Institu tion al E quities Paint Sector · 4 Paints Sector Exhibit 5:… unlike in India where...

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Paint Sector

The sector which keeps on giving growth In recent times, growth in India’s paint sector has been an outlier in the overall domestic consumer space. The industry has been witnessing a gradual shift in terms of consumer preferences from the traditional whitewash to better quality paints. Besides, it is also witnessing healthy competitive environment, where players are applying different strategies to tap the growing demand in the market for a larger regional share. Additionally, rise in disposable income of the average middle class, urbanization, growing rural market, shortening of repainting cycle, upgradation, increase in sale of premium-end products and launch of many innovative products are the major drivers that are pushing the growth of the organized paint industry. Within the Indian decorative paint segment, Asian Paints (APNT) and Berger Paints (BRGR) are the two largest players with more than 80% of their overall revenues coming from the segment and within the industrial paints segment, Kansai Nerolac (KNPL) is the leader (segment contributes ~45% to its revenue). Since in the current environment there is a preference for businesses that are relatively more resilient, sector multiples at current levels in near term will look expensive. We initiate coverage on APNT (Accumulate rating) and BRGR (Sell rating), as we believe that Indian decorative paints will continue to witness higher demand within this space, majorly led by steady shift from unorganized to organized players with bigger players gaining further share.

Leaders continue to maintain share even as new players have entered in an oligopolistic market: Organized domestic decorative paints industry is a comfortable oligopoly with a few big players (Asian Paints, Berger, Kansai Nerolac and Akzo Nobel), constituting bulk of the segment, with strong entry barriers such as distribution network and brand equity. The industry has demonstrated consistent pricing discipline and has not seen mutually destructive price wars, discounting etc. Thus, every company has co-existed with its own specific niche – regional strength, expertise in particular product sub-segment etc. Although new players have entered the market over the last decade, existing players have strengthened their distribution network, focused on capacity building and introduced innovative products & services to help them fortify their market standing across regions.

Domestic decorative paints putting on a good show in a tough environment: Over the years, the segment has been driven by urbanization, shortening of re-painting cycle and industry initiatives in terms of reach expansion and introduction of variety of products. In recent times, the industry has been witnessing a gradual shift in consumer’s preference from the traditional whitewash to better quality ‘value for money (VFM)’/’bottom of pyramid (BOP)’ paints, especially in the tier II/III/IV cities. Growth prospect for these products (mainly putty, distemper, lower end enamels) is strong in the near term for the listed paint majors. Besides, the industry is witnessing healthy competitive environment, where players are applying different strategies to tap the growing demand in the market for a larger regional share. Additionally, rise in disposable income of the average middle class, urbanization, growing rural market and launch of many innovative products (like eco-friendly, odour free and dust & water-resistant paints) are other major drivers that are propelling the organized industry growth.

Benign cost environment in near term: The Indian paint industry is a raw-material oriented industry. The primary cost being crude and its derivatives. Amid the tight business conditions, the soft price trend in raw materials has been a beneficial factor for companies. Notwithstanding the sharp depreciation in the exchange rate, overall material prices have been lower even on a sequential basis. This has helped improve the gross margins for the entire coatings business in India as well as the International markets. In addition, the cost control measures, especially in the area of selling & distribution and admin expenses should help negate some of the adverse impact of lower topline in FY21 for Indian paint companies.

Sector view: Demand conditions for the industry has improved progressively since May’20 driven by demand in upcountry markets, but sporadic lockdowns in various states might cause some hiccups. Tier II/III/IV cities will continue to do well and even metros and tier I cities are expected to bounce back both for decorative and other segments as well. Since in the current environment there is a preference for businesses that are relatively more resilient, sector multiples at current levels in near term will look expensive. We initiate coverage on APNT (Accumulate rating) and BRGR (Sell rating) as we believe these are fundamentally strong businesses in the domestic decorative space.

Vishal Punmiya Research Analyst [email protected] +91-22-6273 8064

Company Rating Mcap

CMP (Rs) TP (Rs) Upside/

Downside (%)

P/E (x) EV/EBITDA (x) RoE (%)

Rsbn $bn FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E

APNT Accumulate 1,822 25 1,899 2,080 10 68 51 44 42 34 30 24 28 29

BRGR Sell 522 7 538 500 -7 76 57 48 46 36 31 24 27 28

Source: Companies, Nirmal Bang Institutional Equities Research

1 September 2020


Paints Sector 2

Table of Content

Industry overview …………………..….……..………………………..….……..………...03

Demand drivers of decorative segment…………….…………………..….…………….11

Key players in the decorative segment...…………..………………..…….……….……18

Foraying into adjacencies…………….…..……..……….………………….……….……20

Raw material centricity…….…….…….…….……..……………………..….……………22

Capacity expansion during the recent years.…..…......…......…......…......…..........…24

Key risks to the sector…………..……………………..….……….…….…….…….…….25

Key highlights from recent channel checks.......……….………………….……….……26

Comparison of top paint companies in decorative segment.…………….……….……27

Sector view....……….…..……………………..…………..……….…….…….…….…….28

Companies

Asian Paints Ltd…. ………………………………………………………………..………33

Berger Paints Ltd..………………………………………….……...………………………63


Paints Sector 3

Industry overview I. Global picture As against the global paints and coatings industry, which generates revenue of ~US$160bn, the Indian paint industry is valued at ~US$7.1bn as on FY20. Asia Pacific (APAC), the world’s largest coatings market with 45% market share and valued at US$71bn+ in 2019, has been growing faster than the global and matured markets on account of relatively higher growth in the economy, especially in China and India. China is the largest part of the APAC market, comprising nearly 60% of volume and value. Including the next two largest markets, India and Japan, the top three markets account for over 80% of the volume and value of the APAC region.

Exhibit 1: Global: APAC shares 45% of market share Exhibit 2: APAC: Top 3 countries demand 80% of market share

Asia Pacific45%

EMEA 30%

US and Canada 18%

Latin America 7%

China 60%India 12%

Japan 8%

Korea 6%

Others 14%

Source: PPG investor presentation, Nirmal Bang Institutional Equities Research Source: Industry, Nirmal Bang Institutional Equities Research

India, APAC’s second largest coatings market, is dominated by the decorative segment with ~75% market share. This is unlike the global and APAC markets’ structure where decorative segment (architectural) contributes less than 40%. Industrial paint’s lower contribution in India’s overall paint market is probably attributable to lower industrial and infrastructure development compared to other matured countries and developing countries like China, and higher technical know-how required in the industrial paint segment, which in turn leads to negligible involvement of unorganized players and thus a lower market size. Globally, the top 10 companies dominate the market with more than 50% market share. However, APAC and China remain fragmented with regional and international players co-existing in these markets. The Indian paint market, unlike APAC and China, is an oligopolistic market with the top 4 players controlling a little less than 70% market share of the overall domestic paint industry.

Exhibit 3: Industrial paints contribute >60% to the demand globally….

Exhibit 4: ….as well as in APAC….

Architectural 39%

OEM and Special Purpose (incl. general industrial, auto

oem, wood, protective, marine etc). 61%

Decorative36%

Industrial (incl. general industrial, protective, powder, wood, auto oem, marine etc).

64%

Source: Sherwin Williams investor presentation, Nirmal Bang Institutional Equities Research

Source: Coatings World, Industry, Nirmal Bang Institutional Equities Research


Paints Sector 4

Exhibit 5:… unlike in India where decorative paints have 75% demand

Exhibit 6: Top 10 players have >50% share across the globe

Decorative75%

Industrial (incl. automotive and general oem, protective, powder

coatings etc.) 25%

Sherwin-Williams

13%

PPG 11%

Akzo Nobel 7%

Nippon 4%

RPM 4%Axalta 3%BASF

3% Kansai 3%Asian Paints 2%Jotun 1%

Other (>5,000 firms) 49%

Source: Company, Industry, Nirmal Bang Institutional Equities Research Source: Sherwin Williams investor presentation, Nirmal Bang Institutional Equities Research

Exhibit 7: APAC’s paint market is highly fragmented as compared to…..

Exhibit 8: ….India’s market which is oligopolistic with top 4 players commanding nearly 70% market share

Nippon8% Akzo

Nobel7%

Asian Paints5% Kansai 3%

KCC 2%Sherwin-Williams 2%

Jotun 2%Berger 2%

Axalta 2%

Others 55%

BASF, Noroo, TOA,Hempel, SKShu, Carpoly, Chugoku each have 1% share

Asian Paints39%

Berger Paints12%

Kansai Nerolac

11%

Akzo Nobel 6%

Others 32%

Source: PPG investor presentation, Nirmal Bang Institutional Equities Research Source: Company, Industry, Nirmal Bang Institutional Equities Research


Paints Sector 5

II. Constituents of the Indian paint industry The domestic paint industry has grown at a rate of 10.4% from FY08, when the market was valued at Rs159bn, to FY20, when the market size reached ~Rs520bn. Over the years, the decorative paint segment (market share of ~75-80%) has grown at a CAGR of 11.4% against the industrial segment (market share of ~20-25%), which has grown at a CAGR of 7.9%. Within the industry, the organized sector has been commanding ~70% market share and the balance 30% is accounted by the unorganized sector. Till the first half of 2010s, the unorganized sector had ~35% market share, but with demonetisation and implementation of GST, the organized players have been able to capture market share from the unorganized players.

Exhibit 9: Indian paint industry has grown at 10.4% CAGR over 12 years

107 185 322 390

52

76

113

130

-

100

200

300

400

500

600

FY08 FY12 FY16 FY20

Decorative paint segment

(Rsbn)

Source: Industry, Company, Nirmal Bang Institutional Equities Research

Exhibit 10: Contribution of decorative paints in the overall Indian paint industry has evidently increased over the years

67 71 74 75

33 29 26 25

-

10

20

30

40

50

60

70

80

90

100

FY08 FY12 FY16 FY20

Decorative paint segment Industrial paint segment

(%)



Paints Sector 6

Exhibit 11: Paints industry in India

Decorative (75%-80%)

Interior Paints/emulsions

/enamels

Exterior Paint/emulsions

/enamels

Distemper

Putty

Wood coatings

Cement paints

Primers and thinners

Industrial (20%-25%)

General Industrial

Automative coating

Protective coating

Powder coating

Glass coating

Pipe coating

Niche segments viz. coil, marine, refinish coatings

Source: Company, Industry, Nirmal Bang Institutional Equities Research

A. Decorative paint industry in India

The decorative paint segment includes multiple categories depending on the nature of the surface like interior wall paints, exterior wall paints, wood finishes, enamels as well as ancillary products like primers, putties etc.

Many factors have contributed to the faster growth of the decorative paint segment compared to the industrial segment (and will continue to do so in the medium term). They include: (a) rapid scale of urbanization and increase in nuclearization of families (b) rising disposable income (c) reduction in repainting cycle (d) government boost for housing (e) upgradation and growth of top-end products and (f) slowdown in the auto industry and infrastructure development in the recent years.


Paints Sector 7

Exhibit 12: Domestic decorative segment grows at 11.4% CAGR over the last 12 years

107

185

322

390

-

50

100

150

200

250

300

350

400

450

FY08 FY12 FY16 FY20

Decorative paint segment

(Rsbn)


Interior/exterior paints/emulsions/enamels: Under the decorative paint segment, emulsion paints (water-based paints) have been growing at a fast pace on account of their durability, washability and superior aesthetics. Moreover, manufacturers have forayed into providing a wider choice to customers with introduction of plastic, acrylic and textured emulsions, each having their unique properties to meet the unique demand of the customers. Enamel paints (oil/solvent-based paints) can be used on a wide variety of surfaces including metals, glass, wood and masonry surfaces, because of their hard, durable and washable features.

Distemper: Distemper paints are water-based paints. They are also known as cement paints as they can be applied directly on walls with plaster finish without using the primer. Considered as a better version of whitewash, distemper paints are a cheaper option for emulsions and even last for more than 4 years. The major constituents of distemper are chalk, lime, water and some coloring pigments and are available in powder and paste form. The distemper market, valued at ~Rs120-150bn, is highly fragmented. The unorganized players’ share in distemper is substantially higher at 40-45% compared to the overall share of the unorganized sector, which is at ~30% of the paint industry. Substantial increase in the usage of distemper in smaller markets and market share gain from the unorganized sector have boosted volume growth for the organized paint industry.

Putty: Putty, generally applied after primer, ensures smooth and even finish before painting and increases longevity of the paint. Growing population, improving standard of living, rise in income levels, changing lifestyles, rising urbanization and government’s infrastructure plans are some of the vital factors driving growth of this product category. The putty market, valued at ~Rs50-60bn, is highly fragmented as well. While preferred brands like UltraTech and JK Cement have the highest share, followed by all four major paint companies, the share of the unorganized sector is still high.

Cement paints: Cement paints can be applied on the exterior as well as interior walls. It is essentially applied on the exterior wall surface for preventing water penetration and reducing dirt collection. It is suitable for coating concrete as well as decorating indoor and outdoor walls.

Wood coatings: These are primarily used on sidings, windows, doors, with stains and sealers used on cabinets, furniture, flooring and decks, in order to increase durability, resistance to moisture and improve aesthetics.

Primers and thinners: A primer (undercoat) is a layer of coating put on materials before painting to give them a smooth finish by leveling out the surface. It ensures better adhesion of paint to the surface, shields the material from paint and increases paint’s durability. Thinners are used to reduce the viscosity of paint for its application. It is also used to clean painting equipment such as brushes, rollers and containers used during painting.


Paints Sector 8

B. Industrial paint indutry in India

The industrial paint segment includes automotive and auto refinish coating, general industrial (GI) paints, protective coatings, powder coatings and other niche segments like coil coatings, marine coatings etc. This segment is dependent on business cycles and economic conditions. Growth of the industrial paint segment, which accounts for 20-25% of the market, is highly dependent on the automotive sector. The auto sector has been the leading consumer of industrial paints with 40-50% of the demand coming from it.

Exhibit 13: Domestic industrial paint segment grows at 7.9% CAGR over the last 12 years

52

76

113

130

-

20

40

60

80

100

120

140

FY08 FY12 FY16 FY20

Industrial paint segment

(Rsbn)


Automotive and refinish coating: A direct function of the automotive industry of a country, the automotive coatings segment has been facing challenging times due to the slowdown faced by the auto industry over the last one and a half to two years. India’s automotive refinish market is valued at ~Rs20bn.

Due to automotive coating’s high contribution to industrial paints, there is direct positive correlation between the growth of the auto industry and growth of industrial paints. During the 8-year period from FY08 to FY16, when auto volumes grew at a CAGR of 9.8%, the industrial paint segment grew at a rate of 10.2%. However, given the slowdown in the auto industry in the recent years, the 12-year auto volume CAGR (from FY08-FY20) recorded at lower 6.9%, has in turn slowed down growth in industrial paints during the same duration which was recorded at 7.9%.

KNPL is the leader in the automotive space and APNT is the leader in the auto refinish market.

GI coating: KNPL is the leader in the GI coatings category, which is used primarily for construction, heavy engineering and agricultural equipment etc. Industrial coating space has been facing challenging times on account of continued slowdown in overall investments in the manufacturing sector and tight liquidity conditions for the small to mid-size companies

Protective coating: Protective coatings are thin layers of solid material applied to a substrate, with the coating acting as a barrier to inhibit or prevent corrosion. BRGR is the leader in this category.

Powder coatings: Powder coatings are usually used for coating metals to prevent corrosion and for finishing applications. They are superior to liquid coating as they are free from VOC (volatile organic compounds) unlike liquid coatings. Powder coating is gaining increasing importance in the automotive, furniture, appliances and others, as powders are an essential part of a construction that experiences damage such as spillage, abrasion and exposure to dust, chemicals, heavy load and UV light. India’s powder coating market is valued at ~Rs63bn. In powder coatings, KNPL is the leader followed by BRGR.


Paints Sector 9

Exhibit 14: Auto sector slowdown in the recent years

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

2Ws 3Ws PVs CVs

(%)

Source: SIAM, Nirmal Bang Institutional Equities Research

III. Rise in per capital consumption of paints India’s per capita consumption of paints has increased at a CAGR of 7.0% over 7 years, from 2.6kgs in FY12 to 4.1 kgs in FY19. However, compared to the global average of ~13-15 kgs per capita consumption, India’s per capita consumption of paints is far behind despite the huge size of the market. Thus, there is immense headroom for the domestic market to grow in the long term given that structural drivers of the industry and economy are in place.

Exhibit 15: India’s per capita consumption of paints far less vis a vis global average

Exhibit 16: Growing per capita consumption in India

20+ 13-15 40

5

10

15

20

25

Developed countries Global average India

(kgs)

2.6 3.3 4.1 -

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

FY12 FY15 FY19

(kgs)

Source: Company, Industry, Nirmal Bang Institutional Equities Research Source: Company, Industry, Nirmal Bang Institutional Equities Research

IV. Correlation of industry with GDP growth

In line with the global paint industry, growth of the domestic paint industry is closely linked to GDP growth. The paint industry’s volume growth tends to be between 1.5x and 2x GDP growth. The strong positive correlation between growth of the industry and GDP growth is a given since demand for paints tends to follow overall economic activity, including income levels, industrial production and construction spending. However, FY20 has been an exceptional year where the correlation has been relatively lower on account of the Covid-19 pandemic hitting the industry towards the end of the year. Commenting on impact of Covid-19 induced lockdown on the industry, Mr. S Mahesh Anand, President, Indian Paint Association (IPA) stated that “FY20 sales had been moderate and have ended flat, if not negative.”


Paints Sector 10

Exhibit 17: The industry’s value growth is positively correlated with the GDP growth

Source: Akzo Nobel India Presentation, Nirmal Bang Institutional Equities Research

Exhibit 18: Correlation of industry volumes with real GDP growth

12.1

14.8

14.5

15.5

12.2

11.8

12.0

5.5

6.4

7.4

8.0

8.3

7.0

6.1

2.2 2.3

2.0 1.9

1.51.7

2.0

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

0.0

3.0

6.0

9.0

12.0

15.0

18.0

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19Paint industry volume growth (%) Real GDP growth (%) Correlation (x)

(%) (x)


Exhibit 19: Correlation of industry volumes with nominal GDP growth

12.1

14.8

14.5

15.5

12.2

11.8

12.0

13.8

13.0

11.0

10.5

11.8

11.1

11.0

0.9

1.11.3

1.5

1.0 1.1 1.1

0.0

0.4

0.8

1.2

1.6

0.0

3.0

6.0

9.0

12.0

15.0

18.0

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Paint industry volume growth (%) Nominal GDP growth (%) Correlation (x)

(%) (x)



Paints Sector 11

Demand drivers of decorative segment

Exhibit 20: Decorative paints remain an attractive and high growth segment in the Asian markets

Source: Akzo Nobel N.V. presentation, Nirmal Bang Institutional Equities Research

I. Urbanization and nuclearization of families: Industry’s long-term growth is attributable to many macro-economic and demographic factors, including rise in gross household income, increasing urbanization and rising nuclearization of families. Gross household income has been continuously increasing, albeit at a slower pace in the recent years. Consequent to the rise in disposable income, consumer spends have also been rising. However, the propensity to save (level of savings as a percentage of disposable income) has been gradually declining, thereby reflecting consumers’ willingness to spend more than what they used to. India’s urbanization trajectory has shaped well from 25.6% in 1990 to 34.5% in 2019 (34.9% 2020P). Rising urbanisation, supported by real estate demand and improving infrastructure, have been boosting paint demand. The UN expects ~40% of India’s population to reside in urban areas by 2030. Thus, even going ahead, increasing urbanization will aid the growth of the decorative paint industry. Rising number of households (on account of increasing nuclearization of families) has also been driving demand for housing. Another factor that partially corroborates increase in housing over the years is the rise in home loans. As on FY20, retail housing loans have grown at a 10-year CAGR of more than 16%, which shows consumer’s growing aspiration to own a house. While the real estate sector has seen a slowdown in the last two years and may continue to be under stress in the near term, we believe that over the medium to long term the sector’s outlook is positive.


Paints Sector 12

Exhibit 21: Household disposable income has been increasing, although at a slower rate

26,6

38

30,1

07

34,6

06

39,1

50

47,0

84

53,7

16

62,0

52

67,0

83

75,9

30

85,7

46

93,6

80

1,02

,847

1,14

,261

1,26

,049

1,41

,946

12.3 13.014.9

13.1

20.3

14.115.5

8.1

13.2 12.9

9.3 9.811.1 10.3

12.6

0.0

5.0

10.0

15.0

20.0

25.0

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Household disposable income % growth

(Rsbn) (%)

Source: MOSPI, Nirmal Bang Institutional Equities Research

Exhibit 22: Propensity to save has been declining thereby reflecting increase in spends

7,63

7

8,69

0

9,94

4

11,1

83

13,3

09

16,3

90

17,4

93

20,6

56

22,3

53

22,8

53

24,3

91

24,7

49

27,8

71

32,7

73

34,4

68

15.813.8 14.4

12.5

19.0

23.2

6.7

18.1

8.2

2.2

6.7

1.5

12.6 17.6

5.2

28.7 28.9 28.7 28.6 28.330.5

28.230.8

29.426.7 26.0

24.1 24.426.0

24.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Gross household savings % growth as a % of disposable income

(Rsbn) (%)

Source: MOSPI, Nirmal Bang Institutional Equities Research

Exhibit 23: Percentage of population residing in urban areas expected to increase to 40% in 2030

25.6 27.730.9 32.8 34.9

40.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

1990

2000

2010

2015

2020

P

2030

F

Percentage of residing in urban areas

(%)

Source: MOHUA (Handbook of Urban Statistics 2019), UN, Nirmal Bang Institutional Equities Research


Paints Sector 13

II. Value migration The eminent players in the industry have been focusing on growing the bottom of the pyramid space, which is far broader in terms of volume vis a vis the top-end and mid segments, through continuous new offerings and focused advertising and marketing. Further, companies have been reiterating that while the premium range continues to grow, the economy range (including emulsions, distempers and putties) have been growing at a much faster rate. Increased awareness among rural households about applying lower/under-coat (putty and primer) before applying final coat (distempers) has aided demand for low-end products. Paint companies have been gaining market share from the unorganized players post regulatory reforms like GST and have also resorted to competitive pricing to gain market share. Given that the presence of the unorganized sector in the lower-end paint segment is much higher than the overall industry and general growth in usage of paints, there is still headroom for paint companies to grow within the bottom of the pyramid space.

Exhibit 24: Bottom of the pyramid offerings of APNT/BRGR/KNPL over the recent years

Source: Company, Nirmal Bang Institutional Equities Research

Putty: The putty market, valued at ~Rs50-60bn, is highly fragmented. While preferred brands like UltraTech and JK Cement have the highest share, followed by all four major paint companies, the share of the unorganized sector is still high. Distemper: The distemper market, valued at ~Rs120-150bn, is also highly fragmented. The unorganized players’ share in distemper is substantially higher at 40-45% compared to the overall share of the unorganized sector, which is at ~30% of the paint industry. Substantial increase in usage of distemper in smaller markets and market share gain from the unorganized sector have boosted volume growth for the organized paint industry. This product is sold largely in the pre-Diwali period on account of higher demand from the smaller towns/rural areas during the festive season.

Exhibit 25: Unorganized segment has a higher share in distemper market vs….

Exhibit 26: ….. overall paints industry

Unorganized 40-45%

Organized 55-60%

Unorganized 30%

Organized 70%

Source: Company, Industry, Nirmal Bang Institutional Equities Research Source: Company, Industry, Nirmal Bang Institutional Equities Research


Paints Sector 14

III. Shortening of re-painting cycle over the last decade Re-painting constitutes ~70% of the decorative segment demand in India and globally. While re-painting is a function of various factors (including income levels, festive & marriage season and lifestyle improvement), fresh construction is a function of improvement in real estate and infrastructure development, which depends on the overall economic growth. Re-painting cycle in India has reduced significantly from 7-8 years till early 2010s to 4-5 years now. Factors that have influenced reduction in the re-painting cycle are: the rise in income levels, increase in number of rented houses (where the owners prefer re-painting to attract tenants) and significant ease of the painting process. The reduction of the re-painting cycle is despite the increase in the life of paints as consumers have been giving importance to aesthetics, change in looks and appearance of their premises. One of major issues impacting the timely repainting of homes was the hassle involved in the painting process, including disruption to daily life, smell of fresh paint, cleaning after the painters left etc. To address these issues, many companies have been successfully venturing into express painting services as well as offering consultancies to their customers. These steps have led to the easing of the painting process as well as avoidance of delay in the re-painting activity.

Exhibit 27: Mix of repainting and fresh painting in the global market similar to…..

Exhibit 28: ….the mix in India

Fresh painting 30%

Re-painting 70%

Fresh painting 30%

Re-painting 70%


Source: Company,Industry, Nirmal Bang Institutional Equities Research

Exhibit 29: Re-painting cycle has reduced over the years; We do not expect any major reduction in re-painting cycle further in the medium term

7-8 4-50

1

2

3

4

5

6

7

8

2010 2019

(yrs)



Paints Sector 15

IV. Growing demand from smaller towns and rural areas For the industry, metros and tier I areas contribute ~25% in value terms with the smaller towns (tier II/III/IV cities) and rural areas contributing the balance 75%. For the past few years, demand in smaller cities and towns has been growing at a faster pace than metro and tier I cities. Rise in disposable income, incremental consumption expenditure, increase in awareness, development of rural markets and various launches have fuelled the paint industry’s growth. Paint companies have been proactively expanding their dealer base in newer geographies, especially tier II/II/IV cities and rural areas, to ensure adequate presence. This has also led to some market share gain from the informal sector. Further, many people have been entering the paint cycle, which has boosted growth in these regions. Even once the pandemic led lockdown was lifted, rural areas have been able to sustain demand on the back of a good monsoon, good crop year, government support and lower penetration of the pandemic compared to urban areas. Even in case of many smaller towns, demand has returned to pre-COVID levels. We have highlighted management commentary of the top three players, showcasing the relatively better scenario in smaller/rural markets in recent earnings call: Management commentary from latest earnings call and interviews on demand scenario:

APNT: Business picked up in tier II/III/IV cities where the demand conditions were better, while in metro and

tier I cities the business was slower. Tier III and tier IV cities have outgrown metro and tier I cities. Western region, including Mumbai and hinterlands, is far more affected. Across India, metros like

Chennai, Kolkata, Bengaluru and Delhi have been affected and tier I cities like Ahmedabad, Surat are also affected.

Dealer expansion has happened in the months of May and June, especially in tier III and tier IV cities. BRGR: Upcountry and non-metro markets are witnessing a quick rebound with pent-up demand streaming in. Specific micro-markets and regions such as the agriculture belts in North and Central India — that

include states such as Uttar Pradesh — and non-industry regions in Eastern India are doing well. In the South, there is good demand from Karnataka.

Decorative paints, driven by repainting demand, are doing better, primarily in upcountry terrains. After a washout in April, there was good demand in May and the same improved further in June. If the current trend (in demand) continues, June 2020 will see us do better than last year and demand will be even higher than pre-COVID levels.

There is a high probability of demand extending all the way up to July-September periods this year, banking on agri-reforms and recovery in rural markets post a good monsoon.

KNPL: Return of demand was better than expected and was driven by rural and small towns, partly attributable

to pent up demand and partly to regular demand. Smaller towns across the country, except those in Western regions, have recovered. Recovery is the

highest in North, followed by East, then South and West. V. Housing for all/affordable housing measures by the government has aided fresh painting

demand and will aid repainting demand in the future The government has been pushing for affordable housing across the country. Certain measures taken by the government in the recent years include: Pradhan Mantri Awas Yojana - Housing for All (Urban) Mission was launched in 2015 to provide

housing for all in urban areas by 2022. As on CY19, 10.3mn houses were sanctioned and 3.2mn houses were completed and delivered against the target of 20mn.

In line with the Housing for All mission, the Pradhan Mantri Awas Yojana Gramin aims at providing a pucca house, with basic amenities, to all houseless people and those households living in kutcha and dilapidated houses, by 2022. Of the revised target of constructing 40mn pucca houses across India by 2022, 15.4mn houses have been completed.


Paints Sector 16

Smart City Mission: Also introduced in 2015, this mission aims to promote smart cities that provide core infrastructure, give a decent quality of life to its citizens, offer clean and sustainable environment and apply Smart’ Solutions. One of the basic requirements of a smart city to sustain itself is housing without which sustenance and further growth of a smart city will be limited. Unlike metros, these smart cities will require good amount of affordable housing to cater to the large middle and lower-income population.

In September 2019, the government announced Rs100bn special window to provide last-mile funding for the completion of ongoing housing projects that are not NPAs or facing bankruptcy proceedings under NCLT.

Through budget 2020, the government increased the tax deduction limit on the home loan interest component to Rs350,000 from Rs200,000 for housing units worth up to Rs4.5mn, which would boost consumption.

These measures would provide boost to demand and supply of housing, in turn aiding growth of concrete and paintable houses in India. In the next 4-5 years, these houses will enter the re-painting cycle.

Exhibit 30: Progress of Pradhan Mantri Awaas Yojana as on CY19

Source: MOHUA, Nirmal Bang Institutional Equities Research

VI. Availability initiatives by company All the eminent players in the decorative paint segment have been consciously and aggressively trying to increase their distribution network in order to penetrate deeper into markets across India. Along with the increase in urbanization and growing number of smaller towns and villages, the dealer universe, which currently stands at an estimated 120,000-150,000 outlets, is expected to increase by ~10% every year. With this growing number, companies have been proactively expanding their dealer base in newer geographies, especially in tier II/II/IV cities and rural areas, to ensure adequate presence across the length and breadth of the country. Further, these companies have been moulding their product offerings as per evolving needs of the market and consumers across various price points. Most players in the organized segment have been focusing on growing the bottom of the pyramid space, which is far broader in terms of volume than the top-end and mid segments, through continuous new offerings and focused advertising & marketing.


Paints Sector 17

Exhibit 31: Number of dealers have grown along with… Exhibit 32:…increase in number of depots for most companies

0

20,000

40,000

60,000

80,000

APNT BRGR KNPL

FY18 FY20

0

50

100

150

200

APNT BRGR KNPL

FY18 FY20

Source: Company, Industry, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research; Note: For BRGR FY19 no. of depots taken as annual report is not yet available for FY20

VII. Innovations, upgradation and growth in premium segment

While there is no linearity in upgradation of paints used by consumers, the industry has been witnessing changes with regards to up-trading/premiumization over more than a decade including shift from-

Distemper to interior emulsion Mid-segment to top-end segment Low-end to top-end segment Cement paint to exterior emulsions Unorganized to organized in smaller towns, especially in tier III/IV cities and rural areas

Albeit metros and the tier I cities, even tier II cities to certain extent, have a relatively larger contribution to the top-end product offering, smaller towns have been showing increasing interest for premium products as well. This has come into play as consumers are now more aesthetically aware and also have the means to opt for better value products, even at higher prices. Another factor that influences consumers to opt for premium variants is cost of labour, which is largely inflexible at all levels and contributes significantly (~60-70%), thereby making the choice of the paint variant relatively indifferent.

Further, paint companies have been launching products offering health centric benefits, like APNT’s Royale Health Shield (anti-bacterial) and Royale Atmos (anti-pollution, air-purifying), BRGR’s Silk Breathe Easy (anti-bacterial, anti-pollution), KNPL’s Impressions Eco Clean (anti-bacterial, fungal resistant). Currently, there are fewer options available in the value added sub category and mainly in the premium price range but with the increasing demand for these products, companies are likely to launch more specialized products.

Exhibit 33: Premium-end offerings of APNT/BRGR/KNPL over the recent years



Paints Sector 18

Key players in the decorative space I. Top 4 players

Asian Paints Ltd. (APNT): APNT is India’s largest paint company commanding over 40% of the overall

domestic paint industry and ~55% in domestic decorative paint industry. The company is present in 15

countries and has 26 manufacturing facilities across the globe. During FY20, the company generated

Rs202bn in revenue with ~84% contribution coming from its domestic decorative business. APNT strives to

be a holistic home décor company, from a conventional paint company, through its foray into the home

improvement space.

Berger Paints India Ltd. (BRGR): BRGR is India’s second largest paint company commanding ~12%

market share of the overall paint industry and over 20% market share of the domestic decorative paints

segment. On a consolidated basis, decorative paint segment contributes a bit over ~80% to the company’s

revenue, and the balance 20% is contributed by industrial paints. The company has 14 manufacturing plants

in India (6 outside India) with total capacity of ~609,247 KL. The company also caters to overseas markets

such as Nepal, Poland and Russia through its subsidiaries.

Kansai Nerolac Paints Ltd. (KNPL): KNPL, a subsidiary of Kansai Paints Co. Ltd. Japan, and has

completed 100 years of presence in India. KNPL is the leader in industrial paints in India (~45% of topline)

within which it is the leader in automotive coatings, general industrial coatings and powder coatings. In

decorative paints, KNPL is the third largest player in India (~55% of revenue). The company has

manufacturing capacity of 518mn litres across 6 plants in India and has another unit coming up at

Visakhapatnam in Andhra Pradesh. The distribution network comprises 27,500+ dealers and 104 sales

depots. The company has also acquired Marpol Pvt. Ltd. (powder coating) and Perma Construction Aids Pvt

Ltd (construction chemicals) and has filed for the merger of these companies with itself.

Akzo Nobel India Ltd.: The fourth largest player in the industry is present in decorative segment (~60%

contribution) and industrial segment (~40% contribution), including marine coatings, protective coatings,

powder coatings, specialty coatings and vehicle refinishes. The company's portfolio includes brands such as

Dulux, Interpon, Trinar, Resicoat, Wanda, Sikkens etc. AKZO has five plants, which are located at

Telangana, Karnataka, Madhya Pradesh, Punjab and Maharashtra. Presently, the company has 52 sales

depots. In the recent years, Akzo Nobel has ventured into adjacent categories of waterproofing through

‘Dulux Acquatech’ and woodcare through ‘Sadolin’. AKZO’s focus will continue to remain on its premium

paints portfolio along with innovation and renovation of its brand.

Exhibit 34: Top 4 players command more than 95% share in the organized decorative market

Asian Paints55%

Berger Paints20%

Kansai Nerolac15%

Akzo Nobel 7%

Others3%

Source: Industry, Nirmal Bang Institutional Equities Research


Paints Sector 19

II. Other players Shalimar Paints: Shalimar Paint Colour & Varnish Company was established in 1902 in Howrah, West

Bengal by two Britishers - A N Turner and A N Wright. Shalimar Paints has a pan-India sales and distribution

network. With 30+ depots, the company services more than 5,000 dealers across the country. Manufacturing

facilities are located at Howrah, Nashik, Shikandrabad and a fourth one is coming up in Chennai.

Nippon Paint India: Nippon Paint India, the domestic arm of the Japan-based company has been

operational in India for more than 10 years and produces coats for automotive, industrial and decorative

segments. Within the decorative space, which contributes ~55% to its topline, the company offers a range of

interior, exterior emulsions and enamel and is also into construction chemicals. Kerala, Karnataka, Tamil

Nadu and Andhra Pradesh are some of the markets where the company is faring well in the decorative

segment,

Indigo Paints: Indigo Paints started operations in 2000 and it is present across segments, such as interior and exterior emulsion, enamels, wood coating, putty, primer and ceiling and floor coat. The Sequoia Capital backed company has 33 sales depots across India. In 2019, Indigo Paints had planned to increase its capacity by investing Rs400-500mn every year for five years towards all its three plants. Largely focused on India's small towns (tier II/III cities), the company has recently entered bigger markets like Mumbai and Delhi.

Kamdhenu Paints: Kamdhenu Paints, launched in 2008, is the paint vertical of business conglomerate

Kamdhenu Ltd. Offerings include decorative paint products like exterior and interior emulsions, cement

paints, water and solvent based primers, acrylic distempers, enamels, wood finishes, textured to designer

finishes. The company has 31 sales depots and a network of 4,000 dealers. The company’s manufacturing

unit is located at Bhiwadi, Rajasthan.

JSW Paints: JSW Paints Pvt. Ltd., part of the US$13bn JSW Group, started the paint division in April 2019.

The company set up its first largest and fully-automated industrial coil coatings facility with an annual

capacity of 25,000 KL in Mumbai and decorative paints unit with 100,000 KL annual capacity at Vijayanagar

in Karnataka. Currently, the company’s products are available in the southern and western states of the

country. The company plans to scale up availability to pan-India by the end of FY21. It’s the only company

offering all water based decorative paints portfolio in the country.

Other paint companies in India with smaller presence are Jenson & Nicholson Paints Pvt. Ltd. (JNPL), Snowcem Paints, Jotun Paints, etc.


Paints Sector 20

Foraying into adjacencies

I. Waterproofing and construction chemicals

Many paint companies have been entering into the waterproofing and construction chemicals space in the past few years. Although there has been a significant shift in the last 10 years in terms of seriousness towards waterproofing, which was otherwise looked upon as an added cost, the Indian waterproofing market, valued at US$0.7bn-US$0.8bn is fairly underutilized compared to China’s US$22bn market. Thus, there is a lot of headroom to grow in this segment in the next 15-20 years. So far, paint companies have been able to cross-sell their waterproofing products through their existing dealer network. Going ahead, other channels like hardware shops, cement dealers can be exploited.

Exhibit 35: Most companies have ventured into waterproofing and construction chemicals


II. Painting services

To reduce the hassle of the painting process faced by the end consumer, paint companies have taken steps to make the process more organized by providing painting services. While APNT has been offering painting services for many years, BRGR pioneered the concept of Express Painting. Following the Covid-19 outbreak, paint companies have taken appropriate measures and safety protocols for addressing the paranoia felt by the consumer towards allowing outsiders (painters) into their premises.

Exhibit 36: APNT and BRGR have modified their painting services to ensure implementation of adequate safety measures in response to COVID



Paints Sector 21

III. Adhesives The India adhesives and sealants market, valued at ~Rs90bn, is consolidated, with the top four players – including Pidilite Industries, Henkel AG & Co, Sika, Bostik India, and H.B. Fuller - with an approximate market share of 85%. During the past few years, along with construction chemicals, paint companies have also entered into adhesives market, which would enable them to tap into the vast B2B and B2C channels and also leverage their existing distribution network. Some paint manufacturers, though marginal players till now, plan to expand their market share in adhesives and sealants market which may intensify competition in the years to come.

Exhibit 37: Many companies have ventured into adhesives and sealants category


IV. Sanitizers and disinfectants In the wake of the Covid-19 outbreak, many paint companies, including the leaders, have come up with a range of sanitizers and disinfectants.

Exhibit 38: Sanitizers and disinfectants APNT/BRGR/KNPL



Paints Sector 22

Raw material centricity

The industry uses over 300 raw materials in its manufacturing process. Major components involved in the manufacture of paints include: Resins (aka polymers/binders) that form the coating layer and hold the pigment in place Pigments that impart colour and opacity Solvents (aka thinner/vehicle) that dissolve or disperse different components used in the paint

formulation, making paint the desired consistency for application. Once paint is applied, the solvent evaporates, allowing resin and pigment to produce a film of paint and dry rapidly.

Additives that are used to modify the properties of the liquid paint or dry film.

Exhibit 39: Crude oil and its derivatives form over 50% of the industry’s raw materials

Source: PPG investor presentation, Nirmal Bang Institutional Equities Research

Importance of crude prices

Over 50% of raw materials like phthalic anhydride, pentaerythritol, methyl methacrylate, aromatics, etc, which act as resins, solvents and additives, are derivatives of crude oil, thereby making crude oil prices an important indicator to track input costs. Further, since crude oil is a heavily imported commodity, fluctuation in foreign exchange becomes another parameter to track.

Another way to look at the impact of volatility in crude prices on the profitability of a paint company is that it acts as a natural hedge during economic downturn. This is on account of conjunction of global demand and crude prices. We have seen that with outbreak of the Covid-19 pandemic, oil prices plummeted 50% due to a drastic fall in demand across the globe. Thus, when demand is impacted, lower crude oil prices aid in expanding gross margins.

Since mid-2000s, the Indian market, much like global markets, has been moving towards environmentally compliant water-based paints from the solvent-based ones. In general, gross margins are better in water-based paints compared to solvent-based paints as they are relatively less sensitive (water-based paints use certain crude derived products in the manufacturing process) to movement in crude oil prices. In line with the global trend, even consumers have been increasingly preferring water-based coatings on account of their superior aesthetics, durability and washability. Although demand for oil/solvent-based paints is here to stay, exposure to price fluctuations in crude oil can be reduced to a certain extent given that usage of water-based coatings is increasing.


Paints Sector 23

Importance of titanium dioxide (TiO2).

Titanium dioxide pigment, derived from ilmenite, comprises ~20-25% of the total content of paint and is commercially available in two forms – Anatase and Rutile. Rutile TiO2 is considered to be more durable and stable and also more efficient in scattering light. Anatase pigments are used mostly in cheap dispersion paints, self-cleaning paints and in road marking paints. Application of rutile pigments is much broader and in practice covers all paint types. Around 70% of India’s domestic demand for TiO2 is met through import deliveries and China is the leading exporter of TiO2 to India. Imports from China for APNT and BRGR vary between 8% and 10% of total raw material cost. Companies have been finding alternative sources to reduce exposure and volatility.

Exhibit 40: Paint companies to benefit from low crude prices Exhibit 41: TiO2 prices have stayed stable in the recent months

0.0

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EUCRBRDT Index

($/bbl)

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TiO2 (Rs/kg)

(Rs)

Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 42: USD/INR volatility impacts input costs Exhibit 43: India WPI Phthalic anhydride

50.0

55.0

60.0

65.0

70.0

75.0

80.0

Aug

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-14

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USD/INR

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Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 44: Raw material as a % of sales change consequent to change in crude prices

57.9

60.2

59.0

58.3

56.9

56.4

55.3

57.6

58.5

56.3

62.7

63.6

61.5

60.6

58.6

58.5

56.9

58.3

61.0

58.5

67.4

68.6

69.6

69.1

68.0

62.9

58.5

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86.7

114.4 110.5 107.6

85.7

47.5 49.0 57.6

70.2 60.9

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APNT BRGR KNPL Brent Crude (Yearly avg.)

(%) ($/bbl)

Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research


Paints Sector 24

Capacity expansion during the recent years

Asian Paints Ltd. (APNT): APNT, the leader in the decorative paints segment, has been continuously investing in expanding its manufacturing footprint to serve customer demand. During FY16, the company had expanded the installed capacity of its plant at Rohtak, Haryana from 200,000 KL to 4,00,000 KL. During FY19, the company commissioned two large paint manufacturing units with an installed capacity of 300,000KL each, at Mysuru, Karnataka in September 2018 and Visakhapatnam, Andhra Pradesh in January 2019. The plant at Mysuru, Karnataka (scalable upto 600,000 KL) has been built with estimated investment of Rs23.0bn and the plant at Visakhapatnam, Andhra Pradesh (scalable upto 500,000 KL) has been built with an estimated investment of Rs17.9bn. With these two capacity additions, the company’s overall installed capacity stands at 1.73mn KL per annum.

Berger Paints India Ltd. (BRGR): BRGR has been significantly ramping up its capacities in the last few years to cater to the increasing demand. The company had commercialized its paint and putty plants at Naltali, Assam in FY17, which has an annual capacity of 48,000 KL/MT of water-based paints, 24,000 KL of solvent based paints, 14,000 MT of resin and 24,000 MT of wall putty. During the same year, the British Paints division of the company had commenced commercial production of its distemper and putty manufacturing facility in Nalbari, Assam with a capacity of 6,600 KL/MT and 7,200 MT per annum, respectively. During FY19, the effective capacity of the Hindupur water-based plant was increased to 109,200KL and the first phase of emulsion plant with final capacity 44,160MT in Rishra was completed. Installation of BRGR’s holistic coatings facility at Sandila Industrial Area, Uttar Pradesh at an estimated investment of Rs2.5bn is on track for completion in 2021.

Kansai Nerolac Ltd. (KNPL): From 4 facilities in FY15 to 6 facilities as on FY20, KNPL has been aggressively augmenting its capacity over the past few years to match the demand of its expanding product portfolio. In FY19, KNPL commercialized the plant at Sayakha, Gujarat, and in FY20 it commenced production at its manufacturing facility at Goindwal-Sahib, Amritsar, Punjab. Both these facilities have a cumulative capacity of 75,800KL and estimated capex of Rs5.7bn. Work is currently in progress to set up another manufacturing unit at Visakhapatnam in Andhra Pradesh, which is has a planned capacity of 60,000KL and an estimated cost of Rs3.0bn. As on FY20, the company has a manufacturing capacity of 518mn litres.

Exhibit 45: Number of manufacturing plants of the top 3 players as on FY15 vs FY20

6 9 49 13 60

2

4

6

8

10

12

14

APNT BRGR KNPL

FY15 FY20


Further, smaller companies have also been on a capex investment mode: Shalimar Paints ramped up its capacity by 70,000KL with Nashik plant getting commercialised in 2019. The newest entrant, JSW Paints, plans to expand capacity with an investment of Rs750mn. Currently,

the company has two plants - Mumbai, Maharashtra (25,000KL) and Vijayanagar, Karnataka (100,000KL).

Akzo Nobel India invested Rs650mn in its sixth facility in India located in Thane, Maharashtra. In 2019, Indigo Paints had planned to increase its capacity by investing Rs400-500mn every year for

five years across all its three plants.


Paints Sector 25

Key risks to the sector

The evolving nature of the Covid-19 pandemic makes near term predictability a challenge. Considering Covid-19 to be a near term risk to the industry, medium term/long term outlook remains positive due to structural opportunities as mentioned above. Companies have been initiating services revolving around safe painting and have received positive response from many consumers. However, reaction of consumers to the pandemic getting prolonged and consequent restrictions/lockdowns is yet to be gauged. Further, timing of the return of migrant workforce to support demand-generating sectors such as real estate and infrastructure development is dependent on the longevity of the pandemic.

Sensitivity to crude prices and USD/INR exchange rates will remain an inherent risk to the sector since crude (and its derivatives) and TiO2 are major to raw materials used in paints and are largely imported.

Paint consumption is positively co-related to GDP growth and therefore a slowdown in GDP would affect the industry directly. Also, paint being a discretionary spend item, there is a likelihood of customers putting their paint requirements on hold for some time, thereby impacting renovation demand.

The vagaries of the monsoon - extended monsoon in some regions and deficit rainfall in others – affect demand from the rural sector, as an extended monsoon can reduce the number of dry days before the festive season and deficit rainfall affects income.

Slowdown in infrastructure and construction activities would affect overall demand for paint companies. Delay in the revival of the auto industry would continue to pose a threat to the growth of industrial paints demand.


Paints Sector 26

Key highlights from recent channel checks: APNT - an undisputed leader: Most of the dealers we spoke to stated that demand for the products of

APNT is undoubtedly higher than the other players. There is outright demand for other companies’ products as well, but not as high as APNT’s. Sale of newer entrant’s or smaller player’s products requires efforts from the dealer’s end, in terms of convincing the contractor/painter as to why the product is suitable for their need, which at times they’re not willing to take.

Inventory days: For most dealers, average inventory days hover around 10-15 days – 5-6 days for

APNT and 15-18 days for other companies. Further, order placed with APNT is generally fulfilled within 4-6 hours while for other companies it takes between 12-24 hours.

Preference for returns over margins: While a dealer earns lower margins on products of the market

leader compared to the higher margins offered by other companies, the return generated on account of higher number of rotations is far ahead of what can be earned from products of other companies. Thus, it is the return that dealers primarily look at rather than margins.

Rise in consumer awareness: Many dealers mentioned that for the past few years, demand is purely

dependant on the customer’s preference compared to earlier times when the dealer could easily influence consumer’s decision. Painters and contractors are much more aware of the product’s features and applications. That is why it is difficult for dealers to push any specific company’s brand/product.

Growth in top-end products as well as low end products: Dealers have stated that there is healthy

growth in premium products, especially value-added products like APNT’s Royale Shield and BRGR’s Easy Clean. Across regions, there is high grown in bottom of pyramid products like distemper and putty. Sale of Birla and JK Cement’s putty is much ahead of any other paint companies.

Negligible sale of sanitizers for Paint companies as of now: Some paint companies have been

pushing their dealers to buy sanitizers but there is hardly any pick-up as no consumer would go to a paint or a hardware shop to buy sanitizers. Few dealers believed that companies need to advertise for their sanitizers on a local level rather than national level.


Paints Sector 27

Comparison of top 3 paint companies in decorative segment

Exhibit 46: APNT has done well across majority of the parameters over the years

Parameter (consolidated) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Net sales growth (%)

APNT 15.6 24.3 13.3 15.7 11.3 1.9 5.5 11.7 14.4 5.0

BRGR 23.8 25.9 13.5 15.6 11.7 -2.3 7.8 13.5 17.3 5.0

KNPL 24.8 22.1 10.4 11.0 12.7 7.5 7.6 14.9 16.4 -2.7

Gross margin (%)

APNT 42.1 39.8 41.0 41.7 43.1 43.6 44.7 42.4 41.5 43.7

BRGR 37.3 36.4 38.5 39.4 41.4 41.5 43.1 41.7 39.0 41.5

KNPL 32.6 31.4 30.4 30.9 32.0 37.1 41.5 39.6 36.2 38.3

Employee cost (% of net sales)

APNT 5.9 5.5 5.7 6.0 6.5 6.9 6.9 6.6 6.4 6.8

BRGR 6.1 5.6 5.6 5.8 5.9 6.5 6.7 6.9 6.7 7.1

KNPL 4.4 4.2 4.3 4.4 4.2 4.6 5.0 5.0 5.2 5.9

Ad spends (% of net sales)

APNT 4.4 4.3 4.7 5.0 5.3 3.9 4.1 3.9 4.1 4.5

BRGR 4.8 5.1 5.5 5.6 6.6 4.9 5.3 4.8 3.3 NA*

KNPL 3.9 3.9 3.7 3.7 4.3 6.3 6.9 6.1 5.1 5.2

EBITDA margin (%)

APNT 17.2 15.4 15.3 14.8 14.7 19.4 19.8 19.0 19.6 20.6

BRGR 10.7 10.3 11.1 11.1 11.8 15.4 15.8 15.6 15.4 16.7

KNPL 13.3 13.3 12.1 11.8 12.9 15.5 18.2 17.0 13.9 15.2

Adj. PAT margin (%)

APNT 10.9 10.3 10.2 9.8 10.2 12.6 12.9 12.1 11.2 13.4

BRGR 6.4 6.1 6.5 6.4 6.1 8.7 9.4 8.9 8.2 10.3

KNPL 9.9 8.5 6.3 6.7 7.8 9.7 12.6 11.0 8.3 9.9

EPS (Rs)

APNT 8.8 10.3 11.6 12.8 14.8 18.7 20.2 21.3 22.5 28.2

BRGR 2.2 2.6 3.2 3.6 3.8 5.3 4.4 4.7 5.1 6.8

KNPL 3.8 4.0 3.3 3.9 5.1 6.8 9.4 9.5 8.4 9.7

ROE (%)

APNT 43.3 40.1 36.3 33.1 32.4 31.9 27.5 25.5 24.1 27.6

BRGR 23.3 24.3 25.0 24.1 22.2 26.1 24.8 22.5 21.3 25.8

KNPL 24.4 21.8 15.1 15.3 18.1 17.8 19.1 17.3 13.8 14.5

ROCE (%)

APNT 42.3 36.5 33.8 31.3 29.7 29.2 24.9 22.5 22.8 26.3

BRGR 17.7 18.2 18.1 17.4 16.5 20.4 20.8 19.3 18.9 22.8

KNPL 21.9 20.2 14.2 14.6 17.5 17.4 18.8 17.0 13.5 14.2

No. of employees (standalone)

APNT 4,937 4,937 5,236 5,555 5,897 6,067 6,156 6,238 6,456 6,750

BRGR 2,446 2,431 2,464 2,607 2,666 2,808 2,993 3,130 3,450 NA*

KNPL 2,220 2,336 2,456 2,298 2,388 2,566 2,697 2,861 2,997 2,992

Sales/employee (Rsmn)

APNT 15.6 19.4 20.8 22.6 23.7 23.5 24.5 27.0 29.8 29.9

BRGR 9.6 12.1 13.6 14.8 16.2 15.0 15.2 16.5 17.6 NA*

KNPL 9.4 10.9 11.4 13.5 14.7 14.7 15.0 16.3 18.1 17.6

Source: Company, Nirmal Bang Institutional Equities Research *Note: FY20 annual report of BRGR is not out yet


Paints Sector 28

Sector View

In recent times, growth in India’s paint sector has been an outlier in the overall domestic consumer space. The industry has been witnessing a gradual shift in terms of consumer preferences from the traditional whitewash to better quality paints. Besides, it is also witnessing healthy competitive environment, where players are applying different strategies to tap the growing demand in the market for a larger regional share. Additionally, rise in disposable income of the average middle class, urbanization, growing rural market, shortening of repainting cycle, upgradation, increase in sale of premium-end products and launch of many innovative products (like eco-friendly, odour free and dust & water-resistant paints) are the major drivers that are pushing the growth of the organized paint industry. Within the Indian decorative paint segment, Asian Paints (APNT) and Berger Paints (BRGR) are the two largest players with more than 80% of their overall revenues coming from the segment and within the industrial paints segment, Kansai Nerolac (KNPL) is the leader (segment contributes ~45% to its revenue).

The overall current environment for discretionary products hinges on opening up of markets. The demand conditions for the paint industry has improved progressively since May’20 driven by demand in upcountry markets. Companies remain confident of the demand conditions with secondary sales improving month-on-month. In terms of regions, Tier II/III/IV cities are expected to continue to do well and even Metros and Tier I cities are expected to bounce back both for decorative paints and other segments as well. From cost point of view, key raw material prices are benign, this along with cost rationalization measures will aid margin in the near term. In the medium term, faster growth in the premium products, operating leverage led efficiencies and savings in logistics costs (with additions of capacities) will add to operating margins.

Since in the current environment there is a preference for businesses that are relatively more resilient, sector multiples at current levels in near term will look expensive. We initiate coverage on APNT (Accumulate rating) and BRGR (Sell rating), as we believe that decorative paints, in Indian context, will continue to witness maximum demand within this space, majorly led by steady shift from unbranded/unorganized to organized players with bigger players gaining further share. We also think that these are fundamentally strong businesses within the domestic decorative space.

Exhibit 47: Revenue of FMCG companies under our coverage universe and top 3 paint companies of India

Revenue (Rsbn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Hindustan Unilever 175 194 217 252 274 302 305 313 339 377 383

Gillette India 7 9 11 12 14 17 20 20 17 17 17

Colgate-Palmolive (India) 20 23 27 32 36 40 39 40 42 45 45

Dabur India 34 41 53 62 71 78 78 76 77 85 87

Emami 10 12 15 17 18 22 24 25 25 27 27

Britannia 38 46 55 62 69 79 84 91 99 111 116

Nestle India 51 63 75 83 91 99 82 91 100 113 124

ITC 182 212 248 296 329 361 362 396 403 444 451

Marico 27 31 40 46 47 57 60 59 63 73 73

Total FMCG revenue 544 631 740 862 949 1,054 1,053 1,111 1,166 1,291 1,323

APNT 67 77 96 109 126 140 143 151 168 192 202

BRGR 19 23 29 33 39 43 42 46 52 61 64

KNPL 17 21 25 28 31 35 38 41 47 54 53

Total Paint revenue 102 121 151 170 196 218 223 237 266 307 319

Source: Company, Nirmal Bang Institutional Equities Research Note: Nestle year ending is December, Gillete year ending is June


Paints Sector 29

Exhibit 48: Paint companies have grown nine out of ten times ahead of coverage FMCG companies during the last 10 years

16.0

17.4

16.4

10.1

11.0

-0.1 5.

5

4.9

10.8

2.4

18.6

24.2

12.8

14.9

11.6

2.0 6.3

12.6

15.3

3.7

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FMCG companies Paint Companies

(%)


Exhibit 49: Valuation of Indian companies vis a vis global companies

Company Country MCap ($ bn)

P/E (x) EV/

EBITDA (x) EBITDA margin (%) 3yr CAGR (FY17-FY20) 3 yr Avg (FY18-FY20)

FY20 FY21E FY22E FY20 FY21E FY22E FY18 FY19 FY20 Rev EBIT

DA EPS RoE RoCE

APNT India 25 67.3 67.6 51.3 43.5 42.4 33.9 19.0 19.6 20.6 10.3 11.7 11.7 25.7 23.9

BRGR India 7 79.4 76.2 56.8 49.5 46.4 36.1 15.6 15.4 16.7 11.8 13.9 15.3 23.2 20.4

KNPL India 4 49.4 55.2 40.2 31.7 33.2 25.7 17.0 13.9 15.2 9.2 2.9 0.8 15.2 14.9

PPG Industries, Inc USA 28 23.8 25.0 19.3 14.6 15.2 12.8 17.2 15.3 17.6 2.0 2.9 1.1 24.2 14.1

Nippon Paint Holdings Co Japan 28 88.1 73.9 54.7 33.4 31.2 24.5 16.9 16.7 15.0 8.9 45.3 13.6 8.6 8.9

Akzo Nobel NV Netherlands 19 26.8 24.0 19.5 15.0 13.4 11.7 12.1 11.2 14.6 -0.6 -3.5 10.3 31.6 24.0

Source: Bloomberg, Company, Nirmal Bang Institutional Equities Research; Note: (i) For all international companies, FY18=CY17, FY19=CY18, FY20=CY19, FY21E=CY20E, FY22E=CY21E. (ii) Valuation ratios are as on 31st August 2020.

Exhibit 50: Returns across periods for consumer coverage companies- Paint companies fall among the best in the lot

Company/Index 1yr 2yr CAGR 3yr CAGR 4yr CAGR 5yr CAGR 10yr CAGR 15yr CAGR

Nifty 50 4.1 -0.9 5.2 7.0 6.5 7.5 11.0

Sensex 30 3.7 0.2 7.1 8.2 7.0 7.6 11.2

BSE FMCG 8.6 -3.1 5.3 7.8 7.9 12.6 NA

BSE CDGS 9.5 -7.6 -1.5 3.8 5.5 8.5 NA

Asian Paints 23.2 18.2 19.9 15.1 17.2 21.6 28.2

Berger Paints 54.9 30.5 33.4 23.0 29.6 32.9 27.4

Britannia 62.9 6.4 22.4 23.4 19.4 34.3 26.6

Colgate 17.7 10.1 9.4 10.1 7.1 13.0 17.3

Dabur 15.2 3.5 17.4 13.2 10.5 16.9 22.0

Emami 22.3 -20.5 -13.6 -11.8 -11.4 8.8 23.0

Gillette India Ltd. -24.3 -9.8 0.3 3.2 0.5 10.9 14.5

Hind. Unilever 19.1 12.1 22.7 24.7 20.1 23.4 18.7

ITC -18.6 -20.7 -11.3 -5.9 -2.2 6.1 11.8

Marico -4.6 1.9 5.9 5.7 11.8 19.6 24.5

Nestle 31.5 23.3 35.8 25.3 22.1 19.2 21.5

Source: Bloomberg, Nirmal Bang Institutional Equities Research; CDGS= Consumer Discretionary Goods & Services


Paints Sector 30

Exhibit 51: Earnings growth across periods for consumer coverage companies

Company 1yr 2yr CAGR 3yr CAGR 4yr CAGR 5yr CAGR 10yr CAGR 15yr CAGR

Asian Paints 25.5 15.2 11.7 10.8 13.7 12.5 19.7

Berger Paints 22.3 19.5 15.3 15.5 20.0 18.5 18.0

Britannia 21.9 18.5 16.8 14.4 19.7 26.6 15.2

Colgate 9.6 9.2 12.2 7.4 7.9 7.3 14.1

Dabur 1.1 5.4 6.0 5.0 7.0 11.6 16.4

Emami 1.8 1.0 -2.3 -0.6 3.0 12.1 21.7

Gillette India Ltd. -9.0 0.3 -3.1 2.0 7.8 5.3 NA

Hind. Unilever 10.9 14.6 16.7 13.1 13.1 12.4 11.5

ITC 22.5 18.8 14.4 13.1 9.7 14.1 14.7

Marico 13.5 13.6 9.0 9.8 12.9 15.8 19.8

Nestle 15.8 21.5 18.7 14.6 9.8 11.1 14.0



31

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32

Company Section


Initi

atin

g C

over

age

Reuters: ASPN.NS; Bloomberg: APNT IN

Asian Paints Ltd.

‘Royale’ play commands rich valuation Asian Paints (APNT) is a 78-year-old company with operations across 15 counties. It is the largest paint company in India and also Asia’s third-largest paint company. Over the years, the company has made fearless moves and even entered related segments to evolve itself into a home décor company. It manufactures a range of paints for decorative and industrial use, offers end-to-end painting & designing services, colour & decor consultancy, waterproofing solutions and much more. In the Industrial coatings space, APNT operates through two strategic 50:50 joint ventures with PPG Inc., USA, a global leader in coatings. Over the years, the company has built a resilient franchise with strong brand recall, significant first mover advantage in dealer network (70,000+ dealers currently) and use of technology across operations. It has always stayed ahead of time by adapting to current market trends and anticipating future trends through the use of digital. Within the Indian organized decorative market, APNT is a leader with ~55% market share (improvement of over 20% in as many years). Even though new players have entered the market, APNT has maintained its strong market leadership despite selling products at a premium to its peers. We see APNT garnering additional market share over the next few years as it has recently added new capacities. In terms of performance, over the last decade, the company has grown its sales at a CAGR of ~11.7% and PAT at a CAGR of ~12.5%. While 1QFY21 was badly affected due to tight business conditions, for the company’s domestic decorative business, demand conditions improved in May and June after a complete washout in April. There is still some uncertainty due to the sporadic lockdowns but we think the business should do well overall progressively. We expect APNT to deliver 9.0%, 13.0% and 15.1% CAGR growth over FY20-23E in Revenue, EBITDA and PAT, respectively, underpinned by (a) strong growth in the organized decorative paints industry (from Tier II/III/IV cities, especially for lower end products), (b) faster growth in premium products, (c) pick-up in GDP growth beyond FY21 (internally we expect real/nominal GDP growth rate of 6.0%/9.7% in FY22) and (e) higher contribution from allied businesses. As operations improve beyond FY21 and utilization levels of new plants go up, we anticipate return ratios to improve and go back to FY20 levels by FY23 itself. We believe that valuation for APNT will always appear expensive as it has consistently delivered strong volume growth even compared to other consumer segments, maintained market leadership in its core business, continuously generated robust cash flows and maintained a healthy dividend payout of >50%. At current market price (CMP), the stock trades at 44.1x FY23E EPS of Rs43.1. We initiate coverage on APNT with Accumulate rating and a target price (TP) of Rs2,080 based on 52x September’22 EPS, implying an upside of 10% from CMP.

ACCUMULATE

Sector: FMCG

CMP: Rs1,899

Target Price: Rs2,080

Upside: 10%


Key Data

Current Shares O/S (mn) 959.2

Mkt Cap (Rsbn/US$bn) 1,901.6/25.8

52 Wk H / L (Rs) 2,017/1,431

Daily Vol. (3M NSE Avg.) 551,347

Share holding (%) 3QFY19 4QFY20 1QFY21

Promoter 52.8 52.8 52.8

Public 47.2 47.2 47.2

Others - - -

One -Year Indexed Stock Performance

60

70

80

90

100

110

120

130

Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20

ASIAN PAINTS LTD Nifty 50

Price Performance (%)

1 M 6 M 1 Yr

Asian Paints 12.7 10.3 23.7

Nifty Index 2.3 3.2 4.6

Source: Bloomberg

FY20 Annual Report 1QFY21 Result and press release

Financial Summary

Y/E March (Rs mn) FY19 FY20 FY21E FY22E FY23E

Net sales 1,92,401 2,02,113 1,96,587 2,34,720 2,61,922

YoY growth (%) 14.4 5.0 -2.7 19.4 11.6

EBITDA 37,655 41,618 42,536 52,943 60,073

EBITDA margin (%) 15.7 16.2 16.9 17.5 17.5

Adj. PAT 21,559 27,052 26,931 35,525 41,303

EPS 22.5 28.2 28.1 37.0 43.1

YoY change (%) 5.7 25.5 -0.4 31.9 16.3

ROCE (%) 22.8 26.3 23.7 27.2 28.2

ROE (%) 24.1 27.6 24.4 27.9 28.8

ROIC (%) 29.5 29.3 27.7 35.2 39.4

P/E (x) 84.5 67.3 67.6 51.3 44.1

P/B (x) 19.2 18.0 15.2 13.5 12.0

EV/EBITDA (x) 48.1 43.5 42.4 33.9 29.8


1 September 2020

https://www.asianpaints.com/content/dam/annual-report/annualreport-19-20/pdf/Asian_Paints_AR_2020.pdf




Asian Paints Ltd. 34

About the company: APNT is India’s largest paint company commanding over 40% of the overall domestic paint industry and ~55% in organized domestic decorative paint segment. The company is present in 15 countries and has 26 manufacturing facilities across the globe. During FY20, the company generated Rs202bn in revenue with ~84% contribution coming from its domestic decorative business.

Exhibit 1: Consolidated revenue breakdown as on FY20

Domestic decorative83.7%

International11.6%

Industrial2.4%

Home improvement2.3%


Exhibit 2: Revenue from contracts with customers (including royalty)

Revenue from contracts with customers (including royalty) (Rsmn) FY18 FY19 FY20

Consolidated

Gross revenue 1,97,805 2,19,219 2,31,892

Growth (%) 5.0 10.8 5.8

Discount 26,778 28,055 30,931

Growth (%) 20.2 4.8 10.3

as a % of gross revenue 13.5 12.8 13.3

Net revenue 1,71,027 1,91,165 2,00,961

Standalone

Gross revenue 1,65,370 1,87,017 1,98,520

Growth (%) 3.4 13.1 6.2

Discount 20,921 23,878 27,147

Growth (%) 13.5 14.1 13.7

as a % of gross revenue 12.7 12.8 13.7

Net revenue 1,44,449 1,63,139 1,71,373




Decorative Paints

APNT has been intensively focusing on innovation and improving its products, besides expanding its product range and offering its consumers a wide range of products & services, delivering value proposition in every segment.

Exhibit 3: Product offerings FY11 v/s FY20


Steering the upgradation and premium products drive

While there is no linearity in upgradation of paints used by consumers, the industry has been witnessing changes with regards to up-trading/premiumization over more than a decade including shift from

Distemper to interior emulsion Mid-segment to top-end segment Low-end to top-end segment Cement paint to exterior emulsions Unorganized to organized in smaller towns, especially in Tier III/IV cities and rural areas

Although metros and tier I cities, even tier II cities to certain extent, have a relatively larger contribution to the top-end products, smaller towns have been showing increasing interest in premium products. This has come into play as consumers are now more aesthetically aware and also have the means to opt for better value products, even at higher prices.

India being a large market and with urbanization far away from its peak, the bottom of the pyramid is much broader in volume terms. Upgradation is a continuous possibility given the rising aspirations, growing awareness and increase in disposable income and there is always potential in terms of converting a bottom of the pyramid consumer to the organized market and there onwards to the upper segments.

APNT has a strong premium and super-premium (luxury) portfolio, which has been able to benefit from the evolving consumer preferences. The company has even adressed the gap between consumer needs and availablility through the launch of products like ‘Royale Health Shield’ (anti-bacterial) and ‘Royale Atmos’ (anti-pollution, air-purifying). Recently, the company has launched another paint called ‘Royale Health Shield – Asthma and Allergy Friendly variant’, which provides a more suitable environment for people with allergies and asthma post painting and helps create a healthier environment indoor.

To bolster premium products in the smaller towns, APNT provides one room/one wall makeover where consumers can experiment and eventuall fully adapt the upper product segment.



Currently, there is a relative slowdown in the growth trajectory of the top end segment as metros and urban areas (which have a larger contribution) have been relatively impacted more by the Covid-19 pandemic. Once the situation normalizes, the growth will return. We expect APNT’s dominance in top end offerings to continue, driving its margin expansion over the long term.

Exhibit 4: Product offerings in the top-end segment


Exhibit 5: Price range of paints, putty, distemper

APNT Interior Price Range Exterior Price Range

Top end/Luxury Royale 420-1100 Ultima 330-460

Mid-segment Apcolite 260-320 Apex 160-210

Bottom of pyramid/Economy/Value for money Tractor/TruCare 60-160 Ace/TruCare 30-210

Source: Aapkapainter, Colourdrive, Company, Nirmal Bang Institutional Equities Research

Focus on bottom of the pyramid segment

For the past few years, demand in smaller cities and towns has been growing at a faster pace than metro and urban areas. Rise in disposable income, incremental consumption expenditure, increase in awareness, development of rural markets and various launches have fueled the paint industry’s growth. Increased awareness among rural households about applying lower-coat (putty and primer) before applying final coat (distempers) has aided demand of low-end products.

For APNT, nearly 40-50% demand comes from metros and tier I cities, and the balance 50-60% comes from smaller towns and rural areas. For APNT, the premium-end range continues to grow, but the economy and value for money range (including emulsions, distempers and putties) have been growing at a much faster rate for the last 3-4 years. In the last three years, the company has introduced a number of products under the ‘Tractor’ and ‘Ace’ brands, which are essentially its economy/value for money brands. Even the recently launched economy emulsions - Tractor Sparc and Ace Sparc, priced 15%-20% below the lowest priced product it had in the past, have performed well and have spurred growth in the low-end segment. There is further potential for APNT to grow strongly in this segment by capturing market share from the unorganized sector (which is much higher in the lower-end paint segment than the overall industry) and general growth in usage of paints, which will in turn drive volume growth.



Exhibit 6: Product offerings in the low-end segment


Project/institution business

Under its institutional business, APNT provides painting solutions and waterproofing solutions to its customers, including co-operative housing societies, new buildings, institutes and government organisations. APNT is present in over 90 locations, including metros across the country. Over the past several years, the company has recorded heathy growth in this business along with market share gains. However, the margins in this segment are slightly lower than the retail business on account of its competitive intensity.

.


I. Waterproofing and construction chemicals

APNT forayed into construction chemicals segment in FY13 through the launch of ‘SmartCare’ range, comprising water proofing and crack bridging products. In FY14, the company set up a research group dedicated for the development of new products for waterproofing, sealant, construction chemicals and tile segments. Since then, APNT has made significant strides in the waterproofing category and as on FY20, its ‘SmartCare’ range of products is the second largest brand in the segment.

Besides the mainstream products, the waterproofing and construction chemical business have served as key drivers of growth as the company has been able to get a good hold in some infrastructure projects and new large construction projects. The current portfolio comprises waterproofing products for interior, cracks and joints, tiling, terrace and bathrooms.

During FY19, the company set up a ‘Waterproofing, Hygiene and Application Experiential Zone’ at its R&D/R&T facility at Turbhe, Navi Mumbai for customers, including architects, applicators, waterproofing contractors and engineers. The experiential zone has different interactive displays of various waterproofing system solutions as well as adhesive products range and also has a section for mechanized tools, which demonstrates faster and smoother finishes to customers.

Given the impending monsoon season, APNT launched a new campaign - ‘Terrace Waterproofing’ - in the recent months to increase awareness about waterproofing. Since this is an exterior painting job, customers have not given into paranoia and have responded well to the campaign. This has helped APNT in creating brand saliency and has also given further leads for its waterproofing business.

The waterproofing and construction chemical segment falls into two verticals - project business and retail business. Some of the key projects currently undertaken by APNT include Bangaluru Airport, Delhi Airport and tunnel in Jammu & Kashmir. The company also supplies to its industrial division, AP-PPG, for some of the infrastructure projects, including highways. Margins earned in retail waterproofing business are equivalent to what is earned in paints. However, in projects/institutions business, margins are relatively lower.



Exhibit 7: Construction chemicals and waterproofing portfolio FY13 v/s FY20


II. Others including painting accessories, adhesives and sanitizers Painting accessories: APNT forayed into painting accessories by launching a range of paint application tools in collaboration with Harris Brushes of UK in 2012-13. In FY16, it launched a range of paint application tools like power sanders, water jet washer, spray machine for putty and paint and putty mixer - all under a new brand called “TruCare”. Leveraging its retail distribution strength and brand equity, the company has strongly forayed into the painting accessories segment in both mechanized and non-mechanized categories.

Exhibit 8: Tools and applicators range under the ‘TruCare’ brand


Adhesives: During FY16, APNT entered the retail segment of the adhesives category with a distribution arrangement with Henkel Adhesives Technologies, Germany, to sell the ‘Loctite’ brand of adhesives under a co-branding initiative. Further, in FY17, it introduced ‘True Grip Ultra’ adhesive, primarily to exploit network synergy and gain access to thousands of hardware and décor stores. The category has been further expanded with a stationary range of products.

Exhibit 9: Adhesives FY16 v/s FY20




Wall coverings: In FY15, APNT launched a full range of wall coverings under the brand name ‘Nilaya’. It is promoted to architects and designers through the company’s Colour Idea stores across the country.

Exhibit 10: Wall coverings available in three collections


Sanitizers, San Assure and safe painting: In response to the Covid-19 pandemic and in an effort to strengthen its foray into the currently nascent ‘Health and Hygiene’ play, APNT launched hand sanitizers and surface disinfectants recently under the brand name of ‘Viroprotek’. The product is being manufactured at the company’s plant at Ankleshwar, Gujarat and it is taking steps to set up additional capacity for these products at the plant at Rohtak, Haryana.

Exhibit 11: Construction chemicals and waterproofing portfolio FY13 v/s FY20


APNT also launched a sanitization service ‘San Assure’ (for shops, offices, homes) and a professional variant ‘San Assure Pro’ (for housing societies, hospitals, hotels and institutions) recently.



Exhibit 12: Sanitization services introduced in response to the pandemic


The company has been providing painting services for many years. In FY15, APNT launched ‘Express Painting Service’ to complete painting with mechanized ‘dust free’ application to complete painting job within a week. In response to Covid-19, the company launched a ‘Safe Painting’ campaign in May to address the fear among consumers towards letting in external painters in their house. The campaign assures customers that the painters are safe to enter their homes and offers a great painting experience. It has also helped the painters and contractors in becoming confident of approaching customers and telling them that it is safe to let them into the house because they are following certain standard operating procedures with respect to hygiene and care in terms of what they are taking into their houses.

Exhibit 13: Safe painting services




III. DIY

The Do It Yourself (DIY) market is still in its embryonic stages in India compared to developed nations where it has a significant share. The concept will take significant time to have a notable presence in India primarily because of the nature of building materials used in India. In developed countries, houses are built using wooden frame structures compared to the brick and mortar construction in India, which makes the painting process much easier.

Exhibit 14: DIY proportion higher in developed markets like US and Canada


However, in response to Covid-19 led paranoia felt by consumers towards letting in a stranger into a house, APNT has launched a range of DIY products that can be used for the peripheral needs of consumers. The offerings incline towards décor, health & hygiene and repair & maintenance related product needs.

Exhibit 15: APNT has introduced a DIY range of products


Exhibit 16: Contents of EzyCR8 ‘Health & Hygiene’ DIY kit

Source: Company,Nirmal Bang Institutional Equities Research



Network distribution and expansion

APNT has set a benchmark for the industry when it comes to store and dealer expansion.

Colour World stores: From a network of 15,000+ colour worlds as on FY10, the company has scaled up to 50,500+ Colour World stores across the length and breadth of India. These stores are equipped with proprietary colour tinting system, enabling them to offer the widest range of colour options.

Colour Idea stores: Started in 2009 with two stores, the Colour Ideas chain provides color consultancy & home solutions services to customers and has expanded to 430+ stores as on FY20. These stores provide end-to-end wall décor solutions, from colour personalisation to safe painting and furnishings.

AP Homes: AP Homes are multi-category integrated décor stores, offering products & solutions across categories of paints, wallpapers, modular kitchens, bath fittings, sanitaryware, furnishings and light fittings, among others. Currently, there are 10 décor stores across Coimbatore (Tamil Nadu), New Delhi, Kochi (Kerala), Raipur (Chhattisgarh), Karur (Tamil Nadu), Tumkur (Karnataka), Jajpur (Odisha), Bengaluru (Karnataka), Nashik (Maharashtra) and Amritsar (Punjab).

Connecting digitally: The company has always tried to connect with the customer using technology. ‘Ezy colour’ consultancy offers assistance from colour experts who answer queries regarding colour combinations with the help of visualisation technology and digital preview in just a few clicks. ‘Beautiful Homes’ is an online décor platform that offers design ideas as per individual personal styles. ‘Colour with Asian Paints’ is a colour visualizer and wall painting application that lets customers try wide range of wall colours, textures and wallpaper designs at the click of a button. Customers can take a photograph of the wall they need painted following which they can pick from a range of colour combinations and can also pick layouts from the gallery to sample wall colours and textures onto it.

Exhibit 17: Different stores and distribution formats


Exhibit 18: Aggressive dealer expansion along with… Exhibit 19: ….increase in number of supply points

52,0

00

60,0

00

70,0

00

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

FY18 FY19 FY20

131

136

140

124

129

134

139

144

FY18 FY19 FY20

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research



Home Improvement

In order to offer end-to-end home décor/renovation services, the company ventured into home improvement segment FY14 onwards with kitchen and bath business. Demand for both the aforementioned sub-segments depends on demand in the real estate industry. While there are immediate concerns regarding the real estate industry, the overall long-term outlook remains strong.

Kitchen: APNT operates in the kitchen business through its wholly-owned subsidiary Sleek International Pvt. Ltd. (Sleek). The company had acquired a 51% stake in Sleek in FY14 and balance 49% in FY18. There are 185+ Sleek stores across the country with an established presence in South, West and North India and a growing presence in East India.

The modular kitchen solutions market, which is a highly fragmented market with majority unorganised players (~8% organized), is estimated at ~Rs150bn. The industry has been witnessing a shift towards branded modular kitchen solutions from local carpenters and interior designers. Though metro and urban cities have already seen the move towards modular kitchens, demand for branded modular kitchens has caught up rapidly in Tier II and Tier III cities over the last two years.

Bath: APNT operates in the chrome plated fillings and sanitaryware space under the brand Ess Ess Bathroom Products Pvt. Ltd. (Ess Ess) and is a prominent player in the bath segment in India and has high-quality products in this segment, including bath fittings and a wide range of sanitaryware.

Similar to modular kitchens, the chrome plated fillings and sanitaryware business too has a large number of unorganised players. About 60% of the market is serviced by the organised players.

Unlike the decorative paints business, contribution from the institutional channel is higher in both the sub-categories of home improvement. While the new construction/projects are under a slump given the liquidity crunch and Covid-19 led impact, government initiatives and positive long-term outlook for the real estate sector would drive the long-term growth of this business.

Exhibit 20: Revenue trajectory of home improvement business

Rsmn FY16 FY17 FY18 FY19 FY20

Sleek

Revenue 1,351 1,576 1,734 2,144 2,383

growth (%) 10.9 16.7 10.0 23.6 11.1

PBT -157 -202 -129 -228 -410

Ess Ess

Revenue 1,190 1,503 1,617 2,021 2,194

growth (%) 45.5 26.3 7.6 25.0 8.6

PBT -265 -185 -190 -303 -294

Total home improvement revenue 2,542 3,079 3,351 4,165 4,577

as a % of consolidated net revenue 1.8 2.0 2.0 2.2 2.3


Exhibit 21: Top cities have almost one-third of Sleek stores

City No. of stores

Bangalore 9

Mumbai 9

Chennai 7

Pune 6

Hyderabad 6

Ahmedabad 5

Vijayawada 5

Coimbatore 5

Kochi 4

Delhi 3

Source: Sleek website, Nirmal Bang Institutional Equities Research



International operations

APNT’s international journey began in 1978 when it established presence in Fiji and since then has expanded to 14 other countries across four regions - Asia (Nepal, Sri Lanka, Bangladesh, Singapore and Indonesia), the Middle East (UAE, Bahrain and Oman), Africa (Egypt and Ethiopia) and South Pacific (Fiji, Solomon Islands, Samoa, Tonga and Vanuatu). Key highlights of the company’s international operations include:

The biggest international market for the company as on FY20 has grown at a 5-year CAGR of 13.2%. The company continues to focus on building capacity, as has been the case in recent years, across units to support its growth in these markets. Currently, APNT is undertaking the expansion of its existing plant in Indonesia and has also commenced its plans in Bangladesh.

The company is among the top 3 players in decorative paints in 12 of the 14 countries outside India. APNT’s presence in the Middle East and South Asia is significant and the company is looking to expand with key focus on Africa and Indonesia.

APNT entered African markets in FY15 through the acquisition of controlling stake in Kadisco Paint & Adhesive Industry Share Company, Ethiopia.

During FY18, APNT completely divested from the low growth Caribbean markets in order to focus on expanding its international portfolio in the emerging markets of Asia and Africa.

Exhibit 22: International markets geography wise revenue breakdown as on FY20

Asia44.0%

Middle East27.0%

Africa24.0%

South Pacific5.0%


Exhibit 23: International region-specific brands

Brand Country

Asian Paints Bangladesh, Nepal, Sri Lanka and Indonesia

Causeway Paints Sri Lanka

Asian Paints Berger Oman, Bahrain and UAE

Kadisco Asian Paints Ethiopia

Scib Paints Egypt

Apco Coatings Fiji, Solomon Islands, Tonga and Vanuatu

Taubmans Fiji and Samoa




Exhibit 24: Revenue growth of APNT’s International markets

14.7

16.8

17.9

20.9

19.8

21.8

22.3

23.4

23.2

13.7

6.6

16.8

-5.3

10.4

2.34.9

-15.0

-5.0

5.0

15.0

25.0

0.0

5.0

10.0

15.0

20.0

25.0

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Revenue from International operations Growth (%)

(Rsbn) (%)


Exhibit 25: APNT ranks amongst the top 3 players in decorative paints in 12 of the 14 countries outside India

Location Rank in decorative paints

Sri Lanka 1

Nepal 1

Bangladesh 2

Oman 4

Bahrain 1

UAE 1

Egypt 3

Ethopia 2

Fiji 1

Samoa Islands 1

Tonga 1

Vanuatu 1

Solomon Islands 1




Industrial Segment APNT is also present in industrial coatings space, which contributes a miniscule ~2.4% to the overall revenue. Of the total industrial paint demand for the company, about two-third comes from the automotive sector. APNT operates in the industrial space through two joint ventures-

PPG Asian Paints Pvt. Ltd. (PPG-AP): This 50:50 JV manufactures automotive original equipment manufacturer (OEM), refinish, marine, packaging and certain industrial coatings. Over the last two years, general slowdown in the economy, lower spending, BS-VI compliance and slowdown in the auto industry in the last year or so have affected this segment. For APNT, business de-growth in the financial year was primarily attributed to the auto and two-wheeler markets, which declined by 15% and 14%, respectively.

Asian Paints PPG Pvt. Ltd. (AP-PPG): This 50:50 JV services the protective coatings, floor coatings, road marking paints and powder coatings segments, and also services customers in the infrastructure, oil & gas, power plants and white goods sectors. During FY20, the industrial coatings market faced a challenging business environment with the overall investments in the manufacturing sector of the economy witnessing continued slowdown for the year and due to liquidity crunch. AP-PPGʼs strategy to focus on geographical expansion and enhancement of product portfolio through customer acquisition and product launches resulted in substantial growth in Protective Coatings and Powder Coatings market segments.

As per IND-AS, PPG-AP has to be treated as an associate company wherein only APNT’s share of profit after tax of PPG-AP would be consolidated as against proportionate consolidation of every line item of P&L. At the same time, AP-PPG has to be consolidated as a subsidiary of APNT in the consolidated financials.

Exhibit 26: Profit considered in consolidation

329

496

458

408

507

34 187

85 31 227

0

100

200

300

400

500

600

FY

16

FY

17

FY

18

FY

19

FY

20

PPG-AP AP-PPG

(Rsmn)




Constant reinvention through Research and Development/Technology (R&D/R&T) and Digital Innovation

The company at its R&D/R&T facility at Turbhe, Navi Mumbai, with over 200 scientists, continuously emphasizes on its strategy around new technology adoption and product development, focusing on creating sustainable products, as well as value re-engineering for productivity improvement and cost optimization. It continues to maintain a strong focus on Intellectual Property (IP) and has filed a total of 54 patents, 14 of which have been in FY21. Some of the activities undertaken by the team include:

Development of new products and processes

Creating revolutionary products that improve health and hygiene of the surfaces and sets benchmark

Creating products in the premium range keeping in mind aspects of Green Assure and product sustainability

Upgradation of existing products with value added features to create product differentiation to retain market share

Continuous benchmarking of products against national/international competition

Exhibit 27: Research & Technology Centre at Turbhe, Navi Mumbai


Exhibit 28: R&D expenses as a % of sales

49 45 86 71 310

418

43 35456

521

631

680

751

762

873

836

0.5 0.4 0.5 0.5

0.7 0.7

0.5

0.4

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

100

200

300

400

500

600

700

800

900

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Capital Recurring R&D as a % of net revenue

(Rsmn) (%)




Exhibit 29: Breakdown of R&D expenses

(Rsmn) FY13 FY14 FY15 FY16 FY17 FY18 FY19

Employee Cost 268 309 361 391 447 471 517

Depreciation on Equipment and Building 57 63 68 75 65 68 112

Travelling Expenditure 15 16 17 19 30 16 17

Testing and Laboratory Expenditure 15 11 16 17 15 13 11

Power and Fuel 24 24 25 29 31 31 37

Stores and Spares 6 5 8 8 8 8 6

Repairs and Maintenance 8 11 26 13 19 17 21

Materials Consumed 4 7 6 5 5 5 6

Others 60 76 104 125 130 133 146

Total recurring expenses 456 521 631 680 751 762 873

Capital Expenditure 49 45 86 71 310 418 43

Total R&D expenses 506 566 716 752 1060 1180 915


Asian Paints stepped up its efforts on the digital front way ahead of the industry. In 2008 itself, APNT adopted automated storage and retrieval systems when robotic warehousing was unheard of in the Indian manufacturing industry. Without any reference point, APNT adopted robotic warehousing and integrated it with ERP to solve the problems of an overstuffed inventory, increased opex, supply chain efficiency and factory level losses, in one stroke.

It also decided to adopt the highly scalable in-memory platform and the new S/4 HANA when it sensed that the old ERP system needed an upgrade. This was one of the first implementations of S/4 HANA in India’s manufacturing industry. The platform helped APNT target customers with personalized real time offers, which in turn reduced operational costs with a 60% reduction in database requirements.

The company also upgraded its demand forecasting platform which allowed better predictability of the sales patterns across various geographies and brands which we believe helped in improving the ability to service an ever-increasing range of products while keeping inventory levels within control.

In FY20 as well, the Company has continued to invest in digital technologies such as AI, ML, Robotic Process Automation (RPA), security systems and advanced analytics which have been used to create immersive customer experiences, improve the operational productivity and aid in better decision making.



Expanding footprint I. Organic capacity expansion

APNT, the leader in the decorative paints segment, has been continuously investing in expanding its manufacturing footprint to serve customer demand. During FY16, the company expanded the installed capacity of its plant at Rohtak, Haryana from 200,000 KL to 4,00,000 KL. During FY19, the company commissioned two large paint manufacturing units with an installed capacity of 300,000KL each, at Mysuru, Karnataka in September 2018 and Visakhapatnam, Andhra Pradesh in January 2019. The plant at Mysuru, Karnataka (scalable upto 600,000 KL) has an estimated cost of Rs23.0bn and the plant at Visakhapatnam, Andhra Pradesh (scalable upto 500,000 KL) has an estimated cost of Rs17.9bn. With these two capacity additions, the company’s overall installed capacity stands at 1.73mn KL per annum.

Exhibit 30: Overall manufacturing footprint

Location No. of paint manufacturing plants

India 10

Sri Lanka 2

Nepal 2

Bangladesh 1

Indonesia 1

Fiji 1

Samoa Islands 1

Oman 1

Bahrain 1

Dubai 1

Egypt 2

Ethopia 3

Total 26


Exhibit 31: Total manufacturing locations in India (Installed capacity/annum)

DECORATIVE PAINT PLANTS KL

Rohtak, Haryana 400,000

Kasna, Uttar Pradesh 80,000

Ankleshwar, Gujarat 130,000

Khandala, Maharashtra 300,000

Patancheru, Telangana 80,000

Visakhapatnam, Andhra Pradesh 300,000

Mysuru, Karnataka 300,000

Sriperumbudur, Tamil Nadu 140,000

Combined capacity of decorative paints plants 1,730,000

CHEMICAL PLANT MT

Cuddalore, Tamil Nadu 6,720

INDUSTRIAL PAINT PLANTS MT or KL

Sarigam, Gujarat (MT) 7,200

Taloja, Maharashtra (KL) 14,000




Exhibit 32: Capex over the years

1.5

5.4

6.4

2.4

4.4

8.0

6.7

14.1

11.5

3.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Capex

(Rsbn)


II. Inorganic growth

In order to bolster presence in the international markets and to foray into other segments, the company has undertaken several inorganic routes, including the following acquisitions in the last decade:

To embark on the journey towards a holistic décor solutions provider, APNT acquired a 51% equity stake in Sleek International Private Limited (SIPL) for a consideration of ~Rs1.2bn during FY14. During FY18, APNT purchased the balance stake of 49% from the non-controlling shareholders of SIPL for a consideration of Rs501mn.

During FY15, the company acquired the entire front-end sales business (including brands, network and sales infrastructure) of Ess Ess Bathroom Products Private Limited for a consideration of Rs365mn.

During FY15, Berger International Pvt. Ltd., Singapore, a wholly owned indirect subsidiary of the company, acquired a 51% stake in Kadisco Paint and Adhesive Industry Share Company, one of the leading paint companies in Ethiopia engaged in the manufacturing and selling of decorative paints, industrial paints, automotive paints, other coatings and adhesives for a cash consideration of Rs1.2bn.

In the start of FY18, the company strengthened its international footprint by acquiring 100% stake in Causeway Paints Lanka Pvt. Ltd. (Causeway), Sri Lanka through its wholly-owned subsidiary Berger International Pvt. Ltd., Singapore. Causeway is a key player in the Sri Lankan coatings market and has been operating for more than two decades in the country before its acquisition.

Further, in FY18 company acquired 100% equity stake in Reno Chemicals Pharmaceuticals and Cosmetics Pvt. Ltd. for a cash consideration of Rs1.6bn to meet APNT’s growing infrastructure requirements.



Enhancing skills and supporting stakeholders

APNT’s ‘Asian Paints Colour Academy’ is a National Skill Development Corporation approved training partner that has been supporting the Skill India Mission furthered by the Government of India. Programmes undertaken at these academies to provide hands-on experience to the participants include:

Vocational training;

Technical knowledge distribution;

Productivity and livelihood; and

Value creation through impactful people solutions

Colour Academies are equipped with facilities to upgrade the skills of existing painters, thus helping them become specialists in their respective fields. Academy offers training programs across a variety of skills, including designer finishes, emulsions, metal care, mechanization, water proofing, wood finishes and wallpaper installation in order to improve the skill set of painters. Since the inception of Colour Academies in August 2014, APNT has imparted more than 147,000 trainings across its 50+ academies.

In the wake of the Covid-19 pandemic, APNT joined forces with several NGOs to provide food, masks and sanitizers to its applicators, contractors and painters in order to ensure their safety. By April 2020, the Direct Bank Transfer (DBT) drive was established through which the company was able to transfer money to their bank accounts. Additionally, APNT offers free sanitization services to their dealer outlets and offers insurance for the outlet employees.



Financial story in charts APNT has delivered a growth of 7.6% in consolidated revenue over FY15-20. Going forward, we expect gradual growth over the coming quarters of FY21E followed by rebound in FY22E volumes and thus build in consolidated revenue growth of 9.0% over FY20-23E.

Exhibit 33: We expect volumes to decline slightly for FY21E led by the lockdown related impact in 1Q, after which we expect positive growth trajectory to resume

-5.0

0.0

5.0

10.0

15.0

20.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Domestic decorative volume growth %

(%)


Exhibit 34: Standalone revenue expected to grow 8.9% over FY20-FY23E which will aid…

Exhibit 35: …9.0% consolidated sales growth over the same period

10

4.2

11

6.5

11

8.3

12

6.5

14

1.7

16

3.9

171.9

16

7.6

20

0.0

22

2.0

16.3

11.8

2.2

7.7

1.4

12.6

4.9

(2.5)

19.3

11.0

(5.0)

-

5.0

10.0

15.0

20.0

25.0

-

50.0

100.0

150.0

200.0

250.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

Standalone sales (Rsbn) Growth (%)

(Rsbn) (%)

125.

8

140.

1

142.

7

150.

6

168.

2

192.

4

202.

1

196.

6

234.

7

261.

9

15.7

11.3

1.9 5.5

11.7 14.4

5.0

(2.7)

19.4

11.6

(5.0)

-

5.0

10.0

15.0

20.0

25.0

-

50.0

100.0

150.0

200.0

250.0

300.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Consolidated sales (Rsbn) Growth (%)

(Rsbn) (%)


We expect gross margin to expand by 152bps over FY20-23E primarily on account of FY21E benefiting from benign crude prices. EBITDA margin is likely to expand by 234bps, led by gross margin expansion and cost efficiencies kicking in.



Exhibit 36: Consolidated gross margin to expand 152bps Exhibit 37: Employee cost expected to increase 7.5%…

41.7

43.1

43.6

44.7

42.4

41.5

43.7

44.9

45.0

45.2

39.0

40.0

41.0

42.0

43.0

44.0

45.0

46.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Gross Margin (%)

(%)

7.6

9.1

9.9

10.3

11.2

12.4

13.7

14.4

16.0

17.0

21.8 19.4

9.1

4.5

7.9 10.9 10.5

5.1

11.2

6.2

0.0

5.0

10.0

15.0

20.0

25.0

0.0

5.0

10.0

15.0

20.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Employee cost (Rsbn) Growth (%)

(Rsbn) (%)


Exhibit 38:… Other expenses expected to increase 7.8%... Exhibit 39: ….leading to EBITDA growth of 13.0% over FY20-23E

26.2

30.7

24.6

27.1

28.2

29.7

33.0

31.4

36.7

41.4

20.6 17.3

-19.7

10.1 4.0 5.4

11.0

-4.9

16.8 12.7

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

0.0

10.0

20.0

30.0

40.0

50.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Other expenses (Rsbn) Growth (%)

(Rsbn) (%)

18.6

20.6

27.7

29.9

32.0

37.7

41.6

42.5

52.9

60.1

11.8 10.4

34.6

7.8 7.1

17.8

10.5 2.2

24.5

13.5

0.0

10.0

20.0

30.0

40.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

EBITDA (Rsbn) EBITDA growth (%)

(Rsbn) (%)


Exhibit 40: EBITDA margin to expand by ~234bps over FY20-23E

Exhibit 41: Adj. PAT to grow at a CAGR of 15.1% led by topline growth and cost efficiencies

14.8

14.7

19.4

19.8

19.0

19.6

20.6

21.6

22.6

22.9

0.0

5.0

10.0

15.0

20.0

25.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

EBITDA Margin (%)

(%)

12.3

14.2

18.0

19.4

20.4

21.6

27.1

26.9

35.5

41.3

10.3 15.8

26.4

7.9 5.1 5.7

25.5

-0.4

31.9

16.3

-10.0

0.0

10.0

20.0

30.0

40.0

-

10.0

20.0

30.0

40.0

50.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Adj. PAT (Rsbn) Growth (%)

(Rsbn) (%)


APNT has reported a 5-year CAGR of 13.7% in net profit. We build in earnings CAGR of 15.1% over FY20-23E along with margin expansion of 238bps. Accordingly, RoE and RoCE will expand by 116bps and 183bps, respectively over the same period.



Exhibit 42: Adj. PAT margin to expand by 238bps leading to… Exhibit 43: ….improvement in return ratios i.e. RoE/RoCE by

116/183bps respectively

9.8

10.2

12.6

12.9

12.1

11.2

13.4

13.7

15.1

15.8

0.0

5.0

10.0

15.0

20.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Adj. PAT margin (%)

(%)

33.1

32.4

31.9

27.5

25.5

24.1

27.6

24.4

27.9

28.8

31.3

29.7

29.2

24.9

22.5

22.8

26.3

23.7

27.2

28.2

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

RoE (%) RoCE (%)

(%)


Exhibit 44: Cash conversion cycle (CCC)

No. of Days FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Inventory days 57 56 54 56 57 55 59 64 57 54

Debtor days 30 30 30 32 35 35 34 35 34 34

Creditor days 46 43 40 42 44 43 41 40 37 37

On average sales basis 41 43 45 46 48 47 52 59 53 51

Inventory days 97 99 97 101 100 94 105 116 103 99

Debtor days 30 30 30 32 35 35 34 35 34 34

Creditor days 79 75 71 76 77 74 73 73 68 68

On average COGS/sales basis 48 54 56 57 57 55 66 78 69 65

Inventory days 60 59 51 64 58 60 61 65 59 56

Debtor days 32 31 30 35 38 36 32 37 36 35

Creditor days 51 40 40 47 47 45 39 41 41 38

On year-end sales basis 42 49 42 52 48 51 55 61 55 53

Inventory days 103 103 91 115 100 102 109 118 107 102

Debtor days 32 31 30 35 38 36 32 37 36 35

Creditor days 87 71 71 84 81 78 69 74 74 69

On year-end COGS/sales basis 48 63 50 66 56 61 73 80 70 67


The company’s FCF generation declined during FY17 and FY18 on account of high capex spends on two of its plants – Mysuru and Vizag. Going ahead, we expect improvement in FCF generation over FY20-23E on expectation of lower capex spends in the near term.



Exhibit 45: We expect cash flow from operations increase over FY20-23E

14.0

11.9

22.4

15.3

21.1

24.7

26.3

23.7

34.2

36.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Cash flow from operations

(Rsbn)


Exhibit 46: FCFF to sharply increase in FY22E given lower capex spends

11.7

7.5

14.4

8.6

7.0

13.2

22.5

20.5

30.7

31.0

0.6

0.4

0.8

0.50.4

0.7

1.21.1

1.6 1.6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

FCF FCF yield

(Rsbn) (%)




Historical cost line items and savings over the years

Exhibit 47: Common size P&L (as a % of consolidated net revenue)

(as a % of Revenue) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

RM cost 57.9 60.2 59.0 58.3 56.9 56.4 55.3 57.6 58.5 56.3

Gross margin 42.1 39.8 41.0 41.7 43.1 43.6 44.7 42.4 41.5 43.7

Employee expenses 5.9 5.5 5.7 6.0 6.5 6.9 6.9 6.6 6.4 6.8

Advertisement expenses 4.4 4.3 4.7 5.0 5.3 3.9 4.1 3.9 4.1 4.5

Processing charges 0.7 0.6 0.7 0.7 0.8 0.7 0.7 0.7 0.7 0.7

Travel expenses 0.6 0.6 0.6 0.7 0.7 0.8 0.8 0.6 0.6 0.7

Freight cost 4.0 4.1 4.3 4.7 5.1 5.6 6.1 5.8 6.0 6.0

Other operating expenses 9.3 9.4 9.5 9.7 10.0 6.2 6.3 5.7 4.0 4.5

EBITDA margin 17.2 15.4 15.3 14.8 14.7 19.4 19.8 19.0 19.6 20.6

Depreciation / Amortisation 1.5 1.3 1.4 2.0 1.9 1.9 2.2 2.1 3.2 3.9

Interest & Finance Charges 0.3 0.4 0.3 0.3 0.2 0.3 0.2 0.2 0.5 0.5

Other Income 0.9 1.5 1.6 2.1 2.5 1.5 1.7 1.3 1.2 1.5

Taxes 4.9 4.5 4.6 4.5 4.6 5.9 6.3 6.2 5.7 4.2

Minority interest 0.5 0.3 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.1

Adj. PAT 10.9 10.3 10.2 9.8 10.2 12.6 12.7 11.7 11.2 13.4


Exhibit 48: Employee expenses have hovered around 6.4-6.8% as a % of net consolidated sales

Exhibit 49: Freight cost have stabilized to 6.0% in the recent years

4.5

5.3

6.2

7.6

9.1

9.9

10.3

11.2

12.4

13.7

5.9 5.5 5.7 6.0 6.5

6.9 6.9 6.6 6.4 6.8

0.0

2.0

4.0

6.0

8.0

0.0

5.0

10.0

15.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Employee expenses (Rsbn) as a % of net revenue

(Rsbn) (%)

3.1

4.0

4.7

5.9

7.1

8.0

9.1

9.8

11.5

12.1

4.0 4.1 4.3 4.7 5.1

5.6 6.1 5.8 6.0 6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Freight cost (Rsbn) as a % of net revenue

(Rsbn) (%)


Exhibit 50: Absolute ad spends have been growing every year after decline in FY16

Exhibit 51: Travel spends hovering around 0.6-0.7% in the recent years

3.4

4.1

5.2

6.3

7.4

5.6

6.2

6.6

7.9

9.2

4.4 4.3 4.7 5.0 5.3

3.9 4.1 3.9 4.1 4.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

2.0

4.0

6.0

8.0

10.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Advertisment expenses (Rsbn) as a % of net revenue

(Rsbn) (%)

0.5

0.6

0.7

0.9

1.0

1.2

1.2

1.0

1.2

1.4

0.6 0.6 0.6

0.7 0.7 0.8 0.8

0.6 0.6 0.7

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.5

1.0

1.5

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Travel expenses (Rsbn) as a % of net revenue

(Rsbn) (%)




Exhibit 52: Processing charges steady at 0.7% Exhibit 53: Other operating expenses <4.5% in the recent years

0.5

0.6

0.8

0.9

1.1

1.0

1.1

1.1

1.3

1.3

0.7 0.6 0.7 0.7

0.8 0.7 0.7 0.7 0.7 0.7

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Processing charges (Rsbn) as a % of net revenue

(Rsbn) (%)

7.2

9.0

10.4

12.2

14.1

8.8

9.5

9.6

7.8

9.0

9.3 9.4 9.5 9.7 10.0

6.2 6.3 5.7

4.0 4.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

5.0

10.0

15.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Other operating expenses (Rsbn) as a % of net revenue

(Rsbn) (%)




Valuation and view

While 1QFY21 was badly affected due to tight business conditions, for the company’s domestic decorative business, demand conditions improved in May and June after a complete washout in April. Business picked up in tier II/III/IV cities where the demand conditions were better compared to metro and tier I cities were the business was slower. While the business achieved 80% of base business volumes in May, APNT managed double digit volume growth of more than 14% in June. Overall, for 1QFY21, APNT achieved 62% of base business volumes and 56% in value terms on the back of pushing upgradation and premium range of products. The safe painting and terrace waterproofing have gained traction. International business portfolio performed well, as markets in UAE and Africa were open in April and portfolio performance improved progressively across all markets. Asia was the worst affected region as Nepal was severely affected with complete washout in April and May. In June, Nepal has completely opened up, so there is pent up demand. Growth in Bangladesh and Sri Lanka have mirrored India. Going further if there are no disturbances, this portfolio will do well. JV for the automotive coatings - PPG-AP, continued to be severely impacted during the quarter. JV for the industrial coatings - AP-PPG, was also impacted in 1QFY21 but saw an improving trend in June. Going forward, while there is still some uncertainty in the domestic market due to the sporadic lockdowns but we think the business should do well overall progressively. Soft material prices and cost control measures especially in S&D and admin expenses will support operating margins in the near term. No big capital expenditure is expected now like the last two years.

We expect APNT to deliver 9.0%, 13.0% and 15.1% CAGR growth over FY20-23E in Revenue, EBITDA and PAT, respectively, underpinned by (a) strong growth in the organized decorative paints industry (from II/III/IV cities, especially for lower end products), (b) faster growth in premium products, (c) pick-up in GDP growth beyond FY21 (we expect real/nominal GDP growth rate of 6.0%/9.7% in FY22) and (d) higher contribution from allied businesses. As operations improve beyond FY21 and utilization levels of new plants go up, we anticipate return ratios to improve and go back to FY20 levels by FY23 itself. We believe that valuation for APNT will always appear expensive as it has consistently delivered strong volume growth even compared to other consumer segments, maintained market leadership in its core business, continuously generated robust cash flows and maintained a healthy dividend payout of >50%. At CMP, the stock trades at 44.1x FY23E EPS of Rs43.1, at a discount of ~15% to five-year average P/E of 52.1x. We initiate coverage on APNT with Accumulate rating and a TP of Rs2,080 based on 52x September’22 EPS, implying an upside of 10% from CMP.

In addition to the risk which is present to the sector:

A near term monitorable to look out for is the outcome of the probe ordered by the Competition Commission of India (CCI) against APNT for allegedly denying access to the distribution channels in the relevant markets to JSW Paints.

Exhibit 54: One year forward P/E

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Aug

-15

Feb

-16

Aug

-16

Feb

-17

Aug

-17

Feb

-18

Aug

-18

Feb

-19

Aug

-19

Feb

-20

Aug

-20

Forward PE 5 yr Median SD -1 SD +1

(x)




Exhibit 55: Average P/E

59.8

54.7

52.1

42.9

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1yr 3yr 5yr 10yr

Avg. PE (x)

(x)


Shareholding

Exhibit 56: Shareholding breakdown as on June 2020

18%

9%

0%

53%

20%

Foreign portfolio investors

Domestic institutional investors

Governement holding

Promoters

Public & Others


Exhibit 57: Top 10 shareholders

Name of the shareholder %

Life Insurance Corp of India 2.9

BlackRock Inc. 1.3

Vanguard Group Inc. 1.1

Axis Asset Management Co Ltd. 0.8

JPMorgan Chase & Co. 0.6

ICICI Prudential Asset Management 0.6

Standard Life Aberdeen PLC 0.4

UTI Asset Management Co Ltd. 0.4

Motilal Oswal Asset Management Co. 0.4

Sands Capital Management LLC 0.3




Board of directors and KMP

Name Designation Description

Mr. Ashwin Dani Non-Executive Chairman

He joined APNT as a Senior Executive in 1968 and moved through successive senior positions like Director - R&D, Works Director and Whole-time Director. He served as Vice- Chairman and MD from Dec 1997 to Mar 2009 and presently holds the position of Non-Executive Chairman of the Company.

Mr. Amit Syngle MD & CEO, Additional director

He has spent 30 years with the Company and has headed Supply Chain, Sales & Marketing and Research & Technology functions. In addition, he also spearheaded the acquired businesses of the Kitchens and Bath spaces in the Home Improvement venture of the Company. Before being appointed as an Additional Director/ Managing Director & CEO, Mr. Amit Syngle held the position of Chief Operating Officer of the Company.

Mr. Manish Choksi Non-Executive Vice Chairman

He joined APNT in the year 1992 as an Executive and has grown in ranks by holding various positions across different functions of the Company. He has spearheaded the IT function of the Company.

Mr. Abhay Vakil Non-Executive Director

He has been associated with the company since 1974. Prior to becoming Managing Director in 1998, he was overseeing the Decoratives India SBU of the Company. He ceased to be the MD of APNT on FY09 and since then holds the position of Non-Executive Director on the Board of APNT.

Mr. Malav Dani Non-Executive Director He joined APNT as Manager-Quality in 2005 and worked on customer centricity initiatives. He was appointed as a Non-Executive Director on the Board of the Company, since 2013 and is also the Chairman of the CSR Committee of the Board from October, 2015.

Ms. Amrita Vakil Non-Executive Director

She began her career at APNT in 2003 in the HR department and was responsible for end-to-end training of the Executives cadre of the Company. In the year 2005, she joined Frost & Sullivan as a Senior HR Executive and managed a Generalist HR profile where she spent a total of 5 years.

Mr. Jigish Choksi Non-Executive Director

During his 5 year long stint with APNT which began in 2010, he has worked as an Area Manager-Project Sales for 3 years and thereafter, he was a part of the Marketing team Mr. Choksi is the Managing Director of M/s. Elf Trading & Chemicals Manufacturing Limited - an agro-chemical company.

Mr. Deepak Satwalekar

Independent Director He has been a consultant to the World Bank, the Asian Development Bank, USAID and the UN HABITAT. He was also the MD & CEO of HDFC Standard Life Insurance Co. Ltd., before his retirement in Nov 2008, before which he served as the MD of HDFC Ltd. from 1993 to 2000.

Dr. S Sivaram Independent Director

He has over 30 years of experience in research on polymer synthesis, high performance polymers and surface chemistry of polymers. He was bestowed with "Padma Shri" award by the President of India in January, 2006 for his outstanding contribution in the field of science and technology.

Mr. M K Sharma Independent Director Mr. M.K. Sharma began his career with DCM Limited and subsequently joined Hindustan Unilever Ltd. as Legal Manager. He retired as the Vice Chairman of Hindustan Unilever Ltd. of in May, 2007. He serves as a Director on the Boards of several companies of repute.

Ms. Vibha Paul Rishi Independent Director She started her career with the Tata Administrative Services and was part of the founding team of Titan Watches. She spent 17 years at PepsiCo in marketing and innovation roles in India, US and UK and was one of the founding team employees of PepsiCo when they set up in India.

Mr. R Seshasayee Independent Director He joined Ashok Leyland Ltd. in 1976 rose to Managing Director in 1998. He has served on the board of ICICI Bank from 1997 to 2003. The former chairman of Infosys Ltd. and Indusind Bank Ltd. is on the board of APNT since 2017.

Ms. Pallavi Shroff Independent Director She is the managing Partner of M/s. Shardul Amarchand Mangaldas, with extensive experience of over 37 years. Her broad and varied representation of public and private corporations and other entities before legal institutions, has earned her national and international acclaim.

Mr. Suresh Narayanan Independent Director Mr. Suresh Narayanan is currently the Chairman & MD of Nestle India Limited. He joined Nestle in the year 1999 and has been associated with the Company since then. He was the Chairman and CEO of Nestle Philippines, Inc. prior to joining Nestle India.

Mr. R J Jeyamurugan CFO & Company Secretary

Mr. R J Jeyamurugan, an associate member of the ICAI and ICSI, was appointed as the CFO & Company Secretary of the Company, w.e.f. 27th November, 2019. He heads the Finance, Accounts, Shared Service Centre, Tax, Legal, Secretarial & Investor relations functions of the Company.



Financials (Consolidated)

Exhibit 58: Income statement

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E

Net Sales 1,92,401 2,02,113 1,96,587 2,34,720 2,61,922

% Growth 14.4 5.0 -2.7 19.4 11.6

COGS 1,12,646 1,13,835 1,08,290 1,29,128 1,43,539

Staff costs 12,368 13,661 14,364 15,969 16,959

Other expenses 29,732 32,999 31,397 36,680 41,350

Total expenses 1,54,746 1,60,495 1,54,051 1,81,777 2,01,849

EBITDA 37,655 41,618 42,536 52,943 60,073

EBITDA margin (%) 19.6 20.6 21.6 22.6 22.9

% growth 17.8 10.5 2.2 24.5 13.5

Other income 2,330 3,043 2,772 4,184 5,184

Interest costs 1,053 1,023 808 751 663

Depreciation 6,221 7,805 8,059 8,255 8,549

Profit before tax (before exceptional items)

32,712 35,833 36,442 48,121 56,046

Tax 10,981 8,549 9,183 12,127 14,124

Rate of Tax (%) 33.6 23.9 25.2 25.2 25.2

Share from assc. /NCI 114 183 328 470 620

Profit from discontinued operations

-58 -50 0 0 0

Reported PAT 21,617 27,101 26,931 35,525 41,303

Adj PAT 21,559 27,052 26,931 35,525 41,303

Adj PAT margin (%) 11.2 13.4 13.7 15.1 15.8

% Growth 5.7 25.5 -0.4 31.9 16.3


Exhibit 60: Balance sheet


Share capital 959 959 959 959 959

Reserves 93,746 1,00,342 1,18,715 1,34,000 1,51,323

Net worth 94,706 1,01,302 1,19,674 1,34,960 1,52,282

Minority Interest 3,613 4,035 4,363 4,833 5,453

Total debt 6,156 3,401 2,801 2,201 1,601

Other LT liabilities 12,137 11,984 10,995 10,000 9,004

Total liabilities 1,16,611 1,20,722 1,37,834 1,51,994 1,68,341

Gross block 77,672 81,230 83,230 85,230 89,230

Depreciation 15,919 21,707 29,765 38,020 46,568

Net block 61,753 59,523 53,465 47,210 42,662

Capital work-in-progress 2,097 1,402 2,602 4,102 5,602

Goodwill 3,213 3,200 3,200 3,200 3,200

Investments 25,686 20,189 29,079 35,920 43,770

Inventories 31,499 33,898 34,932 37,945 39,920

Debtors 19,134 17,994 19,707 23,378 25,418

Cash 4,449 7,828 11,275 16,699 18,819

Other current assets 14,659 17,345 23,931 29,227 36,533

Total current assets 69,740 77,066 89,846 1,07,249 1,20,690

Creditors 23,943 21,366 21,950 26,163 27,320

Other current liabilities & provisions

21,935 19,292 18,409 19,524 20,264

Total current liabilities 45,878 40,658 40,359 45,688 47,584

Net current assets 23,863 36,408 49,487 61,561 73,106

Total assets 1,16,611 1,20,722 1,37,834 1,51,994 1,68,341


Exhibit 59: Cash flow


PAT 23,226 26,175 27,259 35,995 41,922

Depreciation 6,256 7,819 8,059 8,255 8,549

Other income -690 -305 -1,965 -3,433 -4,521

(Inc.)/dec. in working capital -4,097 -7,371 -9,632 -6,650 -9,425


24,695 26,319 23,720 34,166 36,525

Capital expenditure (-) -11,543 -3,771 -3,200 -3,500 -5,500

Net cash after capex 13,152 22,548 20,520 30,666 31,025

Inc./(dec.) in investments -1,575 5,484 -5,251 -9,805 -10,814

Cash from investment activities

-13,119 1,713 -8,451 -13,305 -16,314

Dividends paid (-) -10,487 -21,207 -15,155 -20,239 -23,980

Others -688 -3,445 3,333 4,801 5,890

Cash from financial activities

-11,175 -24,652 -11,822 -15,438 -18,090

Opening cash balance 4,047 4,449 7,828 11,275 16,699

Closing cash balance 4,449 7,828 11,275 16,699 18,819

Change in cash balance 402 3,380 3,447 5,423 2,120


Exhibit 61: Key ratios

Y/E March FY19 FY20 FY21E FY22E FY23E

Per share (Rs)

EPS 22.5 28.2 28.1 37.0 43.1

Book value 98.7 105.6 124.8 140.7 158.8

DPS 12.3 15.7 15.8 21.1 25.0

Valuation (x)

EV/sales 9.4 9.0 9.2 7.6 6.8

EV/EBITDA 48.1 43.5 42.4 33.9 29.8

P/E 84.5 67.3 67.6 51.3 44.1

P/BV 19.2 18.0 15.2 13.5 12.0

Return ratios (%)

RoCE 22.8 26.3 23.7 27.2 28.2

RoE 24.1 27.6 24.4 27.9 28.8

RoIC 29.5 29.3 27.7 35.2 39.4

Profitability ratios (%)

Gross margin 41.5 43.7 44.9 45.0 45.2

EBITDA margin 19.6 20.6 21.6 22.6 22.9

EBIT margin 16.3 16.7 17.5 19.0 19.7

PAT margin 11.2 13.4 13.7 15.1 15.8

Liquidity ratios (%)

Current ratio 1.5 1.9 2.2 2.3 2.5

Quick ratio 0.8 1.1 1.4 1.5 1.7

Solvency ratio (%)

Debt to Equity ratio 0.1 0.0 0.0 0.0 0.0

Turnover ratios

Total asset turnover ratio (x) 1.6 1.7 1.4 1.5 1.6

Fixed asset turnover ratio (x) 2.4 2.4 2.3 2.6 2.8

Inventory days 94 105 116 103 99

Debtors days 35 34 35 34 34

Creditor days 74 73 73 68 68



62

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Initi

atin

g C

over

age

Reuters: BRGR.NS; Bloomberg: BRGR IN

Berger Paints India Ltd.

Strong second and gaining ground Incorporated in the year 1923, Berger Paints India Ltd. (BRGR) is one of India’s oldest paint companies. It is India’s second largest paint company, commanding ~12% market share of the overall paint industry. It is also the second largest player in the domestic decorative paints segment with ~20% market share. It is the market leader in the protective coatings industry and also has presence in the automotive, general industrial and powder coatings segments. On a consolidated basis, decorative paint segment contributes a bit over ~80% to the revenue and the balance ~20% is contributed by industrial paints. It also caters to overseas markets such as Nepal, Poland and Russia through its subsidiaries. Over the years, the company has established a strong position in the paints industry, led by strong brands, well-spread distribution network (still way below the market leader) and expanding product portfolio. In terms of performance, over the last decade, the company has improved its operating performance. It grew its sales at a CAGR of 12.9% and PAT at a CAGR of 18.5% over a period of 10 years. This was led by expanding distribution network, innovations across portfolio, capacity additions and improvement its geographical presence in Western and Southern regions. After a washout in April, good demand was seen in May and the same improved further in June. The company has seen a decent recovery in decorative and subsidiary businesses and believes that there is a high probability of demand extending all the way up to July-September on the back of agri-reforms and recovery in rural markets post a good monsoon. Even protective paints is expected to do reasonably well going forward. However, automotive paints category might remain a mixed bag in the near term as two-wheeler and car segments are coming back to last year’s levels but the CV segment is still substantially down. There is still some uncertainty about the overall business operations due to the sporadic lockdowns but we think that the business should do well overall progressively. Over FY20-23E, we expect BRGR to deliver 10.4%, 16.3% and 18.3% CAGR growth in Revenue, EBITDA and PAT, respectively, led by (a) strong growth witnessed by the organized decorative paints industry from tier II/III/IV cities & rural areas (especially for lower end products) where company has a higher exposure than the industry, (b) portfolio & distribution expansion, (c) high growth in premium decorative products, (d) pick-up in GDP growth beyond FY21 (we expect real/nominal GDP growth rate of 6.0%/9.7% in FY22) and (e) non-decorative segments growing in tandem or even higher going forward. We also expect operating margins to improve due to benign input prices in the near term, better mix and cost rationalization across line items. The company has deferred its capex plans for FY21 but when it is completed it will lead to some savings in logistics cost as well. At CMP, the stock trades at 57x/48x FY22E/FY23E EPS of Rs9.5/Rs11.2. We believe that even though earnings performance of BRGR has been ahead of the market leader over 3-year/5-year/10-year period and also expected to be ahead over FY20-23E, the leader still commands a premium because of the sheer size of the business, market share difference and higher reach. We therefore assign a multiple of 48x on September’22 EPS and initiate coverage on BRGR with Sell rating with a target price (TP) of Rs500, implying a downside of 7% from current market price (CMP).

SELL

Sector: FMCG

CMP: Rs538

Target Price: Rs500

Downside: 7%


Key Data

Current Shares O/S (mn) 971.2

Mkt Cap (Rsbn/US$bn) 522.2/7.1

52 Wk H / L (Rs) 597/357

Daily Vol. (3M NSE Avg.) 1,720,460

Shareholding (%) 3QFY20 4QFY20 1QFY21

Promoter 75.0 75.0 75.0

Public 25.0 25.0 25.0

Others - - -

One -Year Indexed Stock Performance

60

70

80

90100

110

120

130

140150

160170

Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20

BERGER PAINTS Nifty 50

Price Performance (%)

1 M 6 M 1 Yr

Berger Paints 7.8 (0.7) 53.6

Nifty Index 2.3 3.2 4.6

Source: Bloomberg

FY19 Annual Report

1QFY21 Result and press release

Financial Summary Y/E March (Rs mn) FY19 FY20 FY21E FY22E FY23E

Net sales 60,619 63,658 63,342 76,699 85,662 YoY growth (%) 17.3 5.0 -0.5 21.1 11.7 EBITDA 9,355 10,610 11,275 14,419 16,704 EBITDA margin (%) 15.4 16.7 17.8 18.8 19.5 Adj. PAT 4,943 6,578 6,852 9,196 10,878 EPS 5.1 6.8 7.1 9.5 11.2 YoY change (%) 7.3 33.1 4.2 34.2 18.3 ROCE (%) 18.9 22.8 21.3 24.9 25.8 ROE (%) 21.3 25.8 23.9 27.4 27.5 ROIC (%) 22.8 27.3 26.0 32.8 36.7 P/E (x) 105.6 79.4 76.2 56.8 48.0 P/B (x) 21.4 19.6 17.0 14.4 12.2 EV/EBITDA (x) 56.1 49.5 46.4 36.1 31.0


1 September 2020

https://www.bergerpaints.com/resources/pdf/annual-report/ar-18-19.pdf

https://www.bseindia.com/xml-data/corpfiling/AttachHis/c0b53e4e-b618-4555-949d-75476b956d5f.pdf


Berger Paints India Ltd. 64

About the company BRGR is India’s second largest paint company commanding ~12% market share of the overall paint industry and over 20% market share of the domestic decorative paints segment. On a consolidated basis, decorative paint segment contributes a bit over ~80% to the revenue while the balance 20% is contributed by industrial paints. The company has 16 manufacturing plants in India (4 outside India) with total capacity of ~609,247 KL. The company also caters to overseas markets such as Nepal, Poland and Russia through its subsidiaries. Key subsidiaries include:

Berger Jenson & Nicholson (Nepal) Pvt. Ltd. (BJN Nepal): BRGR entered Nepal by acquiring Jenson & Nicholson in 2000. BJN Nepal is engaged in manufacturing and marketing of decorative paints. Revenue (till FY19) has grown at a 5-year CAGR of 20% while profit has grown at a CAGR of 27% during the same duration. The subsidiary grew its topline and profit at a steady pace in FY20. However, operations in FY21 would be affected since Nepal was under lockdown for more than two months since the start of the fiscal. The company has since recovered post the withdrawal of lockdown.

SBL Specialty Coatings Pvt. Ltd. (Erstwhile Saboo Coatings Ltd.): During FY18, BRGR acquired 100% of SBL Specialty Coatings Pvt. Ltd. (SBL Specialty Coatings), which is in the business of liquid coatings for various industrial segments. Since the acquisition, this subsidiary has been recording strong growth in topline and bottomline. While FY21 operations have been affected due to the lockdown, BRGR expects the subsidiary’s performance to significantly improve going ahead.

Bolix S.A: BRGR entered Poland by acquiring Bolix S.A. in 2008. The company is engaged in the business of External Insulation Finishing Systems (EIFS), which is a comprehensive solution for meeting both the insulation and decorative requirements of external walls of buildings. Bolix S.A.’s products, manufactured in-house include adhesives, mortars, plasters, primers and paints. In FY20, operations improved both on topline and profitability front.

Beepee Coatings Pvt. Ltd.: This subsidiary, with its entire manufacturing facilities dedicated to processing BRGR’s products, has been growing at a steady pace. Revenue and PAT have grown at a 5-year CAGR of 4% and 5%, respectively. In FY18, BJN Paints India Pvt. Ltd.,a wholly owned subsidiary of Beepee Coatings Pvt. Ltd., was amalgamated with BRGR for bringing in better efficiencies and improving various operating parameters.

Exhibit 1: Performance of key subsidiaries

Revenue FY14 FY15 FY16 FY17 FY18 FY19

BJN Nepal 787 963 1,022 1,353 1,708 1,972

% growth 19.0 22.4 6.0 32.5 26.2 15.4

SBL Specialty Coatings - - - - 715 1,063

% growth - - - - - 48.6

Bolix S.A 1,560 1,657 1,578 1,897 1,992 2,479

% growth -6.4 6.2 -4.8 20.2 5.0 24.5

Beepee Coatings Pvt. Ltd. 204 216 232 249 244 249

% growth 16.0 6.0 7.3 7.2 -1.8 1.8

PAT FY14 FY15 FY16 FY17 FY18 FY19

BJN Nepal 122 141.2 172.9 278.7 359.4 403.2

% growth 29.1 15.7 22.5 61.2 29.0 12.2

SBL Specialty Coatings - - - - 31.9 93.2

% growth - - - - - 192.2

Bolix S.A 57.8 6.8 43.5 84.8 61.8 87.8

% growth 50.1 -88.2 539.7 94.9 -27.1 42.1

Beepee Coatings Pvt. Ltd. 21.5 16.7 20 27.9 23.9 27.3

% growth 726.9 -22.3 19.8 39.5 -14.3 14.2




Growing on a two-pronged approach

For the past few years, demand in smaller cities and towns has been growing at a faster pace than metro and urban areas. Rise in disposable income, incremental consumption expenditure, increase in awareness, development of rural markets and various launches have fueled the paint industry’s growth. Increased awareness among rural households about applying lower-coat (putty and primer) before applying final coat (distempers) has aided demand of low-end products.

Shift from unorganized to organized, led by GST and better consumer awareness has driven growth in low-end product offerings like putty and distemper.

We expect the company to continue following this two-pronged approach – boosting margin through premiumization and driving volume growth & market share through its low-end offerings.

While BRGR had been focusing on the bottom of the pyramid till the early 2010s, it has been focusing on improving its product mix during the recent years by expanding its premium-end portfolio.

In the recent years, BRGR has been focusing on offering differentiated products, especially revolving around consumer’s comfort and well-being. In FY19, the company launched ‘WeatherCoat Anti Dust’ an exterior emulsion, developed keeping in mind the dry and dusty regions of India where rainfall in sparse, doesn’t allow dust to settle on exterior walls. The company’s ‘Easy Clean Fresh’ interior emulsion, also launched in FY19, absorbs unwanted odour coming from cigarette smoke, musty carpets, kitchens, dustbins etc. in homes. The outbreak of Covid-19 prompted the company to launch ‘Silk Breathe Easy Emulsion’ (positioned as Ghar ka Sanitiser) under its home health & hygiene category, which significantly reduces pollution and kills bacteria. These innovative and differentiated products, focusing on bridging the gap between unidentified consumer needs and availability, are helping BRGR strengthen its brand presence and top-end premium portfolio, drive demand and result in stronger sales with higher margins.

Exhibit 2: Product offerings in the top-end segment


Exhibit 3: Price range of paints, putty, distemper

BRGR Interior Price Range Exterior Price Range

Top end/Luxury Silk/Easy Clean 360-1000 WeatherCoat/Florentina 320-450

Mid-segment Rangoli 250-270 WeatherCoat 270-300

Bottom of pyramid/Economy/ Value for money

Bison/Commando 65-180 Walmasta/Bison 30-200

Source: Aapkapainter, Colourdrive, Company, Nirmal Bang Institutional Equities Research



Exhibit 4: Product offerings in the low-end segment


Project/institution business

BRGR’s projects division ‘Prolinks’ is a solution provider for big projects like housing. The process starts with pre-painting audit, recommending appropriate painting system (keeping in mind the wall surface and climatic conditions), suggesting the kind of primer, topcoat, pre-primer coat (if any) etc. that should be used, product and shade development, technical services to provide solutions to overcome typical problems and on-site supervision, recommending panel of contractors to undertake quality jobs, ensure on-time delivery and post-application maintenance.


I. Waterproofing and construction chemicals BRGR entered the construction chemical market in FY12 with a product portfolio of ‘Cementmix Plus’ (waterproofing compound), ‘Crackfill Paste’ (ready to use flexible putty for filling the cracks on plastered surfaces), ‘Crackfill Powder’, ‘Super Latex Plus’ and ‘Latex Plus’ (liquids for waterproofing and multi-purpose repair work) and ‘Tile Adhesive Plus’ and ‘Tile Adhesive’ (used for bonding of tiles with cement surfaces). Over the years, it has increased the number of offerings under this space, which has in turn spurred growth.

To boost its existing business, BRGR acquired a 91.9% stake in STP Ltd. (formerly known as Shalimar Tar Products Ltd.) out of the planned 95.5% stake. STP Ltd. is engaged in the manufacture and supply of construction chemicals, concrete admixtures, waterproofing chemicals, flooring compounds, bitumen and coal tar-based products, sealants and adhesives, protective and anti-corrosive coatings.

Exhibit 5: Waterproofing and construction chemicals offerings




II. Express painting services

Launched during FY15, BRGR pioneered in providing ‘Express Painting’ service to change the process of painting by offering a faster, cleaner, better way to paint homes using automated tools and completing the painting process in 40% lesser time. The service involves technical evaluation of painting requirements, providing accurate quotation, furniture shifting and covering, painting by specially trained painters with XP automatic tools and many other customer-centric and hassle-free approaches. It further beats conventional manual painting by cutting down on time and providing a dust free environment and that too at no extra cost. As per the company, 90% of customers are satisfied with the service. The company is providing this service in 25+ cities across India.

In response to the Covid-19 pandemic, the company has upgraded its process and approach taken under this service. It has launched an ‘Express Painting App’ through which consumers can get cost estimates, book the painting service, track work progress, monitor health and body temperature of painters and complete all transactions digitally.

Exhibit 6: Express Painting during its launch in 2014; from ‘Faster, Cleaner, Better’ to….




Exhibit 7: …‘Faster, Cleaner, Safer’: Express painting modified in response to COVID


Exhibit 8: Express Painting modified in response to COVID




III. Home hygiene

Due to the outbreak of Covid-19, BRGR has ventured into the ‘home hygiene and safety’ space under the brand name ‘Breath Easy+’ through the launch of:

Breathe Easy+ Virus Guard Hand Sanitizer (80% alcohol content) Breathe Easy+ Hand Sanitizer (70% alcohol content) Breathe Easy+ floor cleaner, which is a non-acidic specialized cleaning solution that removes 99.9%

germs from the floor. It also removes tough stains, including dried paint drips.

The above offerings are in addition to Silk Breathe Easy Emulsion (positioned as Ghar ka Sanitiser), which significantly reduces pollution and kills bacteria.

Exhibit 9: Home hygiene - Sanitization




Revival in industrial paints is material to overall growth trajectory

Industrial coatings have been affected not just by the pandemic but also due to general slowdown faced in the last 2 years. The company is present in the industrial paints segment on a standalone basis (~20% contribution) as well as through its subsidiaries and JVs (18-20% contribution on a consolidated basis). BRGR is present in the protective coatings, automotive coatings, general industrials and powder coatings space.

Protective coatings: This category contributes ~9-9.5% to BRGR’s total revenue. The company is a leader in high performance protective coatings in India for over 45 years and supplies this range of products under the name ‘Berger Protection’. This business serves various sectors, including OEMs, contractors, dealers, fabricators etc. wherein the company is able to command premium given its experience in the field. In FY17, the company entered into two Memorandums of Understanding (MoUs):

One with Promat International Limited NV (US$3bn+ company headquartered in Belgium) for co-operation in the field of passive fire protective coatings and high-performance insulation coatings in India and neighboring countries. The MOU envisages production, distribution and supply of specialized fire-resistant coatings, which may range from lightweight and thin films to cement based wet mix products suitable for steel and concrete, offering various degrees of efficiency in fire resistance. BRGR continues to supply fire proof coatings through itself and Promat.

The other with Chugoku Marine Paints Limited of Japan (established in 1917) for co-operation and collaboration in the field of marine and related industrial paints in India. The MOU envisages joint efforts in marketing, supplying and purchasing marine related industrial paints. BRGR has started supplying marine coatings to its clients in terms of the MoU.

Powder coating: This category contributes less than 2% to the company’s topline. Powder coating in India is a much smaller segment than liquid paints. The company’s main customers include manufacturers of white goods, furniture, luminaries, hospital items, garden tools, power solutions (generators), invertors, batteries, control panel manufacturers, aluminum extrusions used in real estate etc.

General industrial and automotive: The company has a joint venture with Nippon Paint Automotive Coatings Co., Limited of Japan (NPAU) in the form of Berger Nippon Paint Automotive Coatings Private Limited (BNPAC). BNPAC deals with coatings for 4-wheeler passenger cars and SUVs, three wheelers and related ancillaries and automotive plastic parts. In FY18, BRGR acquired 100% of SBL Specialty Coatings Pvt. Ltd. (erstwhile Saboo Coatings Ltd.), which is in the business of liquid coatings for various industrial segments. Since the acquisition, this subsidiary has been recording strong growth in topline and bottomline. While FY21 operations have been affected due to the lockdown, the company expects the subsidiary’s performance to significantly improve going ahead. General industrial and automotive account for ~8% of the company's revenue.

Exhibit 10: Clientele in general industrial segment




Exhibit 11: Clientele in general automotive segment


Auto refinish: The company is already present in all areas of automotive paints in India. However, in FY17, it entered into a MoU with Rock Paint Co. Ltd. (Rock Paint) of Japan for marketing of automotive refinish paints in India and launched the products in May 2017. In FY19, BRGR subscribed to 51% stake in Berger Rock Paints Pvt. Ltd. upon its incorporation in September 2018 while the balance 49% was subscribed by Rock Paint. Berger Rock, a beneficiary of market knowledge and infrastructure of BRGR and technical expertise and high-end products from Rock Paint, has started selling automotive refinish paints.



Network distribution and expansion

Although APNT has expanded its network at an unmatched pace, BRGR has also been scaling up its distribution aggressively. While it is the second largest players it is still far behind the leader in terms of number of dealers. It has been growing its total dealer base by 10-12% annually for the last 2-3 years and expects to continue growing it at a similar pace for the coming years, which would help drive the growth going ahead. The active dealer base is estimated at 29,000 with a penetration of tinting machines over 80%. Even the depot network has been expanded and located in a way to address quick servicing and order fulfilling. While 10-12% growth in dealer base may not be possible in FY21, BRGR will continue to focus on proactively augmenting its dealer base by consolidating its positions in stronger markets and simultaneously gaining market share in its weaker markets over the long term.

Exhibit 12: 2,000-3,000 dealers added every year Exhibit 13: No. of supply depots increased from FY17 to FY19

25,0

00

27,0

00

30,0

00

22,000

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,000

FY18 FY19 FY20

156

167

162

145

150

155

160

165

170

175

FY17 FY18 FY19


Exhibit 14: Depots and manufacturing unit pan-India




Research and Development With its dedicated team of scientists and technologists, BRGR continues to invest in R&D in terms of manpower, equipment, facilities etc. Majority of the company’s research is focused on the near term i.e. towards offering new solutions, lowering costs, providing alternate raw material and enhancing customer product services. For the long term, the company’s aim is to build up strength on futuristic applications in order to get new insights in the area of coatings and construction chemicals. The company’s R&D facility at Howrah, West Bengal focuses on: Development of new products and upgradation of existing products Development of new resins and emulsions Development of eco-friendly products Collaborative work with academic institutes and vendors Reformulation of cost optimization without compromising quality

Exhibit 15: R&D expenses as a % of sales

15

21

37

11

35

14

38

55

65

93

98

13

0

14

5

15

7

0.2 0.2

0.3

0.3

0.4

0.3 0.3

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0

20

40

60

80

100

120

140

160

180

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Capital Recurring R&D as a % of net revenue

(Rsmn) (%)


Exhibit 16: Breakdown of R&D expenses

FY16 FY17 FY18 FY19

Employee Benefit Expenses 67 91 101 110

Materials and Stores & Spares consumption 8 10 10 12

Power and Fuel 3 4 4 4

Depreciation 13 18 20 20

Others 8 8 12 11

Total recurring expenses 98 130 146 157

Capital Expenditure 11 35 14 38

Total R&D expenses 109 165 160 195




Expanding footprint

BRGR has been growing organically and inorganically in order to meet the increasing customer demand and foray into lucrative markets.

I. Capacity expansion

BRGR has been significantly ramping up its capacities in the last few years to cater to the increasing demand. The company commercialized its paint and putty plants at Naltali, Assam in FY17, which has an annual capacity of 48,000 KL/MT for water-based paints, 24,000 KL for solvent based paints, 14,000 MT for resin and 24,000 MT for wall putty. In the same year, the British Paints division of the company commenced commercial production of its distemper and putty manufacturing facility in Nalbari, Assam with a capacity of 6,600 KL/MT and 7,200 MT per annum, respectively. In FY19, the effective capacity of the Hindupur water-based plant was increased to 109,200KL and the first phase of emulsion plant with final capacity 44,160MT in Rishra was completed.

Installation of BRGR’s holistic coatings facility at Sandila Industrial Area, Uttar Pradesh at an estimated cost of Rs2.5bn is on track for completion in 2021.

Exhibit 17: Capex over the years

1.0

1.3

2.1

2.4

1.6

1.2

2.6

2.9

2.9

4.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Capex (Rsbn)

(Rsbn)


Exhibit 18: Manufacturing locations in India

Sr. no. Location of plants

1 Howrah, West Bengal

2 Sikandrabad, Uttar Pradesh

3 Pudducherry

4 Jammu, Jammu & Kashmir

5 North Goa, Goa

6 Rishra, Hooghly, West Bengal

7 Surajpur, Noida, Uttar Pradesh

8 Jejuri, Pune, Maharashtra

9 Industrial Growth Centre, Hindupur, Andhra Pradesh

10 APIIC Industrial Park, Hindupur, Andhra Pradesh

11 Nalbari, Assam

12 Naltali, Assam

13 Taloja, Raigad, Maharashtra




II. Inorganic growth

In order to bolster presence in the existing segments and to venture into newer segments, the company has undertaken inorganic routes, including following acquisitions in the last decade:

BRGR acquired 51% of the paid-up equity share capital of (1,03,03,580 equity shares) of Saboo Hesse Wood Coatings Private Limited (SHWCPL), in FY19 for a cash consideration of Rs15mn. SHWCPL manufactures, imports and sells a wide variety of wood coatings, including alkyd PU, pigmented PU, UV coatings, water-based wood coatings etc. which supplemented BRGR’s existing wood coatings business. The balance 49% is held by Hesse Shares GmbH of Germany, a leading wood coatings manufacturer.

The company also acquired 51% stake in Berger Rock Paints Pvt. Ltd. in FY19 for a cash consideration of ~Rs41mn, which sells automotive refinish paints.

In FY18, BRGR acquired 100% of Saboo Coatings Pvt. Ltd., which is in the business of liquid coatings for industrial segments, for a cash consideration of ~Rs826mn. The name of this company, which is now a subsidiary, has been changed to SBL Specialty Coatings Private Limited w.e.f. 6th May 2019.

In November 2019 (FY20), BRGR acquired a 91.9% stake in STP Ltd. (formerly known as Shalimar Tar Products Ltd.) for a consideration of Rs1.3bn out of the planned 95.5% stake. STP Ltd is engaged in the manufacturing of construction chemicals, waterproofing chemicals, construction admixtures and tar-based products.

CSR initiatives

BRGR imparts training, revolving around decorative painting and wood polishing, to the unskilled and semi-skilled painters through its “iTrain” centres. BRGR also started “mobile iTrains” in FY18, which comprise vans with essential training equipment and facilities. As on FY19, the company had 26 iTrain centres and 13 mobile iTrain vans across the country. From inception of iTrain till the end of FY19, 43,000 painters have been trained under this initiative.

In the wake of Covid-19, BRGR has come to the aid of the painter and contractor community by providing financial aid and assistance. The company has transferred money directly into the bank account of over 20,000 contractors who have been associated with the company. Since, during this time, most painters are struggling to make ends meet, one of the first steps taken towards helping the painter community was to accelerate its cash rewards program. In the pre-pandemic times, when a painter purchased paint from the comapny, there was a long process to get rewards. Because cash is of the essence to survive the pandemic and maintain social distancing norms, BRGR moved to a digital model of rewards and benefits. The company is helping the painters open bank accounts and earned rewards are being credited to their accounts in a matter of few days to enable them to enjoy liquidity once the market resumes. With this initiative, the company has helped over 25,000+ painters and their families with immediate needs and essentials.



Financial story in charts BRGR has delivered a revenue growth of 8.1% over FY15-20 on consolidated basis. Going forward, we expect gradual growth in volumes over the coming quarters of FY21E followed by rebound in FY22E and build in consolidated revenue growth of 10.4% over FY20-23E.

Exhibit 19: We expect volume growth to remain flat for FY21E led by lack of consumption due to the pandemic, after which positive growth trajectory should resume

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Domestic decorative volume growth

(%)


Exhibit 20: Standalone revenue expected to grow 9.1% over FY20-FY23E which will aid…

Exhibit 21: …10.4% consolidated sales growth over the same period

33.8

38.1

38.6

42.3

47.2

55.2

56.9

55.1

66.8

74.0

11.9 12.5

1.3

9.511.8

16.8

3.2-3.2

21.3

10.8

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

0.0

20.0

40.0

60.0

80.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Standalone revenue (Rsbn) Growth (%)

(Rsbn) (%)

38.7

43.2

42.2

45.5

51.7

60.6

63.7

63.3

76.7

85.7

15.611.7

-2.3

7.8

13.517.3

5.0

-0.5

21.1

11.7

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

0.0

20.0

40.0

60.0

80.0

100.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Consolidated revenue (Rsbn) Growth (%)

(Rsbn) (%)


We expect gross margin to expand by 203bps over FY20-23E primarily on account of benign material cost in the near term. EBITDA margin is likely to expand by 283bps primarily driven by benign input costs in the near term, better mix and cost rationalization across line items.



Exhibit 22: Consolidated gross margin to expand ~203bps over FY20-23E

Exhibit 23: Employee cost expected to increase 9.3% CAGR…

39.4

41.4

41.5

43.1

41.7

39.0

41.5

42.5

43.0

43.5

36.0

38.0

40.0

42.0

44.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Gross margin (%)

(%)

2.3

2.5

2.7

3.1

3.6

4.1

4.5

4.9

5.4

5.9

20.4

12.4

8.0

12.1

16.314.6

10.89.2 10.2 8.5

0.0

5.0

10.0

15.0

20.0

25.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Employee expenses (Rsbn) Growth (%)

(Rsbn) (%)


Exhibit 24:… Other expenses expected to increase 9.1%... Exhibit 25: ….leading to EBITDA growth of 16.3% over FY20-23E

8.7

10.3

8.3

9.3

9.9

10.2

11.3

10.7

13.1

14.6

19.0 18.3

-19.1

12.66.2

2.610.6

-5.0

22.5

11.7

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

0.0

5.0

10.0

15.0

20.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Other expenses (Rsbn) Growth (%)

(Rsbn) (%)

4.3

5.1

6.5

7.2

8.1

9.4

10.6

11.3

14.4

16.7

16.218.4

27.1

10.712.3

15.913.4

6.3

27.9

15.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0

4.0

8.0

12.0

16.0

20.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

EBITDA (Rsbn) Growth (%)

(Rsbn) (%)


Exhibit 26: EBITDA margin to expand by ~283bps due to benign input costs, better mix and cost savings

Exhibit 27: Adj. PAT to grow at a CAGR of 18.3% over FY20-23E

11.1

11.8

15.4

15.8

15.6

15.4

16.7

17.8

18.8

19.5

0.0

5.0

10.0

15.0

20.0

25.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

EBITDA margin (%)

(%)

2.5

2.6

3.7

4.3

4.6

4.9

6.6

6.9

9.2

10.9

14.2

6.1

39.4

16.4

7.3 7.3

33.1

4.2

34.2

18.3

0.0

10.0

20.0

30.0

40.0

50.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Adj. PAT (Rsbn) Growth (%)

(Rsbn) (%)


BRGR has reported a strong 5 year CAGR of 20.0% in adjusted profit. We build in earnings CAGR of 18.3% over FY20-23E along with PAT margin expansion of 237bps. Accordingly, RoE and RoCE will expand by 176bps and 301bps, respectively over the same period.



Exhibit 28: Adj. PAT margin to expand by 237bps leading to… Exhibit 29: ….improvement in return ratios i.e. RoE/RoCE by

176/301bps respectively

6.4

6.1

8.7

9.4

8.9

8.2

10.3

10.8

12.0

12.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

PAT margin (%)

(%)

24.1

22.2

26.1

24.8

22.5

21.3

25.8

23.9

27.4

27.5

17.4

16.5

20.4

21.5

19.3

18.9

22.8

21.3

24.9

25.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

RoE (%) RoCE (%)

(%)


Exhibit 30: Cash conversion cycle (CCC)

No. of Days FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Inventory days 63 60 63 67 69 67 72 76 68 65

Debtor days 42 43 47 45 45 41 40 43 40 40

Creditor days 36 37 41 47 57 59 59 63 56 54

On average sales basis 69 66 68 65 57 50 53 56 53 51

Inventory days 104 102 107 117 118 111 123 132 120 115

Debtor days 42 43 47 45 45 41 40 43 40 40

Creditor days 60 63 71 82 97 96 101 110 98 95

On average COGS/sales basis 86 82 83 80 65 55 62 65 62 60

Inventory days 66 61 63 75 71 74 73 78 72 65

Debtor days 46 45 47 46 49 40 41 45 43 42

Creditor days 41 37 45 52 67 60 61 65 58 55

On year-end sales basis 70 69 65 69 53 55 53 58 57 51

Inventory days 108 104 108 132 122 122 125 136 127 115

Debtor days 46 45 47 46 49 40 41 45 43 42

Creditor days 68 63 77 91 116 99 104 113 102 98

On year-end COGS/sales basis 86 86 78 87 55 64 62 68 68 59


The company has deferred its capex plans for FY21E which will lead to a sharp increase in FCF for the current year. From FY22E we expect a steady increase in cash flow from operations and FCF.



Exhibit 31: Cash flow from operations to grow at a steady pace from FY22E

3.1

4.1

5.9

3.9

4.2

6.1

7.2

7.3

9.9

11.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E


(Rsbn)


Exhibit 32: Sharp increase in FCF in FY21E on account of deferment of capex spends

0.7

2.5

4.8

1.3

1.3

3.2

2.9

6.0

7.4

8.6

0.1

0.5

0.9

0.2 0.2

0.6 0.5

1.1

1.3

1.6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

FCF (Rsbn) FCF yield

(Rsbn) (%)




Historical cost line items and cost savings over the years

Exhibit 33: Common size P&L (as a % of consolidated net revenue)

(as a % of Revenue) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

RM cost 63.1 62.7 63.6 61.5 60.6 58.6 58.5 56.9 58.3 61.0

Gross margin 36.9 37.3 36.4 38.5 39.4 41.4 41.5 43.1 41.7 39.0

Employee expenses 6.6 6.1 5.6 5.6 5.8 5.9 6.5 6.7 6.9 6.7

Advertisement expenses 4.5 4.8 5.1 5.5 5.6 6.6 4.9 5.3 4.8 3.3

Rent, rates and taxes 0.8 0.8 0.8 0.8 1.0 0.9 1.2 1.3 1.2 1.1

Travel expenses 0.9 0.9 0.9 0.9 0.9 0.9 1.0 1.1 1.0 0.9

Freight cost 5.3 5.5 5.6 5.6 6.0 6.2 6.9 7.0 6.4 6.3

Other operating expenses 8.2 8.4 8.2 9.0 9.0 9.1 5.6 5.8 5.8 5.2

EBITDA margin 10.5 10.7 10.3 11.1 11.1 11.8 15.4 15.8 15.6 15.4

Depreciation / Amortization 1.9 1.7 1.6 1.7 1.8 2.1 2.3 2.4 2.4 3.0

Interest & Finance Charges 0.9 1.0 1.1 1.1 1.2 1.2 0.6 0.4 0.5 0.8

Other Income 1.4 1.3 1.0 0.9 0.9 0.8 0.8 1.4 0.9 1.0

Taxes 2.7 2.8 2.5 2.7 2.6 3.2 4.5 5.0 4.7 4.5

Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adj. PAT 6.4 6.4 6.1 6.5 6.4 6.1 8.7 9.4 8.9 8.2


Exhibit 34: Employee expenses have hovered around 6.5-6.9% as a % of net consolidated sales

Exhibit 35: Freight cost have been reducing since FY17

1.2

1.4

1.6

1.9

2.3

2.5

2.7

3.1

3.6

4.1

6.6 6.1

5.6 5.6 5.8 5.9 6.5 6.7 6.9 6.7

0.0

2.0

4.0

6.0

8.0

0.0

1.0

2.0

3.0

4.0

5.0

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Employee expenses as a % of net revenue

(Rsbn) (%)

1.0

1.3

1.7

1.9

2.3

2.7

2.9

3.2

3.3

3.8

5.3 5.5 5.6 5.6 6.0 6.2 6.9 7.0

6.4 6.3

0.0

2.0

4.0

6.0

8.0

0.0

1.0

2.0

3.0

4.0

5.0

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Freight cost as a % of net revenue

(Rsbn) (%)


Exhibit 36: Ad spends as a % of net consolidated revenue declining since FY17

Exhibit 37: Rent, rates and taxes have been hovering around 1.1-1.3% during the recent years

0.9

1.1

1.5

1.8

2.2

2.8

2.1

2.4

2.5

2.0

4.5 4.8 5.1 5.5 5.6

6.6

4.9 5.3

4.8

3.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Advertisment expenses as a % of net revenue

(Rsbn) (%)

0.2

0.2

0.2

0.3

0.4

0.4

0.5

0.6

0.6

0.7

0.8 0.8 0.8

0.8 1.0 0.9

1.2 1.3

1.2 1.1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Rent, rates and taxes as a % of net revenue

(Rsbn) (%)




Exhibit 38: Travel spends as a % of net consolidated revenue have been reducing in the recent years

Exhibit 39: Other operating expenses <6.0% during the recent years

0.2

0.2

0.3

0.3

0.4

0.4

0.4

0.5

0.5

0.5

0.9 0.9 0.9 0.9 0.9 0.9

1.0 1.1 1.0 0.9

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.0

0.1

0.2

0.3

0.4

0.5

0.6

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19Travel expenses as a % of net revenue

(Rsbn) (%)

1.6

2.0

2.4

3.0

3.5

4.0

2.4

2.7

3.0

3.1

8.2 8.4 8.2 9.0 9.0 9.1

5.6 5.8 5.8 5.2

0.0

2.0

4.0

6.0

8.0

10.0

0.0

1.0

2.0

3.0

4.0

5.0

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Other operating expenses as a % of net revenue

(Rsbn) (%)




Valuations

1QFY21 performance of the paints industry and for BRGR was impacted by the nationwide lockdown in the initial months. The month of April, which normally contributes ~45% of 1Q sales for BRGR, was a washout in 1QFY21. The company has seen a decent recovery so far, with May seeing 90% recovery YoY and June seeing double digit growth both in volume and value terms. Overall July and August are also expected to be in double digits both volume and value. For the ongoing quarter, the company is eyeing an overall double-digit volume growth and high single-digit value growth led by growth in the upcountry markets for decorative paints. For the rest of the business, auto sector remains a mixed bag with two-wheeler and cars coming back to last year levels. However, commercial vehicles (CV) are still substantially down. BJN-Nepal business is already seeing a strong comeback in the current quarter after getting impacted in 1QFY21 by lockdown. Bolix (Polish subsidiary) is already doing well, STP Ltd. is also on an upswing and performance of SBL Specialty Coatings is also improving significantly. On cost front, raw material cost is benign and company has also done rationalization exercise across cost line items. Some part of rental and travel cost will permanently go down. In the immediate quarter, margins are expected to be better.

Over FY20-23E, we expect BRGR to deliver 10.4%, 16.3% and 18.3% CAGR growth in Revenue, EBITDA and PAT, respectively, led by (a) strong growth witnessed by the organized decorative paints industry from tier II/III/IV cities and rural areas (especially for lower end products) where company has a higher exposure than the industry, (b) portfolio & distribution expansion, (c) high growth in premium decorative products, (d) pick-up in GDP growth beyond FY21 (we expect real/nominal GDP growth rate of 6.0%/9.7% in FY22) and (e) non-decorative segments growing in tandem or even higher going forward. We also expect operating margins to improve due to benign input prices in the near term, better mix and cost rationalization across line items. The company has deferred its capex plans for FY21 but when it is completed it will lead to some savings in logistics cost as well.

At CMP, the stock trades at 56.8x/48.0x FY22E/FY23E EPS of Rs9.5/Rs11.2. We believe that even though earnings performance of BRGR has been ahead of the market leader over 3-year/5-year/10-year period and also expected to be ahead over FY20-23E, the leader still commands a premium because of the sheer size of the business, market share difference and reach. We therefore assign a multiple of 48x on September ‘22 EPS and initiate coverage on BRGR with Sell rating with a target price (TP) of Rs500, implying a downside of 7% from current market price (CMP).

Exhibit 40: One year forward P/E

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Au

g-1

6

No

v-1

6

Fe

b-1

7

Ma

y-1

7

Au

g-1

7

No

v-1

7

Fe

b-1

8

Ma

y-1

8

Au

g-1

8

No

v-1

8

Fe

b-1

9

Ma

y-1

9

Au

g-1

9

No

v-1

9

Fe

b-2

0

Ma

y-2

0

Au

g-2

0

Forward PE 5 yr Median SD -1 SD +1

(x)




Exhibit 41: Average P/E

68.0

57.8

51.9

39.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1yr 3yr 5yr 10yr

Avg. PE (x)

(x)


Shareholding

Exhibit 42: Shareholding

12%

3%

76%

10% Foreign portfolio investors

Domestic institutional investors

Promoters

Public & Others


Exhibit 43: Top 10 shareholders

Name of the shareholder %

Nalanda India Fund Ltd. 4.0

Vanguard Group Inc. 0.9

BlackRock Inc. 0.7

Investor Education Protection Fund. 0.6

Wasatch Advisors Inc. 0.6

Capital Group Cos Inc. 0.5

UTI Asset Management Co. Ltd. 0.4

Dimensional Fund Advisors L.P. 0.4

L&T Mutual Fund Trustee Ltd. 0.4

L&T Investment Management Ltd. 0.1




Board of directors and KMP

Name Designation Description

Mr. Kuldip Singh Dhingra Chairman

Mr. Kuldip Singh Dhingra, a promoter of BRGR, has been a director of the company since 1991. He is the fourth generation of his family which has been continuously in the paint business since 1898.

Mr. Gurbachan Singh Dhingra Vice-Chairman

Mr. Gurbachan Singh Dhingra, a promoter of BRGR, has been a director of the company since 1993. He is the fourth generation of his family which has been continuously in the paint business since 1898.

Mr. Abhijit Roy Managing Director & CEO He started his career with Asian Paints Limited and prior to joining BRGR was associated with L'Oreal. He was appointed as the Managing Director & CEO w.e.f 1st July, 2012.

Mrs. Sonu Halan Bhasin Director

She has been the COO of Tata Capital Ltd. and has worked with Yes Bank, ING Barings Pvt. Bank and ING Vysya Bank and Tata Administrative Services in senior positions. She is currently an Independent Director of a number of companies.

Mr. Pulak Chandan Prasad Director He was the Managing Director and co-head of the India office of Warburg Pincus and a Management Consultant with McKinsey & Company, USA and South Africa prior to that.

Mr. Naresh Gujral Director He is the founder of Span India Group, which is one of the leading exporters of high-end fashion garments to Europe from India. He is an eminent industrialist and Social Activist.

Mr. Kanwardip Singh Dhingra Executive Director Prior to joining BRGR, Mr. Dhingra worked in the field of paints and specialty coatings in The Rohm & Haas Company, Texas, USA and The Sherwin Williams Company, Ohio, USA.

Mrs. Rishma Kaur Executive Director

She has been associated with the company since many years and assumed the position of Director, National Business Development Manager – Retail from Dec 2014. She has led business development efforts in respect of retail business in addition to providing guidance and handling various other matters such as marketing and corporate affairs.

Mr. Anoop Hoon Director

He was associated with Century Plyboards (India) Ltd. from 2008 to 2015. He was also earlier associated with Bells Control Ltd., BOC Gases Ltd., Fortis Health Care Ltd., The Gramophone Co. of India (HMV) Ltd. (CEO), Dunlop Tyres, Asian Paints Ltd.

Dr. Anoop Kumar Mittal Director

Dr. Mittal was associated with NBCC (India) Ltd. since 1985 and was CMD of NBCC from March 2013 to March 2019. He has an experience of more than 35 years in fields of Civil Engineering, Consultancy of Real Estate Development, Merger & Acquisition and Project Management.

Mr. Srijit Dasgupta Director - Finance & CFO

Mr. Dasgupta has over 29 years of work experience and started his career with Machinery Manufacturers Corporation Limited and prior to joining BRGR was associated with the same organization.

Mr. Arunito Ganguly Vice President and Company Secretary

Mr. Ganguly has 16 years of experience in handling secretarial and legal matters including 14 years of experience as Company Secretary/Deputy Company Secretary in large listed companies. Mr. Ganguly has been associated with Bata India Ltd. and Exide Industries Ltd.



Financials (Consolidated)

Exhibit 44: Income statement


Net Sales 60,619 63,658 63,342 76,699 85,662

% Growth 17.3 5.0 -0.5 21.1 11.7

COGS 36,996 37,258 36,421 43,718 48,399

Staff costs 4,085 4,525 4,941 5,446 5,911

Other expenses 10,182 11,265 10,705 13,115 14,648

Total expenses 51,263 53,048 52,067 62,279 68,958

EBITDA 9,355 10,610 11,275 14,419 16,704

EBITDA margin (%) 15.4 16.7 17.8 18.8 19.5

% growth 15.9 13.4 6.3 27.9 15.8

Other income 600 685 633 767 857

Interest costs 472 470 482 437 347

Depreciation 1,823 1,910 2,176 2,362 2,575

Profit before tax (before exceptional items)

7,661 8,915 9,250 12,387 14,639

Tax 2,713 2,271 2,328 3,118 3,685

Rate of Tax (%) 35.4 25.5 25.2 25.2 25.2

Share from associates/NCI

5 66 69 73 76

Reported PAT 4,943 6,578 6,852 9,196 10,878

Adj PAT 4,943 6,578 6,852 9,196 10,878

Adj PAT margin (%) 8.2 10.3 10.8 12.0 12.7

% Growth 7.3 33.1 4.2 34.2 18.3


Exhibit 46: Balance sheet


Share capital 971 971 971 971 971

Reserves 23,467 25,630 29,810 35,328 41,746

Net worth 24,438 26,601 30,781 36,299 42,717

Minority Interest 35 71 71 71 71

Total debt 4,839 5,359 5,359 4,359 3,359

Other LT liabilities 775 483 483 483 483

Total liabilities 30,087 32,514 36,694 41,212 46,630

Gross block 18,000 23,142 25,220 27,275 29,937

Depreciation 4,866 6,776 8,952 11,314 13,889

Net block 13,134 16,366 16,268 15,961 16,048

Capital work-in-progress 1,699 1,785 1,007 1,451 1,790

Goodwill 2,693 2,790 2,790 2,790 2,790

Investments 3,949 3,152 4,152 5,652 7,652

Inventories 12,335 12,785 13,559 15,188 15,310

Debtors 6,715 7,141 7,783 9,027 9,748

Cash 2,385 2,199 4,591 6,039 7,580

Other current assets 2,657 2,778 2,776 4,117 4,097

Total current assets 24,092 24,903 28,709 34,370 36,736

Creditors 9,993 10,658 11,295 12,181 13,013

Other current liabilities & provisions

5,487 5,823 4,936 6,831 5,373

Total current liabilities 15,480 16,481 16,231 19,013 18,385

Net current assets 8,612 8,422 12,478 15,358 18,350

Total assets 30,087 32,514 36,694 41,212 46,630


Exhibit 45: Cash flow


PAT 5,221 6,206 6,922 9,269 10,954

Depreciation 1,823 1,910 2,176 2,362 2,575

Other income 284 282 -151 -330 -509

(Inc.)/dec. in working capital -1,220 -1,152 -1,664 -1,433 -1,451

Cash flow from operations 6,108 7,246 7,282 9,869 11,568

Capital expenditure (-) -2,912 -4,310 -1,300 -2,500 -3,000

Net cash after capex 3,197 2,937 5,982 7,369 8,568

Inc./(dec.) in investments -274 1,672 -367 -733 -1,143

Cash from investment activities

-3,186 -2,638 -1,667 -3,233 -4,143

Dividends paid (-) -2,105 -3,816 -2,672 -3,679 -4,460

Others -483 -978 -551 -1,510 -1,424

Cash from financial activities -2,588 -4,794 -3,224 -5,188 -5,884

Opening cash balance 2,050 2,385 2,199 4,591 6,039

Closing cash balance 2,385 2,199 4,591 6,039 7,580

Change in cash balance 335 -186 2,392 1,447 1,541

Source: Company, Nirmal Bang Institutional Equities Research;

Exhibit 47: Key ratios

Y/E March FY19 FY20 FY21E FY22E FY23E

Per share (Rs)

EPS 5.1 6.8 7.1 9.5 11.2

Book value 25.2 27.4 31.7 37.4 44.0

DPS 1.9 2.2 2.8 3.8 4.6

Valuation (x)

EV/sales 8.7 8.3 8.3 6.8 6.0

EV/EBITDA 56.1 49.5 46.4 36.1 31.0

P/E 105.6 79.4 76.2 56.8 48.0

P/BV 21.4 19.6 17.0 14.4 12.2

Return ratios (%)

RoCE 18.9 22.8 21.3 24.9 25.8

RoE 21.3 25.8 23.9 27.4 27.5

RoIC 22.8 27.3 26.0 32.8 36.7

Profitability ratios (%)

Gross margin 39.0 41.5 42.5 43.0 43.5

EBITDA margin 15.4 16.7 17.8 18.8 19.5

EBIT margin 12.4 13.7 14.4 15.7 16.5

PAT margin 8.2 10.3 10.8 12.0 12.7

Liquidity ratios (%)

Current ratio 1.6 1.5 1.8 1.8 2.0

Quick ratio 0.8 0.7 0.9 1.0 1.2

Solvency ratio (%)

Debt to Equity ratio 0.2 0.2 0.2 0.1 0.1

Turnover ratios

Total asset turnover ratio (x) 2.0 2.0 1.7 1.9 1.8

Fixed asset turnover ratio (x) 3.1 2.6 2.4 2.7 2.7

Inventory days 111 123 132 120 115

Debtors days 41 40 43 40 40

Creditor days 96 101 110 98 95




DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I, Vishal Punmiya, research analyst and the author of this report, hereby certify that the views expressed in this research report accurately reflects my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst is principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.


87

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

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