Detailed Rationale CRISIL Ratings’ ratings on the bank facilities and debt programmes of Kansai Nerolac Paints Limited (Kansai Nerolac; part of the Kansai Nerolac group) continue to reflect the market leadership of the group in the industrial paints segment in India and increasing focus on the decorative paint segment. Moreover, the group has leveraged its association with Kansai Paint Co., Ltd, Japan (Kansai), to maintain its dominance in the automotive paints segment. The ratings also factor in the robust financial risk profile. These strengths are partially offset by pricing pressure from automotive original equipment manufacturers (OEMs)and intense competition in the decorative segment limiting pricing flexibility.
Net consolidated sales for fiscal 2022 grew 26% year-on-year to Rs 6,369 crore due to broad-based growth, both in the decorative and industrial segments. After a 49% growth during the first-half of fiscal 2022 (Rs 3,022 crore) over the corresponding period previous fiscal which got severely impacted due to COVID-19 induced lockdowns (Rs 2,022 crore), revenue for the second-half stood at around Rs 3,346 crore (up by 10% year-on-year), despite the fourth quarter witnessing decline in demand for decorative paints following 3rd wave COVID-19 Impact in quarter four of 2022 and a steep price rise towards end of the third quarter of fiscal 2022. Overall, the industrial segment contributed to ~42% of the overall sales while the balance was contributed by the decorative segment.
Revenue growth of around 10% is expected over the medium term, supported by launch of new products and painting campaigns, increasing penetration in low-value market and rising share in the unorganised market. The group is not expected to lose any market share in the decorative or industrial segments given its strong distribution network (for decorative) and established relationships with customers (for industrial).
Operating margin is expected to remain at 10-11% over the medium term owing to inflationary pressures on raw material prices. Company’s margins were more impacted owing to increase in crude linked RM prices compared to peers as it has a major portion of its revenues (~42%) coming from the industrial segment wherein taking price hikes is comparatively tougher and takes time.
Financial risk profile remains strong, supported by net debt-free balance sheet and sizeable liquid surplus of about Rs 313 crore as on March 31, 2022. Capital expenditure (capex) is expected at a nominal Rs 175 crore in fiscal 2023 and is to be funded entirely through cash accrual. Any incremental working capital requirement and capex will be funded through internal accrual, keeping the group net debt-free over the medium term. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Kansai Nerolac and its subsidiaries and associates, collectively referred to as the Kansai Nerolac group.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Leading position in the domestic industrial paints segment The strong position of the group is underpinned by its technological tie-ups, varied product portfolio and healthy relationships with major OEMs across the passenger car, utility vehicle and two-wheeler segments. Furthermore, technological support from the parent enables the group to introduce high-end products in the form of application as well as power consumption.
Established position in the domestic decorative paints industry The group is the third-largest player in the domestic decorative paints segment, which forms 70-75% of the total domestic paints industry. Operations are supported by a strong network of ~29,500 dealers, ~20,000 colour-tinting machines and 99 depots. The group has presence across product ranges and focuses on premium and innovative brands such as Nerolac Impressions, Beauty Gold, Suraksha Plus, Excel Top Guard and water-based enamels that support sales growth. The Soldier brand focussed on the rural market is gaining traction as well.
Benefits derived from the parent Kansai is a leading paint manufacturing company and among the top 10 coating manufacturers globally. It produces automotive coatings, refinishes, industrial coatings, architectural and marine coating, and is particularly strong in the automotive paint segment. In a sector where technology is a key factor in sustaining market position and determining relationships with OEMs, Kansai has helped the Kansai Nerolac group attain market leadership, retain clients and win new customers.
Robust financial risk profile and strong liquidity Tangible networth of Rs 4,105 crore as on March 31, 2022, and negligible debt resulted in healthy gearing of 0.05 time. Liquidity is supported by cash and marketable securities of about Rs 313 crore. However, return on capital employed (RoCE) was subdued at around 12% in fiscal 2022 due to sharp increase in raw material prices during the fiscal. Muted profitability in the subsidiaries and nominal returns on the large cash surplus further impacted RoCE.
Weaknesses Pricing pressure from automotive OEMs The prices of raw materials (account for 55-60% of total sales) such as titanium dioxide, crude oil derivatives, pigments and resins are affected by volatility in crude oil prices and foreign exchange (forex) rates; which can affect margins. However, players have largely been able to pass on cost increases in recent years, aided by strong demand and concentration. Besides, the group imports some inputs to ensure superior quality. Moreover, despite being a market leader in the industrial paint segment, the Kansai group has limited pricing flexibility, particularly with auto OEMs, which are major contributors to revenue. As a result, operating margin has fluctuated between 10% and 17% over the past decade.
Intense competition in the decorative segment limiting pricing flexibility While the organised paint industry is dominated by a few large players, paint manufacturers face competition from strong regional players, especially in the mass-market product sector. Consequently, while players have the flexibility to pass on increase in cost, their ability to absorb cost benefits and increase the margin is limited. |
Liquidity: Superior Liquidity is likely to be driven by expected annual cash accrual of more than Rs 400 crore in fiscals 2023 and 2024 and liquid surplus of Rs 313 crore as on March 31, 2022. Fund-based working capital limit of Rs 230 crore is largely unutilised. Cash accrual and cash and equivalents will adequately cover debt obligation, incremental working capital requirement and capex and investment requirements in various subsidiaries. |
Outlook: Stable The business risk profile of the group will continue to benefit from its leading position in the industrial paints market, support from the parent, and increasing revenue contribution from the decorative segment. Strong cash accrual is expected to be sufficient to meet capex and incremental working capital requirement and help maintain healthy financial risk profile |
Rating Sensitivity Factors Downward Factors
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About the Group The Kansai Nerolac group, a 74.99% subsidiary of Kansai, has strong presence in the decorative and industrial paint segments. In the industrial paint segment, the group manufactures automotive, high-performance, powder and general industrial coatings.
Technical collaboration with renowned global players gives the group a competitive advantage, enabling it to offer products that meet stringent international specifications. The group also has technological tie-ups with Oshima Kogyo Co Ltd, Japan (for heat-resistant paint), Protech Oxyplast Group, Canada (for powder coatings) and Cashew Ltd, Japan (automotive coatings). In fiscal 2020,
Kansai Nerolac entered into a joint venture with Polygel Industries Pvt Ltd to form Nerofix Pvt Ltd (Nerofix). Nerofix manufactures adhesives, sealants, construction chemicals, admixtures, waterproofing compounds, textures and paints.
It also acquired Perma Construction Aids Pvt Ltd in fiscal 2020, which makes construction chemicals.
The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on March 31, 2022, the promoters held 74.99% stake and the remaining was held by the public |
Key Financial Indicators
*Provisional **not adjusted for any non-cash items |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with buyer's credit, working capital loan, letter of credit and bank guarantee #Yet to be issued |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Cash Credit* | 105 | HDFC Bank Limited | CRISIL AAA/Stable |
| Cash Credit* | 28 | ICICI Bank Limited | CRISIL AAA/Stable |
| Cash Credit* | 25 | Standard Chartered Bank Limited | CRISIL AAA/Stable |
Criteria Details
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