Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Kansai Nerolac Paints Ltd (Kansai Nerolac; part of the Kansai Nerolac group).

 

The ratings continue to reflect the market leadership of the group in the industrial paints segment in India and sustained market position in 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 (auto) paints segment. The ratings also factor in robust financial risk profile. These strengths are partially offset by pricing pressure from auto original equipment manufacturers (OEMs) and intense competition in the decorative segment, limiting pricing flexibility.

 

Revenue grew by 4.3% in fiscal 2024 to Rs 7,893 crore, driven by stable demand for both industrial and decorative paints. The company had double-digit volume growth for the year and undertook price cuts of 3-4% in the decorative segment in the second half. Overall, the industrial segment contributed ~45% of overall sales while the balance was contributed by the decorative segment. Kansai Nerolac has relatively stronger presence in tier-2, tier-3 and tier-4 (which includes rural) towns across India and thus the company is now targeting tier-1 cities for expansion of its business. Revenue growth, over the medium term, would be supported by increasing volumes, launch of new products, increasing premiumisation and technology-based products. In fiscal 2024, the company also booked Rs 661 crore gained from sale of land located in Thane as non-operating income.

 

Operating margin improved to 14.2% during fiscal 2024 from 10.9% in fiscal 2023 with moderating crude oil-based raw material prices and increase in margin in the industrial segment due to premiumisation witnessed this fiscal. The operating margin is expected to remain at 13-14% over the medium term with elevated sales promotion and advertising expenses because of the launch of newer products, change in product mix by shifting towards premium products and improvement in the industrial segment margin. Operating margin remains susceptible to steep increase in crude-linked raw material prices compared to peers as a major portion of revenue (~45%) comes from the industrial segment wherein taking price hikes is comparatively tougher than the decorative segment.

 

The financial risk profile remains strong, supported by net debt-free balance sheet and sizeable liquid surplus of over Rs 1,400 crore as on March 31, 2024. Networth was over Rs 5,500 crore as on March 31, 2024. The liquidity position will continue to remain robust with substantial net cash accrual and strong cash surplus that will be sufficient to meet annual capital expenditure (capex) and working capital requirement 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 and established position in the decorative 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. The group is also the third largest player in the domestic decorative paints segment, which forms 75-80% of the total domestic paints industry. Operations are supported by a strong network of over 33,000 dealers, over 20,000 colour-tinting machines and over 100 depots. The group has presence across product ranges and focuses on premium and innovative brands such as Nerolac Impressions, Beauty Gold, Suraksha Plus, Excel Total and water-based enamels that support sales growth. The Soldier brand, focussed on the rural market, has also gained traction.

 

• Strong market position of the parent in the global coatings market: Kansai is a leading paint manufacturing company and among the top 10 coating manufacturers globally. It produces auto coatings, refinishes, industrial coatings, architectural and marine coating, and is particularly strong in the auto 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. 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 (auto coatings).

 

• Robust financial risk profile and strong liquidity: Strong tangible networth of over Rs 5,500 crore as on 31st March’2024 and negligible debt resulted in healthy gearing of 0.02 time. Liquidity is supported by cash surplus of over Rs 1400 crore as on March 31, 2024, as well as fund-based bank limits that are largely unutilised. Return on capital employed (RoCE) improved to 17.5% in fiscal 2024 as against 14.3% in fiscal 2023, led by operating margin expansion of 330 basis points (bps) followed by nil net debt and robust networth. ROCE is expected to remain robust at 15-17%, over the medium term, on account of strong demand from the auto industry and industrial and decorative segments.

 

Weaknesses:

• Limited pricing flexibility in the auto segment: The prices of raw materials (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 the margin. 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. 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: 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. With the impending rise in competition in the decorative segment due to the entry from large conglomerates, the coming period is expected to witness heightened investments by incumbents to enhance capacity, backward integrate, and expand into non-paint products such as adhesives, construction chemicals and waterproofing products to sustain growth.

Liquidity: Superior

Liquidity is supported by cash surplus of more than Rs 1400 crore as on March 31, 2024. Fund-based working capital limit of Rs 350 crore is largely unutilised. Cash accrual and cash and equivalent will adequately cover debt obligation, incremental working capital requirement, capex and investment requirements in various subsidiaries.

 

ESG profile

CRISIL Ratings believes Kansai Nerolac’s Environment, Social and Governance (ESG) profile supports its already strong credit risk profile.

 

The paint (chemical) sector has a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emission. The sector’s social impact is characterised by health hazards leading to higher focus on employee safety and well-being and the impact on the local community given the nature of its operation.

 

Kansai Nerolac has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• There has been improvement in the GHG emission intensity from 6.26 tCO2/revenue in 2022 to 6.08 tCO2/revenue in 2023. The company aims to become carbon neutral and targets to achieve 70% of its electricity consumption from renewable sources by 2030.
• The specific water consumption has declined from 87.35 kl/revenue in 2022 to 76.03 kl/revenue in 2023. It targets to be water positive by fiscals 2024 to 2025.
• Gender diversity has increased from 2.25% in 2022 to 3.20% in 2023 but is still lower than that of its peers.
• Lost time injury frequency rate is nil during 2023 and is better as compared to its peers, representing healthy employee safety and well-being standards.
• Kansai Nerolac’s governance profile is supported by 43% of its board comprising independent directors, split in chairman and CEO positions and presence of robust internal control systems and processes. It also has extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of KNPL to ESG principles will play a key role in enhancing stakeholder confidence and access to capital markets.

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

• Intensifying competition leading to steep decline in market share in the industrial or decorative segments.
• Significant increase in input prices or steep rise in selling and marketing spends impacting profitability, with operating margin declining to less than 10% on sustained basis.
• Sizeable, debt-funded capex or acquisition materially impacting key credit metrics or leading to material reduction in liquid surplus.

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 auto, high-performance, powder and general industrial coatings.

 

Kansai Nerolac entered a joint venture with Polygel Industries Pvt Ltd to form Nerofix Pvt Ltd (Nerofix) in fiscal 2020. Nerofix manufactures adhesives, sealants, construction chemicals, admixtures, waterproofing compounds, textures and paints. Kansai Nerolac acquired the balance 40% stake in Nerofix from Polygel in March 2023, post which Nerofix became a wholly owned subsidiary of KNPL.

 

The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on March 31, 2024, the promoters held 75% stake and the remaining was held by the public.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating  assigned with outlook
NA	Cash credit*	NA	NA	NA	255	NA	CRISIL AAA/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	95	NA	CRISIL AAA/Stable
NA	Non-convertible debentures#	NA	NA	NA	10	Simple	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	30	Simple	CRISIL A1+

*Interchangeable with buyer's credit, working capital loan, letter of credit and bank guarantee

#Yet to be issued