Detailed Rationale

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

 

The ratings continue to reflect the group’s market leadership in the industrial paint segment in India and increasing focus on the decorative paint segment. Moreover, the group has leveraged its association with Kansai Paints Company Ltd, Japan (Kansai), to maintain its dominance in the automotive paint segment. The ratings also factor in a robust financial risk profile. These strengths are partially offset by pricing pressure from automotive original equipment manufacturers (OEMs) and limited pricing flexibility in the decorative segment.

 

Net consolidated sales for fiscal 2021 de-grew by 4% year-on-year to Rs 5074 crore because of the Covid-19 pandemic related slowdown. After a dip of 30% in revenue in the first half of fiscal 2021 (Rs 2,022 crore) over the corresponding period of the previous fiscal (Rs 2,868 crore) due to the lower demand and temporary plant closure on account of the nationwide lockdown, revenue bounced back in the second half of fiscal 2021 to Rs 3,052 crore (up by 26.5% year-on-year) to restrict overall de-growth to 4%. The industrial segment contributed around 42% of the total overall sales, while the remaining was contributed by the decorative segment.

 

Revenue is expected to rebound in the near to medium term with revival in the paint market and improved demand for new as well as current products. Despite the decline in revenue in fiscal 2021, the group was able to improve its operating margin to 17.0% (15.2% in fiscal 2020), backed by benign raw material prices in the first nine months of the fiscal and cost rationalisation measures.

 

Financial risk profile remains strong, supported by net debt-free balance sheet and sizeable liquid surplus of about Rs 774 crore as on March 31, 2021. Capital expenditure (capex) is expected at a nominal Rs 280 crore in fiscal 2022 and is likely to be funded entirely through cash accruals. The incremental working capital requirement and any capex will be funded entirely 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 paint segment

The group’s strong position in the domestic industrial paint industry 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 with efficiency in the form of application as well as power consumption. All these factors enable the group to sustain its dominant market share in the automotive paint segment.

 

• Established position in the domestic decorative paint industry

The Kansai Nerolac group is the third-largest player in the domestic decorative paint segment, which forms 70-75% of the total domestic paint industry. The company’s 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 world’s top 10 coating manufacturers. It produces automotive coatings, refinishes, industrial coatings, architectural and marine coating. It 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

The group has tangible networth of Rs 4,029 crore as on March 31, 2021, and negligible debt resulting in healthy gearing of 0.04 time. Liquidity is strong, supported by cash and marketable securities of about Rs 774 crore as on March 31, 2021. The group’s return on capital employed (RoCE) was around 18% in fiscal 2021. Subdued profitability in the subsidiaries and nominal returns on the large cash surplus impacted the RoCE. 

 

Weaknesses

• Pricing pressure from automotive OEMs

Raw materials cost accounts for around 60% of sales. The main raw materials include titanium dioxide, crude oil derivatives, pigments and resins. Hence, volatility in crude oil/derivative prices, coupled with fluctuations in the exchange rate, have a direct impact on the industry 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 12% and 17% over the past decade.

 

• Limited pricing flexibility 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 paint manufacturers have the flexibility to pass on increase in cost, their ability to absorb cost benefits and increase the margin is limited. Kansai Nerolac will maintain its margin, profitability will continue to be constrained by intense competition.

Liquidity: Superior

Liquidity is likely to remain ample, driven by expected cash accrual of more than Rs 400 crore each in fiscals 2022 and 2023 and liquid surplus of Rs 774 crore as on March 31, 2021. Fund-based working capital limit of Rs 158 crore is largely unutilised. Cash accrual and cash and equivalents will adequately cover the debt obligation, incremental working capital requirement and capex and investment requirements in various subsidiaries.

Outlook: Stable

The Kansai Nerolac group’s business risk profile will continue to benefit from its market leading position in the industrial paint segment, support from the parent, Kansai, and increasing revenue contribution from the decorative segment. The strong cash accruals which is expected to be sufficient for meeting capex and increased working capital requirements will help maintain healthy financial risk profile.

Rating Sensitivity Factors

Downward Factors

• Decline in revenue by over 20% because of steep fall in demand in the decorative and industrial segments
• Intense competition or significant increase in input prices and fall in sales from the automotive industry affecting profitability, with operating margin declining to less than 10% on a sustained basis
• Sizeable, debt-funded capex or acquisition materially impacting the key credit metrics
• Material reduction in liquid surplus
• Slower-than-expected ramp-up in utilisation levels for the new capacities affecting RoCE

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. Apart from its mainstay technological collaboration with Kansai for manufacturing sophisticated architectural coatings, the group 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 Private Limited to form Nerofix Private Limited (Nerofix). Nerofix manufactures adhesives, sealants, construction chemicals, admixtures, waterproofing compounds, textures and paints.

It also acquired Perma Construction Aids Private Limited in fiscal 2020 which is into construction chemicals.

 

The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on March 31, 2021, the promoters held 74.99%, and the remaining was held by the public.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs.Crore	5,074	5279
Profit After Tax (PAT)	Rs.Crore	526	516
PAT Margin	%	10.3	9.8
Adjusted debt/adjusted networth	Times	0.04	0.05
Interest coverage*	Times	37.79	39.19

*not adjusted for any non-cash items

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 level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	158	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