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 Berger Nerolac ICI Paints Shalimar
Paints Paints
3585.86 1559.75 1404.14 1025.84 256.05
Net Sales
Net Sales 21.78 18.49 13.18 5.4 17.97
growth %

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

 FINANCIALS
Industry
Profitability Ratios (in %age) 2006 2007 2008 (2008) 2009 2010

Total - Reserves 380.55 484.78 566.74 642.25 724.36

Total - Shareholders Funds 406.06 510.29 593.69 673.00 757.44

Reserves/ Shareholders Fund 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

Capital Structure
Debt / Equity 0.18 0.16 0.13 0.15 0.14 0.14

Activity Ratios
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

Stability Ratios
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

 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 AGENCY RATING Product

RATINGS

CRISIL AAA For Non Convertible Debentures

CARE P1+ Short Term Debt

GROUP KANSAI Group of Industries

INCORPORATED ON 1920

CORPORATE STATUS Listed

INDUSTRY Paints

BUSINESS Industrial Paints, Decorative paints

 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 EXISTING PROPOSED
- The company will provide financial information to the
bank on a regular basis
COVENANTS NIL - The assets can’t be sold off to the tune of more than
30% of the asset value as at FY 2008-
- Financials - Current Ratio above 1.33
- TOL/TNW below 1.00 (annual)
- Company incurring loss for 2
EVENTS OF
DEFAULT
NIL 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
PRIMARY ranking pari passu with other participating banks for WC
NIL
SECURITY limits, as and when.

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