net Wrkng Cap. (days) 84 88 84 82

Valuation

PER (x) 56.0 42.7 34.2 30.4

P / B (x) 9.5 6.7 5.9 5.3

EV / EBITDA (x) 34.2 25.7 22.2 19.8

EV / Sales (x) 4.3 3.9 3.4 2.9

Earnings Quality

Eff. Tax Rate 31.9 32.1 32.1 32.1

Other Inc / PBT 5.5 4.0 8.5 9.6

Eff. Depr. Rate (%) 4.8 4.7 4.5 4.8

FCFE / PAT 82.1 81.9 16.0 59.6

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2015 2016E 2017E 2018E

Shareholder's Funds 15,968 22,654 25,608 28,931

Total Debt 415 309 209 100

Other Liabilities 752 888 1,058 1,250

Total Liabilities 17,135 23,851 26,875 30,281

Net Fixed Assets 9,494 11,944 13,992 14,490

Goodwill — — — —

Investments 2,156 1,685 6,497 8,385

Net Current Assets 5,485 10,223 6,387 7,407

Cash & Equivalents 341 4,830 602 610

Other Current Assets 11,448 12,662 14,523 17,162

Current Liabilities 6,303 7,269 8,739 10,366

Other Assets — — — —

Total Assets 17,135 23,851 26,875 30,281

Quarterly Financials (Rs m)

Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16

Net Revenue 8,078 9,998 9,713 9,681

EBITDA 992 1,491 1,539 1,365

% of revenue 12.3 14.9 15.8 14.1

Depr. & Amortization 168 168 170 169

Net Interest — — — —

Other Income 58 65 61 59

Profit before Tax 883 1,388 1,430 1,255

Total Tax 279 447 461 411

Profit after Tax 604 940 969 844

Adj. PAT 604 940 969 844

Key Operating Metrics

Y/e March 2015 2016E 2017E 2018E

Volume Growth (%) 8.5 12.0 15.5 16.0

Gross Margins (%) 32.6 33.4 38.4 38.7

Source: Company Data, PL Research.


April 11, 2016 26

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

49.1%

37.3%

13.6%

0.0%0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% o

f To

tal C

ove

rage

BUY : Over 15% Outperformance to Sensex over 12-months

Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months

Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month

Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES

ANALYST CERTIFICATION

We/I, Mr. Amnish Aggarwal (MBA, CFA), Mr. Gaurav Jogani (MBA, Bcom), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures:

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This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014

PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities.

PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company.

PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.

PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report.

PL or its associates might have received compensation from the subject company in the past twelve months.

PL or its associates might have managed or co-managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months.

PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months

PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report.

PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report.

It is confirmed that Mr. Amnish Aggarwal (MBA, CFA), Mr. Gaurav Jogani (MBA, Bcom), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company

Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest.

PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.

DISCLAIMER/DISCLOSURES (FOR US CLIENTS)

ANALYST CERTIFICATION

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report

Terms & conditions and other disclosures:

This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

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Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.

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