Buy Akzo Nobel India - BP Wealth

Akzo Nobel India (ANI) is the subsidiary of Akzo Nobel, the Dutch based international coating giant. Most recently there was a consolidation in the Indian operations leading to a merger of the three group subsidiaries into one main powerhouse giving ANI the much needed scale to compete. Strong technological support from the parent company has helped the firm become a prominent player in the industrial paints segment, with the automobile industry being one of its main consumers along with other industrial clients.

Opportunities & Constraints

ANI has been showing some promising prospects over the last few years. The sales growth in FY 12 was contributed mainly by tier 2 and tier 3 cities. Creation of different brands has helped the firm compete in various segments of the market. Over time the costs will optimize because the strategic partnerships with vendors will result in protection from price fluctuations and foreign exchange translations. The ongoing assistance and collaboration by the parent has created new products and streamlined operations. Despite the promising future a few hurdles continue to remain. Uncertainty regarding the outcome of the business to be generated by the merged entity. Also the composition of the revenue to be generated from the consumer and the industrial businesses remain to be seen in the coming periods.

Investment Rationale

Reorganizing the product offerings specially the value oriented offerings

ANI has been on a rapid quest to constantly introduce new products and stay ahead of the general marketplace. This has led to several additions to their product portfolio and resulted in a wide array of offerings covering the lower as well as the mid ranges and also includes premium categories. The offerings cater to various segments of the market at multiple price points, ensuring that the company does not only generate enough volumes but also offers decent margins to ensure profitability and stability of earnings.ANI has been particularly focusing on the mid range value products as these offer the highest potential for growth and have been selling well in tier I and tier ii cities, that are expected to provide a reasonable contribution to the firms overall growth in the years to come.

Gearing up marketing initiatives to take on rivals

ANI has been beefing up its marketing activities and indulging in aggressive advertisement campaigns to promote the Dulux brand. As discussed earlier the advertisement spending in the decorative paint segment is generally higher as firms scamper in a bid to grab market share by building a strong brand and high levels of awareness. This will ensure that the playing field is leveled and the management expects the performance in the decorative segment to be better than the industrial segment.

Merger and amalgamation of subsidiaries to add value

ANI has merged three of its entities comprising of industrial coatings, chemicals and A&A along with its decorative paints division to transform the entity into a large powerhouse making it a fully vertically integrated chemicals provider. The amalgamation will provide benefits on various fronts such as scale, cost optimization and better financing abilities. Also branding and marketing activities through a single entity will be much more effective and easily recognizable. The revenue from the merged entities is expected to be 1billion Euros by 2015.

Outlook & Valuation

We have assigned a target PE multiple of 20x to our FY15 EPS of Rs 57.6 to arrive at a target price of Rs 1,152 with a Buy rating on the stock.

Source : Equity Bulls

Keywords