Research Report on Kansai Nerolac Paints

Summary

Overview and history of the Kansai Nerolac:

Kansai Nerolac Paints Ltd., commonly known as Nerolac, is one of India's leading paint companies with a rich history spanning over nine decades. Founded in 1920, the company has established itself as a trusted name in the Indian paint industry and has a strong presence in both the decorative and industrial paint segments. Here's an overview of Kansai Nerolac:

1. History and Background: Kansai Nerolac has its roots in Japan. The company began as Gahagan Paints and Varnish Co. Ltd. in Mumbai, a joint venture between Polychemie Co. Ltd. of Japan and Gahagan Paints and Varnish Co. of USA. In 1930, it was renamed as Goodlass Wall India Ltd. (GWIL). In 1999, Kansai Paint Co. Ltd. of Japan acquired a majority stake in GWIL, leading to the formation of Kansai Nerolac Paints Ltd.

2. Product Portfolio: Kansai Nerolac offers a wide range of paints and coatings catering to various sectors, including:

• Decorative Paints: These are aimed at beautifying homes and include products like emulsions, enamels, exterior paints, and special-effect finishes.
• Industrial Coatings: The company provides coatings for industries such as automotive, powder coatings, protective coatings, and high-performance coatings for various substrates.
• Automotive Coatings: Kansai Nerolac is a major supplier of coatings to the automotive industry, producing coatings for cars, commercial vehicles, and two-wheelers.
• Powder Coatings: They offer environmentally friendly and durable coatings suitable for various applications.
• Construction Chemicals: The company also offers construction chemicals like adhesives, sealants, and waterproofing solutions.

3. Innovation and Research: Kansai Nerolac invests significantly in research and development to develop innovative and eco-friendly products. They have a state-of-the-art research center in Mumbai that focuses on product development and improving existing coatings.

4. Sustainability Initiatives: The company is committed to sustainability and reducing its environmental impact. They have introduced water-based paints, low VOC (volatile organic compound) products, and various initiatives to reduce energy consumption and waste.

5. Market Presence: Kansai Nerolac has a widespread presence in India and has a significant market share. They serve both urban and rural markets, making their products accessible to a wide range of customers.

6. Brand Recognition: The brand "Nerolac" is well-known in India and is associated with quality and reliability. Their tagline, "Nerolac - Suraksha Chhodo, Khushiyon Ko Rang Do" (which roughly translates to "Leave Safety to Us, Add Color to Happiness"), underscores their commitment to providing safe and vibrant solutions.

About Management:

Shareholding Pattern:

  Industry Research:

The India Paints and Coatings Market is poised for significant growth in the coming years, driven by a range of factors, despite facing challenges such as raw material price fluctuations. Here's a breakdown of the market analysis and segmentation:

Market Size and Growth:

• The India Paints and Coatings Market is estimated to be valued at USD 8.78 billion in 2023.
• It is projected to grow at a Compound Annual Growth Rate (CAGR) of 9.38% during the forecast period (2023-2028).
• The market is expected to reach a valuation of USD 13.75 billion by 2028.

Impact of COVID-19:

• The COVID-19 pandemic had both short-term and long-term effects on the industry, with a substantial impact on the construction sector, which, in turn, affected the paints and coatings market.
• With the gradual lifting of restrictions in 2021, the market has started to recover and grow steadily.

Drivers of Growth:

• Construction Industry: The construction sector in India is witnessing growing demand, which is a significant driver for the paints and coatings market.
• Automotive Industry: The automotive industry's recovery is also contributing to increased demand for paints and coatings.

Challenges:

• Raw Material Price Fluctuations: The market faces challenges due to fluctuations in raw material prices, which can impact the cost of production and pricing.

Opportunities:

• Nanotechnology: The use of nanotechnology in paints and coatings presents growth opportunities. Nanotech-enabled coatings can offer advanced properties, including enhanced durability and performance.

Market Segmentation:

• Technology: The market is segmented by technology into four categories: water-borne coatings, solvent-borne coatings, powder coatings, and radiation-cured coatings. These different technologies cater to various industrial and consumer needs.
• Resin Type: Resin types in the market include acrylic, alkyl, polyurethane, epoxy, polyester, and others. Different resin types have specific applications and properties.
• End-User Industries: The market serves multiple end-user industries, including architectural, automotive, wood, protective coatings, general industrial, transportation, and packaging. Each of these industries has distinct requirements for paints and coatings.

Financial of the Company:

1. Profit And Loss Statement 

2. Balance Sheet

3. Cash Flow Statement 

1. Revenue Growth: KNPL's standalone revenue for the quarter grew by 6.5% year-on-year (YoY) to INR 20.7 billion. This figure was slightly below the estimated revenue of INR 21.2 billion.

2. Segment Performance:

• Decorative Segment: The decorative segment recorded high-single-digit growth, reflecting a strong demand for decorative paints.
• Industrial Segment: Within the industrial segment, the automotive demand stabilized, and the non-auto segment performed well.

3. Premium Products: KNPL has been focusing on increasing the salience of premium products across its portfolio, which includes both paints and project business. This strategy has contributed to revenue growth, with the paint+ category now accounting for 7-8% of revenue within a year of its launch.

4. Gross Margins: Gross margins (GMs) expanded significantly, increasing by 539 basis points (bps) YoY to 35.3% on a standalone basis. This improvement was attributed to several factors, including moderating raw material prices, no price cuts, and the growing importance of premium products in the product mix.

5. EBITDA Margin: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins also followed suit, increasing by 298 bps YoY to 16.1%, surpassing the HSIE estimate of 14.2%.

6. Marketing Spending: KNPL has increased its advertising and promotional (A&P) spending, accounting for 4.5% of sales. This move aims to recoup market share loss experienced over the past 2-3 years.

7. Earnings Growth: EBITDA grew significantly by 30.6% YoY to INR 3.3 billion, exceeding the HSIE estimate of INR 3.0 billion. Adjusted Profit After Tax (APAT), which accounts for the INR 6.6 billion Thane land sale, saw a 40% YoY increase to INR 2.28 billion, surpassing the HSIE estimate of INR 1.95 billion.

Outlook: Competition is expected to intensify in the high-margin decorative segment due to the entry of a new player (Grasim). This will likely require higher marketing spending, which is already factored into the outlook.

Q1 FY2023 Concall highlights

Segment Performance:

• The automotive segment, especially passenger vehicles, experienced significant growth.
• Two-wheelers showed marginal growth.
• Decorative paints witnessed higher single-digit volume growth.
• The industrial business, particularly in the automotive sector, is steadily increasing.

Growth Initiatives:

• The company is actively pursuing growth initiatives in the decorative segment, including increased marketing efforts, digital strategies, influencer outreach, new product launches, and project business expansion.
• They introduced new products in the Paint+ category, emphasizing Japanese technology and performance.
• Expansion in distribution and project business is a priority, with a focus on Tier 1 markets and urban areas.

Sustainable Technologies:

• There is a strong emphasis on technologically advanced and sustainable products to reduce VOC (volatile organic compounds) and carbon emissions.

Capacity Expansion:

• Capacity expansion projects in Visakhapatnam, Jainpur, and Hosur are progressing as planned.
• The sale of land in Thane generated INR 671 crores in Q1, which will support business and growth initiatives.

Financials:

• No price cuts have been implemented, but higher discounts in the marketplace may be considered.
• Market share in the project business is currently less than 10%, and efforts are underway to expand reach and pipeline in this segment.
• The company aims to maintain a sustainable EBITDA margin of around 14%.
• Positive market share gains are expected, particularly in weaker markets.
• Advertising spend was around 4.5% of sales in Q1 and is expected to remain at a similar level.
• Cash reserves of approximately INR 800 crores to INR 900 crores are available, primarily from land sales.
• While open to exploring acquisition opportunities, there are no specific plans at the moment.

Industrial Segment:

• The industrial segment is experiencing a mix of volume and pricing growth, with a time lag of 3 to 6 months for price cuts to be passed on.
• Market share in the top markets is less than 10%, with a stronger presence in North India.
• The outlook for the auto and decorative segments is positive, with potential growth in two-wheelers and non-auto industrial segments.
• New clients have been added in the auto segment in the last 3 to 6 months.
• Overall, there is a positive outlook for all business segments.

Risk

• Grasim Industries Ltd. plans to invest ₹10,000 crore in the paints industry by FY25, doubling its initial investment plan of ₹5,000 crore announced last year.
• This substantial investment by Grasim intensifies the competition in the Indian paints sector, traditionally dominated by incumbents like Asian Paints Ltd, Berger Paints India and Nerolac paints
• The increased competitive intensity raises concerns of potential business disruption for Nerolac paints and other companies.

Valuations

Nerolac Paints' P/E ratio of 49 is notably lower compared to the industry average P/E of 60, making it an attractive proposition for investors. The potential for margin improvement suggests that Nerolac Paints has opportunities to enhance its profitability.