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 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.

 

Revenues for fiscal 2022 grew by 24% to Rs. 7147 crore driven mainly by multiple price hikes taken across both decorative and industrial business segment. During 9MFY23, revenues stood at Rs.5809 crore witnessing growth of 20% year-on-year basis on the back of strong demand from auto industry as well as increase in price realisations across both segments. Revenue growth of 9-12% is expected over the medium term, supported by price increase, launch of new products, increasing penetration in Tier-I cities, increasing premiumisation and technology-based products. Overall, the industrial segment contributed to ~45% of the overall sales while the balance was contributed by the decorative segment.

 

Operating margins improved to 11.2% during 9MFY23 after declining to 8.4% in FY22 with rising crude oil based raw material prices and inability to entirely pass on the same, particularly in the industrial segment. Operating margin is expected to remain at 11-13% over the medium term on account of softer raw material prices, change in product mix by shifting towards premium products and benefit of past price hikes. 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 (~45%) 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. Net worth is estimated at ~Rs.4600 crore as on March 31, 2023. Liquidity position will continue to remain robust with substantial net cash accruals and strong cash surplus that will be sufficient to meet the annual capex requirement in 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 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 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

Strong Tangible net-worth of ~Rs. 4600 crore is estimated for fiscal 2023, backed by negligible debt resulting in healthy gearing of 0.02 times. Liquidity is supported by cash surplus of over Rs.211 crore as on September 30, 2022 as well as fund based bank limits that are largely unutilized. Return on capital employed (RoCE) was subdued at around 12% in fiscal 2022 due to sharp increase in raw material prices during the fiscal however it is expected to improve around 15-20% in the medium term on account of on the back of strong demand from auto industry as well as increase in price realizations across both industrial and decorative segments

 

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 better in medium term and estimated cash surplus of more than Rs.500 crores over the medium term. Fund-based working capital limit of Rs 350 crores 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

• Steep decline in revenue because of sharp fall in demand in the decorative and industrial segments
• Intensifying competition or significant increase in input prices impacting profitability, with margin declining to less than 10% on a sustained basis
• Sizeable, debt-funded capex or acquisition materially impacting key credit metrics
• 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 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. KNPL on March 03, 2023 has announced for acquisition of additional 40% stake in Nerofix from Polygel. The acquisition got completed by March 2023, post which Nerofix became wholly owned (100%) subsidiary of KNPL.

 

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

Particulars	Unit	2022	2021
Revenue	Rs crore	7147	5074
Profit after tax (PAT)	Rs crore	343	526
PAT margin	%	4.8	10.3
Adjusted debt/adjusted net worth	Times	0.05	0.04
Interest coverage**	Times	21.9	37.8

**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	180	NA	CRISIL AAA/Stable
NA	Proposed Working Capital Facility	NA	NA	NA	170	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