February 24th, 2012 KANSAI NEROLAC PAINTS LIMITED HOLD

Recommendations Strong Buy Buy Hold Reduce Sell <= 1 year 1 - 2 yrs 2 - 5 yrs

Kansai Nerolac Paints Limited (KNPL) is a 70% subsidiary of Kansai Paint Company Ltd, a leading Japanese paint company. It has strong presence in both decorative and industrial paint segment. It is a leader in industrial paints (automotive and powder) with a market share of over 40%. It is the third largest player in decorative paints with a moderate market share of ~14%. Capacity expansion plans:- KNPL is planning to increase its capacity form its existing 2.05 lakh tones to 3 lakh tonnes by making an investment of Rs 4,000mn, which is expected to be completed by September this year at Jainpur and Hosur, which will be beneficial to cater increasing customer demands. The company has also received board approval for brown field capacity expansion at Bawal unit in Haryana. Undisputed leader in industrial paint segment: - In industrial paint segment, it is the largest and undisputed leader in automotive segment (has more than 60% market share and supplies more than 90% of the OEM requirements) and powder coatings. Growth of automotive paints is directly linked to the growth of automobile industry in India, which is projected to grow at 12% p.a. in volume terms for the next 3 years as per KPMG report. Tremendous growth for decorative paint segment: - Low per capita consumption of 1.5kgs decorative paints in India compared to other developing nations, like China (2.5 kgs), Sri Lanka (3.5kgs) and Malaysia (5 kgs), provides ample opportunity for growth. The Indian paint market is largely dominated by unorganized players and offers tremendous scope for the paint companies to increase their share in the market. Strong technological backup: - KNPL has strong technological backup from its parent company Kansai, the largest paint company in Japan. It provides automotive paints to major auto companies in the world like Suzuki, Toyota, Honda etc. Automotive segment contributed ~45% to its overall revenue. Based on a standalone FY14 P/E multiple of 17, the fair value for the company works out to Rs. 984
Standalone Financial Snapshot Projections (Rs Mn) Revenue Y-o-Y Growth % EBITDA Y-o-Y Growth % Adjusted PAT Y-o-Y Growth % EPS Rs BVPS Rs EBITDA % NPM % ROE % PER x P/B Ratio 18 121 11% 7% 15% 986 1,574 FY09A 14,705 FY10A 18,220 24% 2,637 67% 1,655 68% 31 143 14% 9% 21% FY11A 22,662 24% 2,905 10% 2,060 24% 38 170 13% 9% 22% FY12E 26,301 16% 3,436 18% 2,361 15% 44 214 13% 9% 20% 20 4.1 FY13E 30,343 15% 4,091 19% 2,678 13% 50 264 13% 9% 19% 18 3.3 FY14E 33,877 12% 4,560 11% 3,119 16% 58 321 13% 9% 18% 15 2.7

Strong Buy Expected Returns > 20% p.a. Buy Expected Returns from 10 to 20% p.a. Hold Expected Returns from 0 % to 10% p.a. Reduce Expected Returns from 0 % to 10% p.a. with possible downside risk Sell Returns < 0 %

STOCK DATA BSE / NSE Code Bloomberg Code No. of Shares (Mn) Sensex / Nifty PRICE DATA CMP Rs (22nd Feb 2012) Beta Market Cap (Rs mn) 52 Week High-low Average Daily Volume STOCK RETURN (%) 30D 2% 8% Sensex 9% Nifty SHARE HOLDING PATTERN (%) Promoter Institution

500165 / KANSAINER KNPL IN EQUITY

54 18,145/ 5,505 876.0 0.11 47,209 973.95 / 720 852 3M 1% 15% 17% 6M 4% 10% 11% 1Y 12% -1% 1%

KNPL

Non Institution Total 1 Year Price Performance (Rel. to Sensex)

69.3 11.0 19.7

100.0

135 125 115 105 95 85 75

BSE_SENSEX

KNPL

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February 24th, 2012 BUSINESS PROFILE

Kansai Nerolac Paints Ltd. (KNPL), a subsidiary of Kansai Paint (Japan), was established in the year 1920. It is the second largest coating company in India and the market leader in industrial coatings. Having completed 90 years of existence, KNPL has established itself as a well known brand with a strong recall proposition. The company is present in decorative as well as industrial paint segments. While it is a leader in industrial paints (automotive and powder), it is the third largest player in decorative paints. KNPL has a pan-India presence and serves its customers through its 74 sales locations and 5 factories. The manufacturing operations extend across India and are located in Bawal in Haryana, Lote in Maharashtra, Jainpur in UP, Chennai and Hosur in Tamil Nadu. Undisputed leader in Industrial Paint segment: - KNPL is the undisputed leader in industrial paints segment with market share of more than 40% and contributes ~45% to its overall revenue. It caters mainly to automotive (automotive coatings) and consumer durables (powder coatings) industry and also has presence in general industrial coatings and high performance coatings. KNPL leads the technology intensive industrial paint market due to its collaboration with world leader Kansai Paint Company of Japan (for polyester resins & acrylic resins), Oshima Kogyo Co. Ltd., Japan (for manufacturing heat resistance coatings) and PPG International Performance Coatings and Finishes, USA (for manufacturing high performance coatings for petrochemical & power sectors). Undisputed leader in industrial paints segment with market share of more than 40%

Indicative Revenue Break-up

Industrial Paints Market Share

Kansai Nerolac Paints 24% Berger Paints 42% Asian Paints 13% 16% Others Shalimar Paints

45% 55% Industrial Segment Decorative Segment

5%

KNPL leads the technology intensive industrial paint market

Tremendous growth opportunity for decorative paint segment: - Indian paint industry is characterized by low per capita consumption (pcc) compared to other developing and developed countries and large unorganized market. Pcc is set to increase gradually due to improving financial status and increasing nuclear family culture, which in turn will generate strong housing demand (in turn driving demand for fresh and refinish paints); and urbanization is leading to up trading from lime-wash kind of low end products to paints (distempers, enamels and emulsions). KNPL is one of the major organized players in decorative paints with strong brands covering all price points and distribution network spread all over India. KNPL has a market share of ~14% in the decorative paint segment and generates ~55% of its revenue from it. KNPL offers products across all categories through some renowned brands like Nerolac Impressions, Pearls, Beauty, Suraksha and Excel. Companys product portfolio
Segment Premium Medium Entry Level Economical Impressions 24 Carat Beauty Premium/Flexi Coat Beauty Interior Emulsion Enamel Lustre /Satin/ Synthetic Goody Synthetic Designer Impressions Impression Excel Total Impression Excel Exterior Emulsion

Kansai (India) Decorative Paint Segment Revenue

31% 32% 12% 25%

Emulsions
Suraksha
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Enamels

Distamper

Others

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February 24th, 2012 INDUSTRY OVERVIEW

In FY11, the Indian economy has seen good growth. Demand across various key end user segments (be it housing, automobiles, consumer durables) has been robust. The paint industry as a whole is expected to have grown by 22% in FY11. During the year, KNPL has grown by 26%, supported by growth across all segments. Rising income and aspiration levels of young demography along with changing lifestyle has catapulted the demand for both repainting and fresh paints. Despite slowdown in FY09, paint industry reported robust double digit growth in the last two years on the back of higher demand. Going ahead, we believe demand scenario to remain strong backed by higher discretionary spending, increasing penetration, high construction activities and robust growth in auto & consumer durables industries. In FY11, the industry also saw high inflation which reduced the margins for the company. The companies in the industry took a series of internal measures in-order to minimize the impact of rising RM prices. In the decorative business, the companies were able to pass on the cost increases to a certain extent. However, in the industrial business, passing on the cost impact continues to be a challenge. This has had an impact on the bottom line growth for the companies. As far as the market for paints segment for India is concerned, the long term fundamentals are sound and the industry is expected to grow at about 12-13% annually over the next five years. Industry Composition The industry size for paints is estimated at Rs. 240bn, wherein the organized sector accounts for 65% while the remaining is with the unorganized sector, comprising of around two thousand small scale paint units. The decorative paints segment accounts for Rs. 180bn while industrial accounts for Rs. 60bn of the total paint market. Unorganized players mainly offers low quality enamels, distempers, lime wash, cement paint etc. Top organized players include Asian Paints (30% market share), Kansai Nerolac (20% market share), Berger Paints (19% market share) and ICI (12% market share). These organized players offers premium to high range of emulsions. Paints industry can be classified in two broad categories. Decorative: - It accounts for 60% of the entire paint industry in India. Major segments in decorative include exterior wall paints, interior wall paints, wood finishes, enamel and ancillary products such as primers, putties etc. Demand for decorative paint is mainly driven by fresh construction (40%) and repainting (60%). Industrial: - It accounts for 40% market share in Indian paint industry. The automobile segment generates more than two-third of the demand for industrial paints, and hence is the growth driver for the segment. Industrial paints segment mostly offers products like automotive coatings (35%), powder coatings (10%), and protective coatings & general industrial coatings (32%). The industrial paints segment has grown at a fast pace of more than 15% in the last 4-5 years on back of boom in auto and consumer durables demand along with rising industrial spend.

Decorative Sector Composition

India Paint Industry

Industrial Sector Composition

Automotive Paints
5% 5% 10%
Decorative Segment (60%) Industrial Segment (40%)

12% 17%

2%

Enamels Distemper 50% Emulsions Exterior Coatings

50% 30%

High Performance Coating Powder Coating Coil Coating

19%

Wood Finishes

Premium Range ( High end Acralic Emulsions)

Medium Range (Enamel Paints)

Distamper Range (Low end Paints)

Automotive Sector (about 2/3 rd share)

Consumer Durables Marine Paints other OEM's

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February 24th, 2012 BUSINESS PERFROMANCE

For Q3FY12, KNPL reported sales at Rs 6,657mn, a Y-o-Y and Q-o-Q growth of 18.79% and 8.06% respectively. It was lower than street expectations on the back of moderation in volume growth in industrial paints, which accounts for ~45% of its revenues. Decorative paints continued to perform well on the back of good volume growth and higher realization. The blended volume growth for Q3FY12 has been ~6-7%, much lower than ~10% in Q2FY12 and ~15% in Q1FY12. The sales in industrial paints segment continued to suffer due to slowdown in auto industry. Volume of passenger vehicles registered a marginal growth of 1.45% in 9MFY12 dragged largely due to production cut on the back of labour issues at Maruti Suzuki. The average price hike taken by the company is ~8-10% in decorative segment and ~2-3% in industrial segment in the 9MFY12. Going forward, although we expect some improvement in volume growth (on back of normalization in production in Maruti Suzuki) but lower growth in realization would reduce the overall growth in revenues for FY13. Any interest rate cuts can result in a revival in demand for new housing and automobiles and, hence, volume growth for paints

Revenue, Operating & PAT Margin

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 FY09 FY10 FY11 FY12E FY13E FY14E 6% 4% 2%
0

Quarterly Performance
14% 12%
Revenues (Rs mn)
7000 6000 5000 4000 3000 2000 1000 20% 18% 16% 14%

10% 8%

Margins(%)

12% 10% 8% 6% 4% 2% 0%

0%

Revenue (Rs Mn)

EBIDTA Margin

PAT Margin

Net Revenue (Rs mn)

EBITDA Margins

Peer Comparison
Peer Group Comparison Companies Kansai Nerolac India Ltd Revenue (Rs. mn) 24,534 12,170 25,116 EBITDA PAT ROE (%) Margin (%) Margin (%) 13% 20% 10% 8.6% 10.0% 6.6% 23% 17% 23% P/E (x) 22.3 16.6 22.0 P/B (x) 5.2 2.8 5.1 CMP (Rs.) 876 815 106 FV (Rs.) 10 10 2

Akzo Nobel
Berger Paint India Ltd TTM Figures

We are comparing KNPL with Akzo Nobel and Berger Paints, which operates under the same industry. KNPL is the leader in industrial paint segment in India, with a market share of over 40% and it is the third largest player in decorative paints. Going forward we believe that revenue of the firm is expected to grow by 15% annually on account of strong position in the industrial paint segment. RoE is better as compared to Akzo Nobel and same as compared to Berger Paints. EBITDA margins are higher as compared to Berger Paints.

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February 24th, 2012 VALUATIONS

At the CMP, the stock is trading at 18x and 15x its FY13 and FY14 estimated EPS of Rs 50 and Rs 58, respectively. With the slowdown in automobile sales and considering automotive paints constitutes maximum of the sales for the company, we believe volume sales growth in the upcoming quarters would be weak for this segment. As far as the demand for decorative paint is concerned, it is expected to grow at a slower pace. The paint industry is raw material intensive with most of the products based on pertroleum. So any major fluctuation in crude oil and titanium dioxide would keep the margins under pressure. With increasing focus on expanding its capacities and maintaining its leadership position in industrial paint segment, KNPLs future prospects looks promising. The stock was trading at 2 year forward PE multiple of 11.9x in FY08 and has reached 14.9x in FY12E so we expect the stock to trade at 2 year forward multiple of 17x in FY14E. Based on a standalone FY14 P/E multiple of 17, the fair value for the company works out to Rs. 984. We recommend a HOLD rating on the stock. With increasing focus on expanding its capacities and maintaining its leadership position in industrial paint segment, KNPLs future prospects looks promising

Standalone Profit & Loss Statement Particulars (Rs Mn) Net Revenue Operating Expenditure Depreciation EBIT EBIT Margin (%) Interest Other Income Profit Before Tax Less: Tax Adjusted PAT PAT Margin (%) ROE (%) EPS (Rs) BVPS (Rs) FY09A 14,705 13,131 376 1,198 8% 18 222 1,402 416 986 7% 15% 18.3 121 FY10A 18,220 15,583 443 2,194 12% 12 204 2,386 731 1,655 9% 21% 30.7 143 FY11A 22,662 19,757 494 2,411 11% 8 488 2,891 832 2,060 9% 22% 38.2 170 FY12E 26,301 22,866 543 2,893 11% 8 395 3,279 918 2,361 9% 20% 43.8 214 FY13E 30,343 26,252 699 3,393 11% 22 455 3,826 1,148 2,678 9% 19% 49.7 264 FY14E 33,877 29,317 555 4,005 12% 58 508 4,455 1,337 3,119 9% 18% 57.9 321

Ratio Analysis Ratios (x) Current Ratio Cash Ratio Debt-Equity Sales / Assets ROE % ROCE % FY09A 1.5 0.2 0.1 2.0 15% 11% FY10A 1.4 0.1 0.1 2.1 21% 17% FY11A 1.5 0.1 0.1 2.3 22% 17% FY12E 2.1 0.1 0.2 2.0 20% 16% FY13E 2.6 0.1 0.3 1.6 19% 12%
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FY14E 2.6 0.1 0.0 1.5 18% 13%

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February 24th, 2012

Standalone Balance Sheet Particulars (Rs Mn) Sources of Funds Equity Capital Reserves & Surplus Shareholders funds Loan funds Total Application of funds Net Block Capital WIP Investments Inventories Debtors Cash & bank balances Loans & advances Total Current Assets Current Liabilities Provisions Total Current Liabilities Net Current Assets Other Assets Net Deferred Tax Total 106 7,481 115 8,828 134 9,987 134 13,347 134 19,025 2,374 356 2,944 1,706 2,096 762 417 4,981 2,442 839 3,281 1,700 2,893 164 4,015 2,474 2,324 411 411 5,620 3,043 937 3,980 1,640 2,782 1,036 3,718 3,541 2,603 397 502 7,043 3,636 1,091 4,727 2,316 3,239 1,036 3,718 4,471 3,945 556 850 9,823 3,156 1,447 4,603 5,220 5,540 1,036 3,718 6,676 6,069 785 530 14,059 3,945 1,517 5,462 8,597 3,485 1,036 3,718 10,163 8,469 1,030 400 20,063 5,082 2,710 7,792 12,271 1,500 134 22,144 270 6,275 6,545 936 7,481 270 7,459 7,728 1,100 8,828 539 8,623 9,162 825 9,987 539 10,984 11,523 1,825 13,347 539 13,662 14,201 4,825 19,025 539 16,781 17,320 4,825 22,144 FY09A FY10A FY11A FY12E FY13E FY14E

Standalone Cash Flow Statement Particulars (Rs Mn) Profit Before Tax Total Adjustments (PBT & Extraordinary Items) Change in Working Capital Direct Taxes Paid Cash Flow from Operating Activities Net Investment in GFA Sale of Fixed Assets Change in Investments Others Cash Flow from Investing Activities Proceed from 0ther Long Term Borrowings Proceed from Short Tem Borrowings Of the Long Tem Borrowings Of the short term Borrowings Dividend Paid Net Interest Paid Others Cash Flow from Financing Activities Net Cash Flow Opening Balance of Cash Closing Balance of Cash (Transferred to Balance Sheet) FY09A 1,402 201 861 (419) 2,046 (747) 0 (586) 155 (1,178) 8 0 (51) 0 (324) (18) (55) (441) 428 481 909 FY10A 2,386 255 (366) (770) 1,505 (757) 0 (1,029) 157 (1,629) 203 0 (39) 0 (323) (12) (55) (227) (351) 762 411 FY11A 2,891 32 (822) (796) 1,306 (1,268) 1 573 129 (565) 0 0 (54) (221) (404) (9) (67) (755) (14) 411 397 FY12E 3,279 543 (2,744) (918) 159 (1,000) 0 0 0 (1,000) 1,000 0 0 0 0 0 0 1,000 159 397 556
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FY13E 3,826 699 (3,149) (1,148) 228 (3,000) 0 0 0 (3,000) 3,000 0 0 0 0 0 0 3,000 228 556 785

FY14E 4,455 555 (3,428) (1,337) 246 (3,000) 0 0 0 (3,000) 3,000 0 0 0 0 0 0 3,000 246 785 1,030

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February 24th, 2012

Board Of Directors Director Name Current Position Description

Jamshed Irani

Independent Non-Executive Chairman of the Board

Dr. Jamshed J. Irani, Ph.D., is Independent Non-Executive Chairman of the Board of Kansai Nerolac Paints Limited. He obtained a B.Sc. from Science College, Nagpur with a Gold Medal in Geology and a M.Sc. (Geology) from the Nagpur University, both with a first class first, M. Met and Ph.D from the University of Sheffield, U.K., with a Gold Medal for the Ph.D. thesis. Dr. Irani, honoured with a Padma Bhushan by the Government of India in 2007, is a recipient of numerous awards from reputed institutions in India and abroad for his contributions made to the metallurgical profession and industry, for fostering harmonious employee-management relations in industry and for entrepreneurial success and corporate leadership. Dr. Irani is Chairman/member of the Board of Directors of the following Companies (excluding private companies, foreign companies and companies registered under Section 25 of the Companies Act, 1956): Tata Sons Limited, Tata Steel Limited, Tata Motors Limited, Electrosteel Castings Limited, Repro India Limited, Housing Development Finance Corporation Ltd, BOC India Limited, Tata Refractories Limited and TRF Limited.

Devendra Kothari

Mr. Devendra M. Kothari is Independent Non-Executive Vice Chairman of Kansai Nerolac Paints Ltd. He is qualified Chartered Accountant by profession and is an authority on the Indian Paints Industry. Mr. Kothari had been in the wholetime employment of the Company for a period of 29 years, till his retirement on 30th April, 1990. During his employment with the Company, Mr. Kothari had an extremely tenure as the Managing Director of the Company for a period of 15 years, from 1st April, 1975 to 30th April, 1990, that witnessed the spectacular growth in turnover of the Company by over ten times from about Rs. 14 crores in 1975 to Rs. 147 crores in 1990. During his tenure as the Managing Director, the Independent Non-Executive Vice Company entered into technical and financial collaboration with Kansai Paint Co. Ltd., Japan, which laid the foundation for the Company to be the undisputed leader in the industrial paints business and paved the way for the Company to Chairman of the Board attaining greater heights. Subsequent to his retirement as the Managing Director, Mr. Kothari was appointed as a NonrExecutive Director designated as the Vice-Chairman of the Company from 1st May, 1990, which position he continues to hold on the Board of Directors of the Company. Mr. Kothari has also been the president/member of several trade Associations such as the Indian Paints Association, The Chemicals & Allied Products Export Promotion Council (CAPEXIL), The Indian Chemicals Manufacturers Association (ICMA), The Bombay Chamber of Commerce and Industry (BCCI) and The Federation of Indian Export Organization (FIEO).

Harishchandra Bharuka

Managing Director, Wholetime Director

Mr. Harishchandra M. Bharuka is Managing Director, Wholetime Director of Kansai Nerolac Paints Ltd. Mr. Bharuka, with a varied experience of around 28 years, joined the Company on 1st October, 1985. Mr. Bharuka was appointed on the Board of Directors on 1st April, 1999, and was Deputy Managing Director, prior to his appointment as the Managing Director from April 1, 2001.

Pravin Chaudhari

Wholetime Director

Mr. Pravin D. Chaudhari is Wholetime Director of Kansai Nerolac Paints Limited since 1st May, 2008. Mr. Chaudhari is B.E. (Production), MMS and was Director- Supply Chain prior to his appointment on the Board.

Hiroshi Ishino

Non-Executive Director

Mr. Hiroshi Ishino is Non-Executive Director on the Board of the Company. Mr. Ishino is a Graduate of the Faculty of Law, Tokyo University and MBA of the Wharton School of University of Pennsylvania, USA. Mr. Ishino is having knowledge in the field of Marketing. Mr. Ishino is a Senior Managing Director of Kansai Paint Co, Ltd.,Japan. Mr. Ishino is a Nominee Director of Kansai Paint Co. Ltd., Japan, the Companys holding Company.

Y. Takahashi

Non-Executive Director

Mr. Y. Takahashi is Non-Executive Director of Kansai Nerolac Paints Ltd, Representative of Kansai Paint Co. Ltd. He is a graduate from Hitotsubashi University and has in the field of Automotive Business Marketing, Dealer Development, Logistics, Corporate Strategy and Planning and General Administration. Mr. Takahashi has had a varied experience working abroad in a number of countries. He joined Kansai Paint Co. Ltd., Japan at the Osaka Head Office in February, 2009 and is Senior Manager at their International Business Division. Mr. Susim Mukul Datta is Independent Non-Executive Director of Kansai Nerolac Paints Limited. He is a reputed management and is on the Board of Directors of a number of companies. Mr. Datta graduated with Honours in Chemistry, Presidency College, Kolkata and obtained a Post- graduate Degree in Science & Technology from the Kolkata University. Mr. Datta is a Chartered Engineer, Fellow, Institution of Engineers, Fellow, Indian Institute of Chemical Engineers, Member, Society of Chemical Industry (London) and Honorary Fellow of All India Management Association. Mr. Datta was the chairman of Hindustan Lever Limited (HLL) as well as of the Unilever Group Companies in India and Nepal from 1990 to 1996. Mr. Datta is a Past President of Associated Chambers of Commerce and Industry and the Council of EU Chambers of Commerce in India, a past president of Bombay Chamber of Commerce & Industry, Indian Chemical Manufacturers Association and Bombay First. Mr. Datta is Chairman/member of the Board of Directors of the following companies (excluding private companies, foreign companies and companies registered under Section 25 of the Companies Act, 1956): Chairman of Castrol India Ltd., Philips Electronics India Ltd., IL & FS Investment Managers Ltd., BOC India Ltd., Tata Trustee Co. Ltd., Transport Corp. of India Ltd., and member of the Board of Directors of Peerless General Finance & Investment Co. Ltd., Peerless Hospitex Hospital & Research Centre Ltd., Peerless Hotels Ltd., Zodiac Clothing Company Ltd., Atul Ltd., Bhoruka Power Corporation Ltd., Deutsche Postbank Home Finance Ltd. and Rabo India Finance Ltd. Mr. Datta is the Chairman of the following Board Committees (other than that of Kansai Nerolac Paints Limited).

Susim Datta

Independent Non-Executive Director

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