Industry Risk Score : PAINTS

By: Group 9 Section B• Rahul Relan

AGENDA

• Industry : Executive summary

• Company Analysis

• Competition Analysis

• Financials

• HDFC Bank

• Risks Involved

• Products and Offerings

INDUSTRY

• Executive Summary– The paint industry is divided into organized and unorganised

sector

– The Indian Paints Industry stands at Rs 112 bn, of which

75% is Decorative Paints while 25% is Industrial Paints.

– The unorganised segment plays a huge role in decorative

paint segment due to low technical know-how and highly

scattered market

– Market is seasonal in nature

DEMAND Side Analysis

– Positively related with GDP and disposable income

– Decrease in investment in Real Estate

– Increase in income levels of the consumers

INDUSTRY

• Executive Summary

Supply Side Analysis

– Dependent on raw materials, mostly petro based.

– Large distribution network is a prime requirement decorative

paints business.

– Most companies are planning CapEx to increase their installed

capacity.

Recent Developments

– Increase in the crude oil prices

– Depreciating rupee to affect imports

Government Policies

– Industrial paint segment would benefit from the excise duty

cuts in the auto sector.

– The cut in Personal income tax and waiver of Agricultural Debt

which results in the rise of disposable income

Kansai Nerolac Paints

Background– Established in 1920

– Strong corporate governance, with high focus on technology,

transformation, innovation & style

– Good brand image/recall with brands, like Impressions,

Beauty, Excel and Suraksha

– Coveted many awards in last 5 years including ICSI National

Award for Excellence in Corporate Governance

– It supplies 70 per cent of the paint requirement of Maruti

besides supplying to other customers like Telco, Toyota,

Hindustan Motors, Hero Honda, TVS-Suzuki, Mahindra &

Mahindra, Ashok Leyland, Ford India, PAL Peugeot and Bajaj

Auto.

– KNP leads the industrial segment with 41%, & owns 70% of the

market in OEM passenger car segment

Kansai Nerolac Paints

– Consistent supplies from Khakhu Enterprises.

– Ventured into eco-friendly coating, with low VOC

(Volatile Organic Compounds), has helped the customer

increase its productivity and reduce power cost.

– Believe in technology up gradations, KNP has technical

collaborations with Ashland Chemicals Inc, USA, a leader in

the petrochemical industry, Nihon Tokushu Toryo Co and

Oshima Kogyo Co Ltd, Japan.

COMPETITOR ANALYSIS

COMPETITOR ANALYSIS

Asian Paints

Berger Paints

Nerolac ICI Paints Shalimar

Net Sales3585.86 1559.75 1404.14 1025.84 256.05

Net Sales growth %

21.78 18.49 13.18 5.4 17.97

PBDIT 619.55 130.16 247.69 115.87 16.14

PAT 375.2 83.07 153.61 60.21 4.75

PAT growth % 37.92 18.18 10.94 -86.57 39.3

TNW 928.5 274.46 510.29 761.5 27.25

TOL /TNW 0.85 0.72 0.62 0.35 2.43

Current Ratio 1.15 1.33 2.7 0.81 1.18

NWC 61.1 243.74 368.5 -73.35 68.21

FINANCIALS

Profitability Ratios (in %age) 2006 2007 2008Industry (2008) 2009 2010

Total - Reserves 380.55 484.78 566.74 642.25 724.36

Total - Shareholders Funds 406.06 510.29 593.69 673.00 757.44

Reserves/ Shareholders Fund 0.94 0.95 0.95 0.95 0.96

PAT/ Sales 0.17 0.12 0.11 0.10 0.14 0.14

Retained Profit / PAT 71.41 80.66 78.95 45.32 81.42 82.06

Return on Capital Employed 54.37 35.81 36.80 42.74 37.03 35.94

Return on Equity 43.95 31.40 25.87 45.3 32.78 32.22

Capital Structure          

Debt / Equity 0.18 0.16 0.13 0.15 0.14 0.14

Activity Ratios          

Stock Days 85.33 72.87 65.95 46 70.37 69.96

Debtor Days 49.49 55.19 55.35 32 56.37 57.49

Creditor Days 74.84 61.43 65.39 52 59.84 57.12

Stability Ratios          

Current Ratio 2.07 2.56 2.74 1.31 2.70 2.79

Acid Test Ratio 1.44 1.82 2.07 1.98 2.04

HDFC Bank

Exposure for chemical industry : Around 780 crore

(Sub Sector Paints – Can get about 78 crores)

Consortium of 5 Banks

Company Rating Analysis

COMPANY Kansai Nerolac Limited

i-RISK – CURRENT AA BASE YEAR: 2007-2008

i-RISK - PREVIOUS BASE YEAR:

EXTERNAL CREDIT RATINGS

AGENCY RATING Product

CRISIL AAA For Non Convertible Debentures

CARE P1+ Short Term Debt

GROUP KANSAI Group of Industries

INCORPORATED ON 1920

CORPORATE STATUS Listed

INDUSTRY Paints

BUSINESS Industrial Paints, Decorative paints

Assessment of Risk

STRENGTH OF THE CREDIT: Very Strong

– NPL has secured loans of only Rs 192 crores that has been secured by a charge on the fixed assets of the factory at Jainpur

– The remaining of the Net Total Assets of INR 6,916 crores are free of any charge

Assessment of Risk

RISKS PERCEIVED AND MITIGANTS

Risks Perceived:– Prices of Raw materials: Rise in raw material prices

especially crude oil prices may affect margins adversely.– Foreign Currency Risk: Due to weakening of rupee there will

be a negative impact on the performance of the company as it is a net importer.

Mitigants:– The company can hedge itself against oil price fluctuations

by employing various futures and options contracts. – The company has hedged itself against currency

fluctuations by employing various forwards and options.

Products Offered

• FUND BASED WCAP

• FUND BASED TERM LOAN

• CHANNEL FINANCING

• FOREX SWAPS

ASSESSMENT OF LIMITS

• FUND BASED WCAP – 30 crores– The company will need excess working capital financing of INR

79.2 Crores in FY 09 & FY 10– No working capital loan to finance the net working capital

position of INR 424.17 cr. as at FY 2008 

• FUND BASED TERM – 20-30 crores– Not a capital intensive business; Fixed Assets to Sales Ratio is

just at 0.16 for FY 08

• LC – NIL– Raw material imports stood at INR 1,806 crores for FY 08

implying 20% of the total raw material requirement of INR 8,370 crores

• BG – NIL– Corporate guarantee provided by its holding company, Kansai

Paint Co. Ltd., Japan

• OTHERS: Channel Financing, CMS, Forex Swaps (for hedging against foreign exposures as it is a net importer by INR 1865 crores)

Terms & Covenants

TERM EXISTING PROPOSED

COVENANTS NIL

- The company will provide financial information to the bank on a regular basis- The assets can’t be sold off to the tune of more than 30% of the asset value as at FY 2008-

EVENTS OF DEFAULT

NIL

- Financials - Current Ratio above 1.33- TOL/TNW below 1.00 (annual)- Company incurring loss for 2 consecutive years

- Others - Cross default (as and when)- Change in Management (as and when)- CARE rating below A (as and when)

PRIMARY SECURITY

NIL

First charge on all current assets of the company ranking pari passu with other participating banks for WC limits, as and when.

MARGINS NIL

COLLATERAL NIL3rd/Residual charge on all fixed assets of the company including factory and buildings on pari passu terms with other banks.

GUARANTEES NIL

FUND BASED WCAP

• Purpose - Inventory Financing

• Limit – 30 crores

• Tenure – Review every year

• Interest Rate – 8.75% + 150 BP

• Collateral - First charge on all current assets of the company

FUND BASED TERM – 30 crores

• Purpose – Capacity Expansion

• Limit – 20-30 crores

• Tenure – 5 years

• Interest Rate – 8.75% + 100 BP

• Collateral - 3rd/Residual charge on all fixed assets of the company including factory and buildings on pari passu terms with other banks

Channel Financing

• Purpose – Improve Cash Cycle

• Limit – maximum 10 crores

• Tenure – Review every year

• Interest Rate – 8.75% + 175 BP

• Collateral – Bills Receivable

Cash Management Service

• Purpose – Collection & disbursement of cash

• Fee – 25 BP

Thank You