Nerolac Credit Analysis

Industry Risk Score : PAINTS

By: Group 9 Section B • Rahul Relan

AGENDA • Industry : Executive summary • Company Analysis • Competition Analysis • Financials • HDFC Bank • Risks Involved • Products and Offerings

INDUSTRY • Executive Summary –

The paint industry is divided into organized and unorganised sector

–

The Indian Paints Industry stands at Rs 112 bn, of which 75% is Decorative Paints while 25% is Industrial Paints.

–

The unorganised segment plays a huge role in decorative paint segment due to low technical know-how and highly scattered market

–

Market is seasonal in nature

DEMAND Side Analysis –

Positively related with GDP and disposable income

–

Decrease in investment in Real Estate

–

Increase in income levels of the consumers

INDUSTRY • Executive Summary Supply Side Analysis –

Dependent on raw materials, mostly petro based.

–

Large distribution network is a prime requirement decorative paints business.

–

Most companies are planning CapEx to increase their installed capacity.

Recent Developments –

Increase in the crude oil prices

–

Depreciating rupee to affect imports

Government Policies –

Industrial paint segment would benefit from the excise duty cuts in the auto sector.

–

The cut in Personal income tax and waiver of Agricultural Debt which results in the rise of disposable income

Kansai Nerolac Paints Background –

Established in 1920

–

Strong

corporate

governance,

with

high

focus

on

technology, transformation, innovation & style –

Good brand image/recall with brands, like Impressions, Beauty, Excel and Suraksha

–

Coveted many awards in last 5 years including ICSI National Award for Excellence in Corporate Governance

–

It supplies 70 per cent of the paint requirement of Maruti besides supplying to other customers like Telco, Toyota, Hindustan Motors, Hero Honda, TVS-Suzuki, Mahindra & Mahindra, Ashok Leyland, Ford India, PAL Peugeot and Bajaj Auto.

–

KNP leads the industrial segment with 41%, & owns 70% of the market in OEM passenger car segment

Kansai Nerolac Paints –

Consistent supplies from Khakhu Enterprises.

–

Ventured

into

eco-friendly

coating,

with

low

VOC

(Volatile Organic Compounds), has helped the customer increase its productivity and reduce power cost. –

Believe in technology up gradations, KNP has technical collaborations with Ashland Chemicals Inc, USA, a leader in the petrochemical industry, Nihon Tokushu Toryo Co and Oshima Kogyo Co Ltd, Japan.

COMPETITOR ANALYSIS

COMPETITOR ANALYSIS Asian Paints 3585.86

Berger Paints 1559.75

Nerolac

ICI Paints

Shalimar

1404.14

1025.84

256.05

Net Sales growth %

21.78

18.49

13.18

5.4

17.97

PBDIT

619.55

130.16

247.69

115.87

16.14

PAT

375.2

83.07

153.61

60.21

4.75

PAT growth %

37.92

18.18

10.94

-86.57

39.3

TNW

928.5

274.46

510.29

761.5

27.25

TOL /TNW

0.85

0.72

0.62

0.35

2.43

Current Ratio

1.15

1.33

2.7

0.81

1.18

NWC

61.1

243.74

368.5

-73.35

68.21

Net Sales

FINANCIALS Profitability Ratios (in %age)

2006

2007

2008

Total - Reserves

380.55

484.78

Total - Shareholders Funds

406.06

Reserves/ Shareholders Fund

Industry (2008)

2009

2010

566.74

642.25

724.36

510.29

593.69

673.00

757.44

0.94

0.95

0.95

0.95

0.96

PAT/ Sales

0.17

0.12

0.11

0.10

0.14

0.14

Retained Profit / PAT

71.41

80.66

78.95

45.32

81.42

82.06

Return on Capital Employed

54.37

35.81

36.80

42.74

37.03

35.94

Return on Equity

43.95

31.40

25.87

45.3

32.78

32.22

0.18

0.16

0.13

0.15

0.14

0.14

Stock Days

85.33

72.87

65.95

46

70.37

69.96

Debtor Days

49.49

55.19

55.35

32

56.37

57.49

Creditor Days

74.84

61.43

65.39

52

59.84

57.12

Current Ratio

2.07

2.56

2.74

1.31

2.70

2.79

Acid Test Ratio

1.44

1.82

2.07

1.98

2.04

Capital Structure Debt / Equity Activity Ratios

Stability Ratios

HDFC Bank

Exposure for chemical industry :  Around 780 crore           (Sub Sector Paints – Can get about 78 crores) Consortium of 5 Banks

Company Rating Analysis COMPANY

Kansai Nerolac Limited

i-RISK – CURRENT

AA

BASE YEAR: 2007-2008

i-RISK - PREVIOUS

BASE YEAR:

EXTERNAL CREDIT RATINGS

AGENCY

RATING

CRISIL

AAA

CARE

P1+

GROUP

KANSAI Group of Industries

INCORPORATED ON

1920

CORPORATE STATUS

Listed

INDUSTRY

Paints

BUSINESS

Industrial Paints, Decorative paints

Product For Non Convertible Debentures

Short Term Debt

Assessment of Risk STRENGTH OF THE CREDIT:

Very Strong

– NPL has secured loans of only Rs 192 crores that has been secured by a charge on the fixed assets of the factory at Jainpur – The remaining of the Net Total Assets of INR 6,916 crores are free of any charge

Assessment of Risk RISKS PERCEIVED AND MITIGANTS Risks Perceived: – Prices of Raw materials: Rise in raw material prices especially crude oil prices may affect margins adversely. – Foreign Currency Risk: Due to weakening of rupee there will be a negative impact on the performance of the company as it is a net importer.

Mitigants: – The company can hedge itself against oil price fluctuations by employing various futures and options contracts. – The company has hedged itself against currency fluctuations by employing various forwards and options.

Products Offered • FUND BASED WCAP • FUND BASED TERM LOAN • CHANNEL FINANCING • FOREX SWAPS

ASSESSMENT OF LIMITS • FUND BASED WCAP – 30 crores – The company will need excess working capital financing of INR 79.2 Crores in FY 09 & FY 10 – No working capital loan to finance the net working capital position of INR 424.17 cr. as at FY 2008 

• FUND BASED TERM – 20-30 crores – Not a capital intensive business; Fixed Assets to Sales Ratio is just at 0.16 for FY 08

• LC – NIL – Raw material imports stood at INR 1,806 crores for FY 08 implying 20% of the total raw material requirement of INR 8,370 crores

• BG – NIL – Corporate guarantee provided by its holding company, Kansai Paint Co. Ltd., Japan

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

Terms & Covenants TERM

COVENANTS

EXISTING

PROPOSED

NIL

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

EVENTS OF DEFAULT

NIL

PRIMARY SECURITY

NIL

MARGINS

NIL

COLLATERAL

NIL

GUARANTEES

NIL

- Current Ratio above 1.33 - TOL/TNW below 1.00 (annual) - Company incurring loss for 2 consecutive years - Others - Cross default (as and when) - Change in Management (as and when) - CARE rating below A (as and when) First charge on all current assets of the company ranking pari passu with other participating banks for WC limits, as and when.

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

FUND BASED WCAP • Purpose - Inventory Financing • Limit – 30 crores • Tenure – Review every year • Interest Rate – 8.75% + 150 BP • Collateral - First charge on all current assets of the company

FUND BASED TERM – 30 crores • Purpose – Capacity Expansion • Limit – 20-30 crores • Tenure – 5 years • Interest Rate – 8.75% + 100 BP • Collateral - 3rd/Residual charge on all fixed assets of the company including factory and buildings on pari passu terms with other banks

Channel Financing • Purpose – Improve Cash Cycle • Limit – maximum 10 crores • Tenure – Review every year • Interest Rate – 8.75% + 175 BP • Collateral – Bills Receivable

Cash Management Service • Purpose – Collection & disbursement of cash • Fee – 25 BP

Thank You