Akzo Nobel India Ltd - Initiating Coverage - Kotak Securities

Price: Rs.1770
Recommendation: BUY
Target Price: Rs.2250
FY20E PE: 27.3x

Akzo Nobel NV, the world's largest paint company, operates in India through its subsidiary Akzo Nobel India (Akzo) operating primarily in the decorative paint segment through its well-known brand "Dulux" and in the area of performance coating and specialty chemicals. Akzo in India enjoys ~9% market share in decorative paints in India serviced through its network of 9,000 plus dealers and 90 depots and six manufacturing facilities. We expect the company to report ~14.5% earnings CAGR over FY18-20E driven by ~9% revenue CAGR and improving margins. Strong growth in volumes should translate into improvement in operating margin and return ratios for the company. Broadly, we are of the opinion that the demand environment to remain healthy for paint companies including Akzo which would enable them to continue to command premium valuation in the consumption Industry. Despite comparable performance, Akzo trades a steep discount to market leader Asian Paints and peers Kansai Nerolac and Berger in the paint industry. We initiate coverage on Akzo with a BUY rating based on 35x FY20E earnings, which is the average one year forward multiple for the company and also at 22% discount to PE multiple of peers and arrive at a target price of Rs 2250. We believe the valuation gap to narrow between Akzo and other players and which is one of the key triggers for the stock.

Key Investment arguments

- One of the key players in the decorative paint industry. Akzo is the fourth largest player in the decorative paint industry with a market share of 9%.The Company's Decorative Paints business manufactures the Dulux brand of paints for interior and exterior decoration and protection as well as products for surface preparation and wood care. In the decorative paints business, Akzo has presence in premium as well as mass market and economy segments, with strong positioning in the premium segment. The company continuously launches innovative new products to stay ahead of the competition and improve market share. Going forward, macro developments like nuclear families, availability of easy finance for housing, governments thrust on affordable housing etc. are expected to push up the per-capita consumption of paints in the country and sustain the growth momentum in decorative segment for the company.

- Emerging player in industrial segment. Industrial segment primarily involves marine coating, powder coating, metal coating and automotive paints. Key drivers for the industrial segment include infrastructure support provided by the government and the private sector, construction of various freight corridors and industrial parks, various policies of the Indian government revolving around housing projects, smart city mission and 'Make in India' policy and most importantly growth of the automotive segment. Akzo has presence in each area of industrial paints which contributes 10% of its overall revenues.

- Building on strong chemical platforms. In Specialty Chemicals segment, Akzo operates in Polymer Chemistry and Surface Chemistry businesses, which cater to oil & gas, personal care and agrochemical industries. It is one of the most specialised areas under painting and Akzo is an established player in the segment. In FY17, this segment recorded a turnover of Rs 2.65 bn (+34% YoY) with PAT of Rs 214 mn (+42% YoY). Akzo is in final stages to sell the specialty chemical business, post which we will update our financials accordingly.

- Continued focus on marketing and improved products. Despite slowdown, Akzo is focused on improving its brand image and improve geographical reach through increasing its dealer base, effective regular advertisement, investment in R&D and introduction of niche products which should yield results for the company in the long run.

Valuation

The listed players in the paint industry have been trading at premium valuations as the sector continues to perform well exhibiting double digit volume growth for the last 20 years. The prospects also remain healthy with strong GDP growth, rising disposable income, shortening re-painting cycle and increasing per-capita consumption of paints. Amongst the established players in an Oligopoly market, Akzo trades at a discount to peers and market leader. We prefer to use a P/E approach to value the stock (like any other consumer company) and give a value of 35x FY20E earnings which is the average one year forward multiple for the company and also at 22% discount to PE multiple of peers and arrive at a target price of Rs 2250. We believe the valuation gap to narrow between Akzo and other players and which is one of the key triggers for the stock. We initiate coverage on Akzo with a BUY rating and at TP of Rs 2250.

Risk and concerns

- Weak macro environment leading to poor demand for decorative paints
- Prolong slowdown in the economy leading to weak capex cycle impacting industrial demand
- Sharp increase in raw material prices coupled with inability to take price hikes
- Increasing competition

Company Background

Akzo Nobel NV, the world's largest paints company, operates in India through its subsidiary Akzo Nobel India (AKZO) which it acquired as a part of the global acquisition of Imperial Chemicals Industries (ICI) Plc. in FY08 for USD16bn. Its brand portfolio includes well-known brands such as Dulux, Sikkens, Glidden and International. The company has it's headquarter in Amsterdam and operates in more than 80 countries. Akzo in India enjoys ~9% market share in decorative paints in India serviced through its network of 9000 plus dealers, 90 depots and six manufacturing facilities.

Shares of Akzo Nobel India Limited was last trading in BSE at Rs.1797 as compared to the previous close of Rs. 1777.25. The total number of shares traded during the day was 872 in over 150 trades.

The stock hit an intraday high of Rs. 1830 and intraday low of 1785.15. The net turnover during the day was Rs. 1581895.

Source : Equity Bulls

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