Rating Rationale
June 23, 2020 | Mumbai
Kansai Nerolac Paints Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.160 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
 
Rs.10 Crore Non Convertible Debentures CRISIL AAA/Stable (Reaffirmed)
Rs.30 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL 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 group's market leadership in the industrial paints segment in India and increasing focus on the decorative paints segment. Moreover, the group has leveraged its association with Kansai Paints Company Ltd, Japan (Kansai) to maintain its dominance in the automotive paints segment. The ratings also factor in its robust financial risk profile because of healthy gearing and sizeable cash generation. These strengths are partially offset by pricing pressure from automotive original equipment manufacturers (OEMs) and limited pricing flexibility in the decorative segment.
 
Decline in demand and temporary shutdown of plants in March-April 2020 due to the nationwide lockdown to control the Covid-19 pandemic will hit the group's performance in the near term. Revenue is expected to decline 15-20% in fiscal 2021 with a 18-20% drop in sales in the industrial segment (around 45% of revenue) and 7-12% fall in the decorative segment (around 55% of revenue). However, revenue should rebound in the next fiscal with gradual revival in demand across both segments. Despite the expected decline in revenue in the near term, the group will likely sustain its operating margin at 12-14% (13.7% in fiscal 2020) because of benign raw material prices and various cost reduction measures.
 
The financial risk profile remains strong, supported by net debt-free balance sheet and sizeable liquid surplus of around Rs 480 crore as on March 31, 2020. Capital expenditure (capex) is expected to be nominal at around Rs 170 crore for fiscal 2021 and Rs 150-175 crore for fiscal 2022 (largely towards expansion of the water-based paints plant in Visakhapatnam), and is likely to be funded entirely through internal accrual. Hence, CRISIL believes the group will sustain its net debt-free balance sheet over the medium term.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Kansai Nerolac and its subsidiaries and associates, together 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 group's strong position in the domestic industrial paints industry is underpinned by its technological tie-ups, varied product portfolio, and established relationships with major OEMs across passenger cars, utility vehicles, and two-wheelers. Furthermore, technological support from the parent enables it to introduce high-end products, and translate into 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 paints segment.
 
* Established position in the domestic decorative paint industry: The Kansai Nerolac group is the third-largest player in the domestic decorative paints segment. It accounts for 70-75% of the total domestic paints industry, and is supported by a strong network of 27,500 dealers, 20,000 colour-tinting machines, and 104 depots. The group has presence across product ranges and focuses on premium and innovative brands such Nerolac Impressions, metallic finish, Beauty Gold, Suraksha Plus, Excel Top Guard and water-based enamels which support sales growth. The Soldier brand focussed on the rural market is also seeing good traction.
 
* Benefits derived from the parent: Kansai is one of the leading paint manufacturing company and among the world's top 10 coating manufacturers. It produces automotive coatings, refinishes, industrial coatings, architectural and construction materials, and marine coating. It is particularly strong in the automotive paints segment. In a sector where technology is a key factor in sustaining market position and determining relationship with OEMs, Kansai has helped the Kansai Nerolac group attain market leadership, retain clients and win new ones.
 
* Robust financial risk profile, including strong liquidity: The group has tangible networth of Rs 3,707 crore as on March 31, 2020, and negligible debt on its books while gearing was healthy at 0.05 time.. Liquidity is also strong marked by cash and marketable securities of about Rs 480 crore as on March 31, 2020. However, the group's return on capital employed (RoCE) was moderate at around 18% in fiscal 2020 owing to subdued profitability in the subsidiaries, nominal returns on the large cash surplus and also the group's sizeable capital investments aggregating to Rs 506 crore over the last 2 years towards expanding capacities in its plants. 
 
Weaknesses:
* Pricing pressure from automotive OEMs: Raw material expenses in the paints industry account for 60-70% of the operating incomes of most players. Most of the raw materials, including solvents, phthalic anhydride and pentaerythritol, are petroleum products. The other important raw material is titanium dioxide, a vital pigment used in manufacturing paint and accounts for 20% of raw material cost. Besides, the group imports some inputs to ensure superior quality. Thus, operating margin remains susceptible to fluctuations in raw material prices and foreign exchange rates. Moreover, the group has limited pricing flexibility due to its relatively low bargaining power with auto OEMs, which are a major contributor to this segment's revenue. This has resulting in operating margin of 12-17% over the four years through fiscal 2020
 
* 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 mass-market products. Consequently, while paint manufacturers have flexibility to pass on increase in cost, their ability to absorb cost benefits and thereby increase margins is limited. While the Kansai Nerolac group will maintain its profitability, ability to increase it is limited by competition and decisions of the market leader.
Liquidity Superior

The group will sustain ample liquidity driven by expected cash accrual of more than Rs 350 crore each in fiscals 2021 and 2022 and liquid surplus of Rs 480 crore as on March 31, 2020. It also has access to fund-based working capital limits of Rs 158 crore, which are largely unutilised. CRISIL believes the group will have sufficient accrual and cash and equivalent to meet 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 strong market position in the industrial paints segment, support from parent Kansai and steady revenue contribution from the decorative segment. The expected increase in cash accrual against moderate internal requirement for capex and working capital will help maintain healthy financial risk profile and increase liquid surplus over the medium term.

Rating Sensitivity factors
Downward factors
* Decline in revenue by more than 20% because of steep fall in demand in both decorative and industrial segments
* Intense competition or steep increase in input prices and significantly lower sales from the automotive industry affecting profitability, with operating margin declining to less than 10% on sustained basis
* Sizeable debt-funded capex or acquisition, materially impacting key credit metrics
* Material reduction in liquid surplus
* Slower than expected ramp up in utilization levels for the new capacities, in turn affecting RoCE
About the Group

The Kansai Nerolac group, a 74.99% subsidiary of Kansai, has strong presence in the decorative and industrial paints segments. In the industrial paints segment, the group manufactures automotive coatings, high-performance coatings, powder coatings 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 Company Ltd, Japan (for heat-resistant paints), Protech Oxyplast Group, Canada (for powder coatings), and Cashew Ltd, Japan (automotive coatings). In June 2018, Kansai Nerolac entered the Bangladesh market by purchasing 55% stake in RAK Paints Ltd (RAK Paints). The group will offer technical support to RAK Paints.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 5,903 5,997
Profit after tax (PAT) Rs crore 516 448
PAT margin % 8.7 7.5
Adjusted debt/adjusted networth Times 0.05 0.03
Interest coverage Times 39.19* 81.40*
*not adjusted for any non-cash items

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs cr)
Rating assigned with outlook
NA Cash Credit* NA NA NA 160 CRISIL AAA/Stable
NA Non-convertible debentures# NA NA NA 10 CRISIL AAA/Stable
NA Commercial paper NA NA 7-365 days 30 CRISIL A1+
*Interchangeable with buyer's credit, working capital loan, letter of credit and bank guarantee
#Yet to be issued
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
KNP Japan Private Ltd Fully Consolidated Subsidiary; business linkages
Kansai Paints Lanka (Private)Ltd Fully Consolidated Subsidiary; business linkages
Marpol Private Ltd Fully Consolidated Subsidiary; business linkages
Perma Construction Aids Private Limited Fully Consolidated Subsidiary; business linkages
Nerofix Private limited Fully Consolidated Subsidiary; business linkages
RAK Paints Ltd Fully Consolidated Subsidiary; business linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  30.00  CRISIL A1+      19-06-19  CRISIL A1+  26-07-18  CRISIL A1+  26-07-17  CRISIL A1+  CRISIL A1+ 
Non Convertible Debentures  LT  10.00
23-06-20 
CRISIL AAA/Stable      19-06-19  CRISIL AAA/Stable  26-07-18  CRISIL AAA/Stable  26-07-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
Fund-based Bank Facilities  LT/ST  160.00  CRISIL AAA/Stable      19-06-19  CRISIL AAA/Stable  26-07-18  CRISIL AAA/Stable  26-07-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 160 CRISIL AAA/Stable Cash Credit* 160 CRISIL AAA/Stable
Total 160 -- Total 160 --
*Interchangeable with buyer's credit, working capital loan, letter of credit and bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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