Paints: Spark Shade-Card

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1 : Spark Shade-Card Executive Summary Spark Shade-Card: 3QFY14 Showing brighter shade, somehow In our endeavor to keep pace with the ever evolving Indian paint sector, we publish our second 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 near term trends and emerging long term themes. Post our interaction with the industry participants at the end of 9MFY14, we believe the following trends are emerging this quarter. (1) After being subdued in 1HFY14 due to extended monsoon, exterior paint sales have bounced back sharply this quarter... (2) However, the good monsoon has led to increased disposable income in the rural market which should translate to better paint demand and higher rural offtakes in the coming quarters (3) Good festive offtakes in October and moderate sales in November and December is expected to lead to healthy volume traction this quarter. (4) Premiumisation trend continues across decorative paints offerings (5) We understand that the dealer network is gearing up for an another round of price increase in February, though official communication is still awaited (6) In the industrial paints segment, pressure on growth and margins continued in this quarter as well. How do we see the current quarter shaping up for the coverage paint companies Akzo Nobel India (AKZO): Growth of ~12% to be pegged on volume growth of ~9% in decoratives segment. Operating margins to remain flat despite higher raw material costs on account of low other operating expenses. Watch out for guidance on its business plan for the merged entities. New CEO comments on growth plans and margin expansion. Asian (APNT): Growth to be led by ~12% volume offtakes and ~4% pricing increase in the decoratives segment. Better traction in construction chemicals to lead to higher growth. Watch out for comments on demand outlook, raw material prices (TiO2 in particular). Some hint on the anticipated expansion in the scope of business activities will be crucial. Berger (BRGR): Favorable mix to improve volume growth in the decorative paints segment. Growth to be led by increasing offtakes in tier 2 and tier 3 towns. Festive off-takes have been on expected lines. Operating margins to remain flat. Watch out for comments on Hindupur plant status and overall business outlook. Kansai Nerolac (KNPL): Tepid industrial (automotive/non-automotive) demand to keep revenue growth subdued. On account of high cost inventory and low pricing power in non-decorative business, gross margins are expected to contract sequentially, albeit EBITDA margins to expand yoy. Watch out for guidance on - demand outlook across business verticals, raw material basket (TiO2 in particular). Stock Calls: Akzo Nobel India- Add (TP: Rs. 946), Asian - Add (TP: Rs. 538), Berger - Reduce (TP: Rs. 228), Kansai Nerolac Reduce (TP: Rs. 1088) Date Jan 17, 2014 Market data BSE SENSEX Nifty 6318 Stock performance Company 1m 3m 12m Asian Tejash Shah tejash@sparkcapital.in Berger Akzo Nobel India Kansai Nerolac Sensex Nifty Gnanasundaram S gnanasundar@sparkcapital.in

2 : Spark Shade-Card Spark quarterly Estimates All numbers in Rs. mn except per share data Quarter Change Dec-13 Sep-13 Dec-12 YoY QoQ Akzo Nobel India (Consolidated) (Date of results : YTA) Net sales 6,768 5,764 6,052 12% 17% EBITDA % 53% EBITDA Margin 8.5% 6.5% 8.2% 24bps 195bps PAT % 64% EPS % 64% Asian (Consolidated) (Date of results : 20 th January 2014) Net sales 35,381 31,147 30,529 16% 14% EBITDA 6,226 5,108 5,104 22% 22% EBITDA Margin 17.6% 16.4% 16.7% 88bps 120bps PAT 3,958 3,268 3,352 18% 21% EPS % 21% Berger India (Consolidated) (Date of results : 1 st February 2014) Net sales 10,829 9,662 9,203 18% 12% EBITDA 1,295 1,042 1,168 11% 24% EBITDA Margin 12.0% 10.8% 12.7% -73bps 118bps PAT % 29% EPS % 29% Kansai Nerolac (Consolidated) (Date of results : 31 st January 2014) Net sales 8,434 7,917 7,666 10% 7% EBITDA % 5% EBITDA Margin 11.5% 11.6% 11.0% 43bps -12bps PAT % 6% EPS % 6% 2

3 : Spark Shade-Card All the players extensively promoted exterior offerings this quarter APNT s premium variant Aspira advertisement was rolled out this quarter while exterior paint brand Apex Ultima Ads were back on air. Aspira Advt featuring Celebrities, (Saif & Soha Ali Khan) Apex Ultima Exterior paints Exterior Weather coat offering and Premium Silk offering advertisements were the most prominent from Berger s stable this quarter. Berger exterior ads resurfaced this quarter While Silk Advts continued to be prominent Source: Company, Youtube, Spark Capital AKZO concentrated on its premium offering Velvet and exterior offering Dulux weather shield Dulux Weather guard exterior was extensively promoted along with velvet advertisements Source: Company, Youtube, Spark Capital..while KNPL extensively promoted their exterior emulsion offering pan India and economy Nerolac little master offering in southern markets. Ad behind economy Nerolac Master was visible in South India While external Nerolac Excel ads were prominent pan India Source: Company, Youtube, Spark Capital Source: Company, Youtube, Spark Capital 3

4 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 : Spark Shade-Card Demand Drivers GDP growth continues to dwindle So does absorption of new real estate projects GDP growth is expected to remain subdued in FY Real estate activity remains lackluster 25% 20% 15% 10% 5% 0% YoY GDP growth Quarterly New Launches Absorption Rate Source: Industry, Spark Capital Source: Industry, Spark Capital Passenger cars production is struggling to bounce back Price hikes affected in decorative paints to counter weakening Rupee Domestic Passenger car offtakes Weakening Rupee has forced the companies to affect ~4% price increase in 3QFY Source: SIAM, Company, Spark Capital 4

5 USD/Barrel INR/Barrel : Spark Shade-Card Raw material price movement TIO2 prices have risen on a YoY basis Global crude oil prices though have increased 10% YoY this quarter TiO2 (INR/Kg) Titanium Di-Oxide prices are up 11.2% yoy this quarter on Rupee weakening Indian crude prices were up 26% YOY this quarter due to weaker Rupee USD/Barrel INR/Barrel Source: Bloomberg, Spark Capital Further Diesel price hike though could force further price rise Source: Bloomberg, Spark Capital...so does Rupee weakening Diesel prices are already up 12% YoY in 3QFY13, further pressure could prompt another price rise With the Rupee weakening by 14% YoY, pressures are evident on imported Ti02 prices and Crude oil. Diesel (INR/Lit) Source: Bloomberg, Spark Capital Source: Bloomberg, Spark Capital 5

6 : Spark Shade-Card Corporate Announcements Major filings by the paint companies in the exchanges Date Category Announcement Asian 20-Dec Dec Nov-2013 Strike at Sriperumbudur, Tamil Nadu Update Update Operations at the Company's Plant situated at Sriperumbudur, Tamil Nadu will be affected due to the strike called by the Asian Employees Union Sriperumbudur Company's Chemical Plant engaged in manufacturing of Penta situated at Cuddalore, Tamil Nadu, has taken temporary shut down for annual preventive maintenance. Asian Industrial Coatings Limited (APICL), has closed down the operations of its powder coatings plant at Baddi, Himachal Pradesh with effect from November 25, Nov-2013 Update Announces voluntary unconditional cash offer for the shares of Berger International Limited (BIL), Singapore by Asian (International) Limited 21-Oct-2013 Change in Directorate Mrs. Ina Dani, Non - Executive Director has resigned as a Director of the and the vacancy so created has been filled by the Board of Directors by appointment of Shri Malav Dani as a Non - Executive Director 21-Oct-2013 Berger Board declares Interim Dividend Board of Directors of the Company at its meeting held on October 21, 2013, inter alia, have recommended payment of interim dividend of Rs. 1.10/share 03-Dec-2013 U.K increases stake U.K. (which held 45.63% prior to the transaction) purchased 0.10% from Mr.Vinu Dingra (2.20% prior to the transaction) via inter se-transfer via inter se-transfer with with in promoters for Rs. ~80mn ( per share) promoters Akzo Nobel India 18-Dec-2013 Change in Directorate Mr. Amit Jain, Managing Director, will be stepping down from the Board of the Company as the Managing Director with effect from close of business on December 31, Dec-2013 Change in Directorate Mr. Himanshu Agarwal, Wholetime Director and CFO has, in addition to his current role, been nominated as the Operating Head of the Company. 2-Sep-2013 Company Update Akzo Nobel India Ltd has submitted to BSE a press release issued on October 28, 2013, after the formal inauguration of Company's Gwalior plant by Akzo Nobel Group CEO Mr. Ton Buchner. Kansai Nerolac 09-Jan-2014 Company Update Source: Exchange filings, Company, Spark Capital Trading Window" of the Company will remain closed from January 17, 2014 to January 31, 2014 in view of the Board Meeting to be held on January 31, 2014 to consider the unaudited financial results for the quarter ended December 31, 2013 for the Directors/ Officers and designated employees. 6

7 : Spark Shade-Card Key Developments Asian Berger Strike at Sriperumbudur, Tamil Nadu Closed down its powder coatings plant at Baddi, Himachal Pradesh Announces the launch of Berger Silk to Nepal Indicates robust growth from rural India backed by good monsoon Source: Company, Spark Capital Source: Company, Spark Capital Akzo Nobel India Kansai Nerolac Mr.Himanshu Agarwal appointed to lead operations Plant in Gwalior official inaugurated. Ties-up to be the official partner of Kidzania, India Rolls out mobile-swipe promotions to promote Nerolac Excel Source: Company, Spark Capital Source: Company, Spark Capital 7

8 ROE - 1 YR FWD EPS GROWTH (%) : Spark Shade-Card Valuations Recap of what happened in 1HFY14 1QFY14 2QFY14 Stock performance (%) Company 1 month 3 months 6 months 12 months Company ROE Vs PE YoY Revenue Growth YoY PAT Growth YoY Revenue Growth YoY PAT Growth Asian 11.5% -4.6% 18.3% 36.7% Berger 12.6% 10.6% 19.1% 17.4% Akzo Nobel India 1.9% -42.8% 10.1% -24.7% Kansai Nerolac 9.5% -3.8% 16.1% 9.1% Asian Berger Akzo Nobel India Kansai Nerolac Sensex Nifty EPS growth Vs PE 60% 50% Sherwin Williams 25.0% 20.0% Akzo Nobel Berger Asian 40% 30% 20% 10% Akzo Nobel India Nippon Akzo Nobel PPG industries Kansai Berger Kansai Nerolac Asian 0% YR FWD PE 15.0% 10.0% 5.0% Nippon Akzo Nobel India Kansai Kansai Nerolac Sherwin Williams PPG industries 0.0% YR FWD PE 8

9 : Spark Shade-Card Global paint companies valuation summary Company Parent Country Markt Cap (USD Mn) EV (USD Mn) PE PB EV/EBITDA ROE (%) OCF Yield Dividend Yield CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E Ppg Industries Inc Sherwin-Williams Co/The United States United States 27,084 28, % 0.3% 19,571 20, % 0.3% Akzo Nobel Netherlands 10,060 11,711 NA % 0.6% Koninklijke Dsm Nv Netherlands 13,857 8, % 0.9% Clariant Ag-Reg Switzerland 5,121 8, % 1.9% Valspar Corp Rpm International Inc United States United States 6,229 7, % 0.4% 5,773 7, % 0.6% Nippon Paint Co Ltd Japan 4,608 4, % 0.4% Kansai Paint Co Ltd Japan 3,898 3, % 0.5% 9

10 : Spark Shade-Card Valuation Summary Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) EBITDA Margin Company FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E Asian 96,322 1,09,7071,28,6511,53,032 15,088 17,319 21,178 24,895 9,887 11,139 13,095 15, % 15.8% 16.5% 16.3% Akzo Nobel India Berger Kansai Nerolac 19,878 22,320 24,793 29,249 1,746 1,885 2,207 2,790 2,017 2,188 2,142 2, % 8.4% 8.9% 9.5% 29,477 33,464 39,184 46,372 3,034 3,712 4,340 5,314 1,800 2,184 2,535 3, % 11.1% 11.1% 11.5% 26,006 28,566 32,086 36,899 3,373 3,361 3,772 4,313 2,159 1,995 2,302 2, % 11.8% 11.8% 11.7% P/E (x) EV/EBITDA (x) EV/Sales (x) Mkt Cap Target * Rating CMP (Rs) Company FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E (Rs. mn) P/E Price Absolute Asian x 538 Add Akzo Nobel India x 946 Add Berger x 228 Reduce Kansai Nerolac x 1088 Reduce Company Per Share FY14E Dividend Payout % Dividend Yield OCF/Sales OCF OCF Yield WC days FY14E ROE FY14E ROCE FY14E Asian % 1.1% 10.9% 2.5% % 31.2% Akzo Nobel India % 2.4% 7.1% 3.5% % 17.5% Berger % 0.9% 0.0% 0.0% % 17.4% Kansai Nerolac % 1.1% 6.6% 3.4% % 15.3% 10

11 : Spark Shade-Card Absolute Rating Interpretation Buy Stock expected to provide positive returns of >15% over a 1-year horizon Add Stock expected to provide positive returns of >5% <15% over a 1-year horizon Reduce Stock expected to provide returns of <5% -10% over a 1-year horizon Sell Stock expected to fall >10% over a 1-year horizon Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. 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. 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: 11

12 : Spark Shade-Card 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 & Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker & 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 & Co. All responsibility for the distribution of this report by Decker & Co, LLC in the US shall be borne by Decker & 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 & 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 & Co, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations; Disclosure of interest statement Analyst ownership of the stock Group/directors ownership of the stock Broking relationship with the company covered Investment banking relationship with the company covered Yes/No No No No No 12