Kansai Nerolac Paints is the second largest paint company in India after Asian Paints and is a dominant player in Industrial paints and has also a substantial presence in decorative paints market catering to the individual home consumers. The recent tax cuts to auto and individual tax payers besides the constant urging by the Government to slash housing interest rates can help the company maintain and improve the present growth.
The company has its origins in Gahagan Paints and Varnish Co ltd, founded in 1920, which was taken over by Lead Industries Group in 1933 and named as Goodlass Wall (India) Ltd. This company was finally named as Goodlass Nerolac Paints Ltd., in 1957. In 2000 Kansai Paint Co, Japan, the technical collaborator acquired 28.56% of the shares from Forbes Gokak Ltd and their associates (the TATA Group). Kansai, the largest paint company in Japan, now holds 64.52% of the shares issued and hence the new name to the company. It has also technical tie up with DuPont, Oshima Kogyo to address the needs of specialty industrial heat resisting paints and automobile paints. The company has 6 manufacturing plants and 20, 000 dealers.
Robust housing growth
Over 40% of the demand for decorative paints is from the housing sector. According to the Census Survey 2001, about 40 million new households were added between in the last 10 years (FY90-00), taking the total number to 192 million. The housing figures as of FY 05 were put at 201.7 million by CRIS INFAC estimates. With the trend of nuclear families rising, the number of households is expanding at faster pace. We expect 4.7-5.3 million new housing units to be added every year in future. This will include 2.7-3.0 million new houses, and 2.0-2.3 million replacement demand. The government’s initiative to encourage well built houses in rural areas would further create new housing demand. The expected demand for new households would be the key driver for decorative paints. Of late Kansai has also started more brand offerings in the decorative paint segment vigorously. It is expected to dent the 32% market share held by Asian Paints. The increasing incomes of middle and higher-income categories, government’s sops for housing loan, easy financing due to the rising competition among financial institutions, and increased loan repayment tenures have aided spurt in housing demand. The tax cuts amounting to Rs. 440 Billion will put enough surpluses in the hands of individuals to spur demand for decorative and other type of products made by Kansai.
Industry
The size of the Indian paints industry was estimated at Rs 10,200 crore in FY07, which is likely to grow at 15%. Organized players account for 75% of the industry, while unorganized players make up the remaining 25%. Over the last few years, the organized sector has become highly concentrated, with the top six players enjoying a market share of 84% in volume terms. The unorganized sector comprises 2,000 odd players that are widely scattered. Among organized companies, the decorative segment accounts for Rs 5,800 crore in value term, while industrial paints accounts for Rs 1,700 crore. The industrial paints segment is dominated by the organized sector with its high technology orientation. Kansai dominates this with a market share of 40% being the OEM supplier to Maruti, Mitsubishi and Telco. Demand for decorative paints is direct as it is used for new houses and repainting, whereas demand for industrial paints is derived from user industries such as automobiles, auto ancillaries, consumer durables, marine vessels and containers, and depends on the volume growth from these.
Past Financials
The quarterly results of the company in the past 5 quarters are given below
| Rs Millions | Dec ' 07 | Sep ' 07 | Jun ' 07 | Mar ' 07 | Dec ' 06 |
| Sales | 3453.9 | 3484.2 | 3175.3 | 2852.1 | 3091 |
| Operating profit | 497.7 | 511.7 | 451 | 362.3 | 410.5 |
| Interest | 3.8 | 4 | 2.8 | 2.8 | 2.3 |
| Gross profit | 542.6 | 573 | 542.9 | 451.6 | 456.9 |
| Depreciation | 103.3 | 96.2 | 88.2 | 94.8 | 88.1 |
| Net profit / loss | 302.4 | 331.2 | 324.7 | 233 | 243.3 |
| Equity capital | 269.5 | 269.5 | 269.5 | 269.5 | 255.1 |
| EPS (Rs) | 11.22 | 12.29 | 12.05 | 8.65 | 9.54 |
| OPM (%) | 14.41% | 14.69% | 14.20% | 12.70% | 13.28% |
| GPM (%) | 15.71% | 16.45% | 17.10% | 15.83% | 14.78% |
| NPM (%) | 8.76% | 9.51% | 10.23% | 8.17% | 7.87% |
The company has registered a moderate revenue growth of 11.74% over the past year. The operating profit has improved by 21.24% over the past year. The net margin has improved to 8.75% from 7.87% posted a year ago. The increased depreciation is on account of commissioning of new facility at Jainpur. Marginal decline in margins over the previous quarter is attributed to the rising crude prices affecting the material costs. The company has also been successful in passing the price hikes to the consumers.
How does the stock compare with its peers?
The company’s performance is compared with its peers in the table below
| Rs Millions | Kansai Nerolac | Asian Paints | ICI India | Berger Paints | Shalimar Paint |
| | | | | | |
| Sales Turnover | 3453.9 | 9162.4 | 2566.9 | 3560 | 768.9 |
| Other Income | 48.7 | 168.9 | 6.2 | 19.2 | 6.2 |
| Total Income | 3502.6 | 9331.3 | 2573.1 | 3579.2 | 775.1 |
| Total Expenses | 2956.2 | 7621 | 2184.4 | 3196.1 | 723.5 |
| Operating Profit | 497.7 | 1541.4 | 382.5 | 363.9 | 45.4 |
| Gross Profit | 546.4 | 1710.3 | 388.7 | 383.1 | 51.6 |
| Interest | 3.8 | 26.9 | 7.1 | 31.7 | 16.9 |
| PBDT | 542.6 | 1683.4 | 193.6 | 351 | 34.7 |
| Depreciation | 103.3 | 111.9 | 56 | 47.6 | 9.2 |
| PBT | 439.3 | 1571.5 | 137.6 | 303.4 | 25.5 |
| Tax | 136.9 | 515.2 | 73.9 | 70.9 | 9.4 |
| Net Profit | 302.4 | 1056.3 | 63.7 | 232.5 | 16.1 |
| Earnings Per Share | 11.22 | 11.01 | 1.65 | 0.73 | 4.25 |
| Equity | 269.5 | 959.2 | 385.5 | 637.7 | 37.9 |
| OPM | 14.41% | 16.82% | 14.90% | 10.22% | 5.90% |
| NPM | 8.76% | 11.53% | 2.48% | 6.53% | 2.09% |
It is second only to Asian Paints in almost all the parameters but has managed to spread sales over equity better, nearly 13 times compared to 10 times posted by Asian Paints. The incentives provided to the auto industry in the recent budget will help the company grow its sales in the industrial segment further. The company has nearly 21% market share in the paint market which we expect to increase as the additional capacity created will help it address the north Indian market. Further the capacity which is presently at 182,505 tons will move to 195, 280 by FY 09 helping the company to spread the sales more on equity and increasing profitability.
The risks arise from higher crude prices affecting the raw material prices and supply coupled to the inability of the company to pass on the price hikes or decline in the consumer interest.
The stock prices over a year suggest a pull back from the present Rs. 650. The long term investor can consider buying now and averaging at Rs. 580 -600 region, if need be.