May 23, 2012

RESULT UPDATE Q4FY12

Akzo Nobel India

Sensex: 15,948 CMP: INR 878 Target: INR 848 Paints

Akzo Nobel India (Akzo) reported sales and PAT of INR 9,718mn & INR 782mn respectively in Q4FY12 which included FY12 sales of 3 merged businesses. EBIDTA margin for the post-merger entity stands at 8.78% for FY12 compared to 12.13% in FY11 (pre-merger). Post merger, decorative paints business accounts for ~60% of the overall sales which has reduced from ~85% previously. Consequently we have reduced our earnings multiple from 25x to 22x. Going ahead, we expect overall sales and operating profits to grow at a CAGR of 15% and 22% respectively over FY12-14.
Results not disclosed separately; estimations drawn Due to absence of separate disclosure of results, we have estimated sales of INR 3,451mn in Q4FY12, a YoY growth of 28% and EBIDTA margins at 8.76%, down 91bps YoY for the pre-merger entity. PAT is estimated at INR 473mn, a YoY decline of 18%. For the full year, sales are estimated at 13,612mn, a YoY growth of 24%. EBIDTA margins at 9.53% declined by 270bps YoY and PAT at INR 1,709mn reported a fall of 3%. We estimated other business FY12 sales of INR 6,267mn, a YoY growth of 11%. Margins remained under pressure High RM cost pressure and merger of lower margin industrial paints businesses dented the post-merger EBIDTA margin which came at 8.78%. The key RM TiO2 increased by ~42% YoY. Other crude based derivatives also continued to put pressure owing to high crude prices and unfavourable exchange rate movement. Going ahead, we expect pressure on margins to reduce on the back of visible signs of moderation in RM cost. We expect EBIDTA margins of the post-merger entity to expand by 86bps to 9.64% by FY14. Uncertainty on other businesses performance prevails After winning the vote on merger, company merged 3 unlisted group entities (namely Akzo Nobel Coating India Pvt Ltd, Akzo Nobel Car Refinishes India Pvt Ltd and Akzo Nobel Chemicals (India) Ltd) into listed company (Akzo), effective from April, 2011. Company issued 11.1mn in a swap agreed for the merger diluting its equity base by 30%.
Shareholding % Promoters FIIs DIIS Others Mar-12 59.64 1.18 17.30 21.88 Key Data BSE Code NSE Code Bloomberg Code Reuters Code Shares Outstanding (mn) Face Value Mcap (INR bn) 52 Week H/L
Nov-11 Dec-11 Aug-11 Sep-11 May-11 Feb-12 Apr-12 Oct-11 Jun-11 Jul-11 May-12 Mar-12 Jan-12

Due to lack of information regarding other businesses, we have assumed 15% CAGR in combined sales growth in other businesses (32% of post-merger FY12 sales) over the next two years. Decorative paints business is expected to register sales CAGR of 15.32% over FY12-14. Other highlights - Company announced buyback (2.7% post-dilution) at maximum price of INR 920, amounted at INR 1.2bn Post merger, paints manufacturing capacity stands at ~0.16mn MT. Company plans to set-up green-field plant at Gwalior at a capex of INR 2bn and with capacity of ~0.05mn MT, to be commissioned by FY14E

Outlook & Valuation Akzo reported good performance in its decorative paints business in FY12 on the back of ~16-17% volume growth. Company's efforts to increase its market share by launching new mass market products have been paying well. With addition of industrial segment post merger, company has strengthened its position in overall paint industry with wide portfolio offerings besides reaping benefits of synergies from two businesses. However, since industrial paints now account for ~40% of company's sales, we have lowered our earnings multiple to 22x from 25x earlier. We roll-over our multiple to FY14 earnings and revise our target price to INR 848 (22x FY14 operational EPS plus INR 204/share cash). We recommend Hold.
(INR mn) 500710 AKZOINDIA AKZO IN ICI.BO 36.8 10 42.1 1,045/693 9,155 0.30 Net Sales Growth (%) EBIDTAM (%) Adj. PAT Operating PAT Growth (%) FY11 10,968 15.81% 12.13% 1,676 733 5.91% FY12# 19,878 81.24% 8.78% 2,018 917 25.12% 4.62% 19.13 2.46% 19.35 16.21 (0.75) 15.93% FY13E 22,873 15.06% 8.92% 1,963 1,081 17.86% 4.73% 23.20 2.28% 20.84 15.46 (0.69) 13.97% FY14E 26,173 14.43% 9.64% 2,160 1,364 26.18% 5.21% 29.28 2.28% 18.94 12.45 (0.65) 15.31%

Relative Price Performance

130 120 110 100 90 80

Optng. PAT Margins (%)6.69% Operational EPS Dividend Yield (%) P/E (x) EV/EBIDTA 19.91 2.18% 18.13 15.24 (0.93) 16.09%

2W Avg. Qty, NSE Beta 1 yr. Nifty

Net Debt/Equity RoANW (%)

Akzo

Sensex

Sumit Duseja
sumit.duseja@spagroupindia.com Ph. No. 91 4289 5600 Ext.630

Paints Quarterly Standalone Financial

Particulars (INR mn) Net Sales Other Operating Income Total COGS Gross Profit Gross Profit Margins % Employee Cost as a % of sales Other Expenditure as a % of sales Total Expenditure EBIDTA EBIDTA Margins % Depreciation EBIT (excld. Other income) Other Income EBIT Interest Income/(expense) - (Net) Exceptional Items EBT Tax Expense (Total) PAT PAT Margins EPS
*Not Comparable

Q4FY12* 9,336 381 9,718 5,854 3,864 39.76% 809 8.33% 2,295 23.6% 8,958 759 7.81% 179 581 381 962 (30) 931 149 782 8.05% 21.24

Q4FY11 2,666 30 2,696 1,440 1,257 46.61% 171 6.34% 825 30.60% 2,435 261 9.67% 54 206 476 682 6 688 110 578 21.44% 15.69

YoY (%) 250.20% 1170.67% 260.44% 306.66% 207.50% -6.85% 373.33% +199bps 178.22% -698bps 267.83% 191.37% -185bps 229.52% 181.35% -19.95% 40.96% -613.56% 35.34% 35.12% 35.39% -1338bps 35.39%

Q3FY12 3,688 25 3,713 2,066 1,648 44.37% 243 6.54% 1,128 30.39% 3,437 276 7.44% 67 210 153 362 (2) 360 68 293 7.9% 7.94

QoQ (%) 153.13% 1443.32% 161.71% 183.41% 134.50% -461bps 233.22% +179bps 103.40% -677bps 160.66% 174.71% +37bps 167.37% 177.05% 149.77% 165.56% 1494.74% 158.55% 119.94% 167.49% +17bps 167.49%

FY12* 19,425 453 19,879 11,391 8,488 42.70% 1,473 7.41% 5,269 26.51% 18,133 1,746 8.78% 366 1,379 1,026 2,405 58 2,463 446 2,018 10.15% 54.78

FY11 10,876 92 10,968 5,775 5,193 47.35% 697 6.35% 3,165 28.86% 9,637 1,331 12.13% 217 1,114 957 2,071 15 113 2,199 433 1,766 16.10% 47.95

YoY (%) 78.61% 391.12% 81.24% 97.23% 63.45% -465bps 111.39% +106bps 66.47% -235bps 88.15% 31.16% -335bps 69.16% 23.77% 7.23% 16.13% 289.33% -100.00% 12.04% 3.03% 14.25% -595bps 14.25%

4000 2000 0 -2000 Q1 FY10 Q2 FY10 6% -5%

Quarterly Sales Trend (INR mn) 22% 21% 19% 5% 0% 2% 20% 26% 23%

28% 40% 20% 0% -20%

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q4FY12E

Q1FY12

Q2FY12

Q3FY12

Quarterly EBIDTA Trend (INR mn) 600 16% 15% 14% 13% 13% 500 13% 11% 10% 10% 400 8% 7% 9% 300 200 100 0 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q4FY12E Q1FY12 Q2FY12 Q3FY12

20% 15% 10% 5% 0%

Net Sales (LHS)

Source: Company, SPA Research

YoY Growth (%)

EBIDTA (LHS)

EBIDTAM (%)

Paints

Financials Standalone
Income statement Year End March (INR mn) Net Sales Growth (%) Cost of Goods Sold Employee Cost Other Operating Expenses Total Operating Expenses EBIDTA (excl. OI) EBIDTA Margin (%) Depreciation/Amortization EBIT Interest Expense Other Income Exceptionals EBT Tax Expenses PAT Adjustment to PAT APAT Growth (%) Operating PAT Growth (%) Operating PAT Margin (%) FY11 10,968 15.81% 5,775 697 3,165 9,637 1,331 12.13% 217 1,114 15 987 113 2,199 433 1,766 (90) 1,676 5.21% 733.2 5.91% 6.69% FY12# 19,878 81.24% 11,391 1,473 5,269 18,133 1,746 8.78% 366 1,379 20 1,104 2,463 446 2,018 2,018 20.39% 917.4 25.12% 4.62% FY13E 22,873 15.06% 13,163 1,670 5,999 20,831 2,041 8.92% 422 1,619 17 1,009 2,610 647 1,963 1,963 -2.69% 1,081.3 17.86% 4.73% FY14E 26,173 14.43% 14,990 1,884 6,775 23,649 2,524 9.64% 487 2,037 16 850 2,872 711 2,160 2,160 10.02% 1,364.3 26.18% 5.21% Balance Sheet Year End March (INR mn) Sources of Funds Share Capital Reserves and Surplus Total Networth Total Debt Deferred Tax Liability (Net) Total 368 10,548 10,916 41 15,399 480 13,931 14,411 26 22,080 466 13,235 13,701 52 22,559 369 14,057 14,523 23 24,622 FY11 FY12# FY13E FY14E

Application of Funds Net Block CWIP Investments Current Assets Current Liabilities Net Current Assets Total 1,419 145 9,850 3,986 4,442 (456) 15,399 3,565 150 10,035 8,331 7,644 687 22,080 4,192 300 8,598 9,469 8,806 663 22,559 4,965 240 8,581 10,836 10,077 759 24,622

Key Ratios Year End March Per Share Data (INR) Adj. EPS Growth (%) Operational EPS Growth (%) DPS BVPS Return Ratios (%) RoACE RoANW RoIC Liquidity Ratios Net Debt/Equity Interest Coverage Ratio Current Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Payable Days Valuation Ratios P/E (x) P/BV (x) Dividend Yield (%) EV/Net Sales (x) EV/EBIDTA (x) FY11 45.50 5.21% 19.91 5.91% 18.00 296.36 12.77% 16.09% 17.80% (0.93) 74.29 0.90 0.71 79 25 157 18.13 2.78 2.18% 1.86 15.24 FY12# 42.07 -7.54% 19.13 25.12% 20.00 300.47 15.58% 15.93% 18.48% (0.75) 68.96 1.09 0.88 78 27 128 19.35 2.71 2.46% 1.46 16.21 FY13E 42.14 0.16% 23.20 17.86% 20.00 294.04 13.54% 13.97% 13.63% (0.69) 94.37 1.08 0.70 99 39 157 20.84 2.99 2.28% 2.01 15.46 FY14E 46.36 10.02% 29.28 26.18% 20.00 311.68 14.75% 15.31% 15.77% (0.65) 128.39 1.08 0.73 99 39 158 18.94 2.82 2.28% 1.75 12.45

Cash Flow Year End March (INR mn) EBT Less: Other Income/Exceptionals Add: Depreciation Add: Interest Paid Taxes Paid Change in Working Capital Others Cash Flows from Operations (a) Capital Expenditure Asset Sales Change in Investment Others Cash Flows from Investments (b) Change in Equity Debt Raised/(Repaid) Dividend paid (including tax) Interest Paid Cash Flows from Financing (c) Net Change in Cash (a+b+c) Opening Cash Closing Cash FY11 2,086 1,100 217 15 (458) 532 (707) 585 (379) 184 312 157 273 (683) (15) (698) 160 9,743 9,903 FY12# 2,463 1,104 366 20 (335) 1,058 438 2,906 (1,250) 257 (993) (771) (20) (791) 1,122 9,903 11,025 FY13E 2,610 1,009 422 17 (673) (116) 548 1,800 (1,200) 113 (1,087) (1,200) (1,122) (17) (2,339) (1,626) 11,025 9,398 FY14E 2,872 850 487 16 (682) (20) 604 2,427 (1,200) (21) (1,221) (1,090) (16) (1,106) 99 9,398 9,498

#Financials are post-merger from FY12 onwards and not comparable with FY11

Paints

Sharad Avasthi

Dy Head - Equity Research

sharad.avasthi@spagroupindia.com

Tel.: +91-33-4011 4800

Ext.832

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