Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently interacted with the management of Akzo Nobel India (Akzo Nobel) for an update on the company’s
business and its future growth strategy. Based on our interaction, we find Akzo Nobel poised to tread a strong
growth trajectory over the next 4-5 years on the back of its new-found aggression and with focus no longer
confined to just the top segment. Akzo Nobel has shed the lethargy characteristic of the erstwhile ICI and is
aggressively looking to capture the #1 and #2 slots in its business segments. The step-up in advertising spends
and planned capex of Rs2.5bn (~2x the current net block) are initial steps in this direction. With an ambitious
target of Euro1bn in revenues for India (including three unlisted entities) by 2015, we expect the listed Akzo Nobel
India entity to at least double in size over the next four years from Rs11bn currently. At 11-12%, EBITDA margins
are mediocre but high gross margins of 47% (500bp higher than for Asian paints) provide Akzo Nobel adequate
scope to improve EBITDA margins as it acquires scale. Further, the company has high cash and cash
equivalents of Rs10bn (1/3rd of market cap) on its book, amply sufficient to fund organic as well as inorganic
growth initiatives. At 17.7x FY12E earnings (Bloomberg consensus), the stock trades at a 45% discount to Asian
Paints and a 30% discount to all peers on PB.
Akzo Nobel – the changing contours of India business
For much of the last decade, even as companies like Asian Paints fortified their presence in the market, the erstwhile
ICI, with its focus largely on the premium end of the portfolio, lack of aggression and minimal risk taking appetite,
remained a laggard. With Akzo coming on board, we see visible signs of change. After two years of consolidation, the
company looks poised for growth. Consider the following:
a) Product portfolio revised; focus extended to mid tier segment as well: Akzo Nobel has divested non-core businesses
like starch and adhesives. According to the management, the focus is now clearly on the paints business – both
decorative and industrial. Further, the company is establishing presence in the mid tier segment (>33% of category) as
well, in addition to the top end (<20% of category). The initiative, we believe, will provide Akzo Nobel access to the fast
growing Tier II and rural markets. The wider customer base would enable Akzo Nobel to capitalize on uptrading from
low tier to mid tier as well as mid tier to top tier.
b) Increased aggression underlines the growth strategy: Akzo Nobel, to back up innovation (new products such as
Weathershield Sunreflect) and drive higher brand preference, has increased its A&P spend from ~6% to ~8% of sales
in the past couple of years. In addition, it plans to launch at least 1-2 new products every year to further expand its
portfolio. The company has chalked out an ambitious Euro 1bn revenue plan for India by 2015 (including three unlisted
entities, viz. Akzo Noble Car Refinishes, Akzo Nobel Chemicals and Akzo Noble Coatings) with a goal of being #1 or
#2 in every segment that it operates in. This would entail the listed entity to at least double its revenues over the next
four years.
c) Capex- Signals commitment: Akzo Nobel has a planned capex of Rs2.5bn (almost twice the current net block of
Rs1.4bn) to double its paints capacity from ~80,000 tonnes to ~160,000 tonnes over the next three years. The
expansion is in line the intent to double the revenues at full capacity. The capex commitment further marks Akzo
Nobel’s commitment to grow the India operations.
While execution remains the key, early signs of success are visible with organic revenues registering 14% CAGR in the
last four years and an increase of 16% in FY11
A liquid balance sheet offers significant scale-up opportunities
Akzo Nobel is currently sitting on a pile of liquid assets (~Rs10bn of cash and cash equivalents as of FY11), which
translates to almost 30% of its market cap and 1x revenues. This, we believe, is amply sufficient to fund its future capex
plans as also inorganic initiatives without straining the balance sheet.
Valuations appear inexpensive
At 17.5x FY12E earnings, the stock trades at a 45% discount to Asian Paints and at a marginal discount to other peers
on PE basis. However, it trades at a 30% discount to its nearest peer on Price to Book. We believe there is scope for rerating
as Akzo embarks on the high growth trajectory, leverages scale to improve EBITDA margins and deploys cash
for growth opportunities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently interacted with the management of Akzo Nobel India (Akzo Nobel) for an update on the company’s
business and its future growth strategy. Based on our interaction, we find Akzo Nobel poised to tread a strong
growth trajectory over the next 4-5 years on the back of its new-found aggression and with focus no longer
confined to just the top segment. Akzo Nobel has shed the lethargy characteristic of the erstwhile ICI and is
aggressively looking to capture the #1 and #2 slots in its business segments. The step-up in advertising spends
and planned capex of Rs2.5bn (~2x the current net block) are initial steps in this direction. With an ambitious
target of Euro1bn in revenues for India (including three unlisted entities) by 2015, we expect the listed Akzo Nobel
India entity to at least double in size over the next four years from Rs11bn currently. At 11-12%, EBITDA margins
are mediocre but high gross margins of 47% (500bp higher than for Asian paints) provide Akzo Nobel adequate
scope to improve EBITDA margins as it acquires scale. Further, the company has high cash and cash
equivalents of Rs10bn (1/3rd of market cap) on its book, amply sufficient to fund organic as well as inorganic
growth initiatives. At 17.7x FY12E earnings (Bloomberg consensus), the stock trades at a 45% discount to Asian
Paints and a 30% discount to all peers on PB.
Akzo Nobel – the changing contours of India business
For much of the last decade, even as companies like Asian Paints fortified their presence in the market, the erstwhile
ICI, with its focus largely on the premium end of the portfolio, lack of aggression and minimal risk taking appetite,
remained a laggard. With Akzo coming on board, we see visible signs of change. After two years of consolidation, the
company looks poised for growth. Consider the following:
a) Product portfolio revised; focus extended to mid tier segment as well: Akzo Nobel has divested non-core businesses
like starch and adhesives. According to the management, the focus is now clearly on the paints business – both
decorative and industrial. Further, the company is establishing presence in the mid tier segment (>33% of category) as
well, in addition to the top end (<20% of category). The initiative, we believe, will provide Akzo Nobel access to the fast
growing Tier II and rural markets. The wider customer base would enable Akzo Nobel to capitalize on uptrading from
low tier to mid tier as well as mid tier to top tier.
b) Increased aggression underlines the growth strategy: Akzo Nobel, to back up innovation (new products such as
Weathershield Sunreflect) and drive higher brand preference, has increased its A&P spend from ~6% to ~8% of sales
in the past couple of years. In addition, it plans to launch at least 1-2 new products every year to further expand its
portfolio. The company has chalked out an ambitious Euro 1bn revenue plan for India by 2015 (including three unlisted
entities, viz. Akzo Noble Car Refinishes, Akzo Nobel Chemicals and Akzo Noble Coatings) with a goal of being #1 or
#2 in every segment that it operates in. This would entail the listed entity to at least double its revenues over the next
four years.
c) Capex- Signals commitment: Akzo Nobel has a planned capex of Rs2.5bn (almost twice the current net block of
Rs1.4bn) to double its paints capacity from ~80,000 tonnes to ~160,000 tonnes over the next three years. The
expansion is in line the intent to double the revenues at full capacity. The capex commitment further marks Akzo
Nobel’s commitment to grow the India operations.
While execution remains the key, early signs of success are visible with organic revenues registering 14% CAGR in the
last four years and an increase of 16% in FY11
A liquid balance sheet offers significant scale-up opportunities
Akzo Nobel is currently sitting on a pile of liquid assets (~Rs10bn of cash and cash equivalents as of FY11), which
translates to almost 30% of its market cap and 1x revenues. This, we believe, is amply sufficient to fund its future capex
plans as also inorganic initiatives without straining the balance sheet.
Valuations appear inexpensive
At 17.5x FY12E earnings, the stock trades at a 45% discount to Asian Paints and at a marginal discount to other peers
on PE basis. However, it trades at a 30% discount to its nearest peer on Price to Book. We believe there is scope for rerating
as Akzo embarks on the high growth trajectory, leverages scale to improve EBITDA margins and deploys cash
for growth opportunities.
No comments:
Post a Comment