11 Mar 2013
Update |Sector: Consumer‐Paints
Akzo Nobel
We attended the analyst meet of Akzo Nobel. Following are key takeaways and
potential implications for Asian Paints.
Akzo Nobel’s vision is to reach EUR 1 bn revenues in medium term. For 9MFY13,
it clocked revenues of INR16.9bn and as per management, the Indian business
contributes ~3% of parent’s turnover.
It targets to become the second largest player in Decorative Paints segment
(currently at number 4). Driving shares in mid‐lower end of the Paints industry is
a key focus area (Akzo is number 2 in Premium segment with 20% plus market
Management expects a challenging near term environment for the Decorative
paints industry and believes near term growth will be driven by volumes.
Pricing environment is expected to remain stable and may even see some
softening as raw material prices (especially Tio2) has seen the top, as per
Akzo’s focus is on improving dealer network strength (currently at 8500),
building brands (higher ad‐spends) and sustained innovation efforts.
Despite significant capacity build up by incumbents company does not see
concern for medium term volume growth in the industry.
From Asian Paint’s perspective, we believe the softening of RM environment
augurs well. However challenging near term demand environment can have
implications for Decorative paints volume growth. We have a BUY rating on
Asian Paints with TP of INR 5000.
We do not have a rating on Akzo Nobel.
Possible near term slowdown: weak macros may weigh on near term decorative
paints demand
Management expects potential slowdown/softening in Paints industry in the
near term. Slowdown in GDP growth, postponement of re‐painting decisions
and sluggish construction sector activity point towards near term softening.
Long term trajectory for Decorative segment continues to remain attractive –
led by urbanization, mix improvement in favor of Water based paints
(Emulsions) and evolving consumer lifestyles are key growth drivers.
Strong long term potential for Paints industry in India
AKZO NOBEL (Analyst meet takeaways):
Near term Paint
industry demand at risk; RM softening is well entrenched;
Implications for Asian Paints

Akzo Nobel
RM softening is here to stay; augurs well for Paints industry margins
Akzo believes softening in Tio2 (Titanium dioxide) prices is here to stay. In
management’s view, the upward spiral of Tio2 till FY12 was unnatural and it was
a matter of time before prices corrected.
Given the slowdown, it believes demand‐supply economics has shifted in favor
of Paint manufacturers and hence it expects soft RM prices to sustain.
Akzo procures Tio2 globally through its parents and benefits from parent’s
scale. Overall 50% of Akzo’s RM is imported.
Growth in paints industry in FY14 will entirely volume‐led as prices are expected
to be cut to pass on the benefits of input cost deflation.
Akzo strong in Premium segment; looking to build presence in mid market;
innovation a key growth driver
Akzo’s strength lies in premium segment (Dulux Velvet) where it enjoys 20% plus
market share and is the second largest player after APNT.
However, its market share in mid‐market segment is a miniscule ~4‐5% and is its
Achilles heel. Akzo is looking to expand its presence here by augmenting its
dealer network (8500 dealers, ~1/4
of APNT) and enhancing product portfolio.
It recently launched Dulux Promise and Dulux Rainbow in mid‐segment. Akzo
plays in the lower end through ICI brand.
Unlike its peers which are driving premiumisation, Akzo is trying to build its
presence in mid and lower end segments. While it has gross margin
repercussions, management believes better scale will provide operating
leverage, helping offset gross margin contraction.
Strong R&D capabilities is a key competitive advantage for Akzo. Innovation will
be a key strategy, going forward. Products launched in last 24 months now
contributed 20% of portfolio.
Capacity build up by industry indicates long term attractive of the market
It does not see any cause for worry by the collective strong capacity expansion
plans of key paints players.
Continued industry discipline in pricing will preclude any fears of possible price
based competition.
Akzo has 3 facilities for Decorative paints with total capacity of 150 million litres
per annum . It will double its capacity in 3‐5 years.
However, in the near term, it is adding 25% capacity in Gwalior and will move to
190 million litres per annum capacity by 1HFY14.
Blended royalty rates for Akzo will be ~2.5% and is locked for the next five years.
Recent merger of the coating subsidiaries will augment operational efficiencies
in management’s view and provide access to cash.
Akzo is not present in Auto OEM and operates only in Auto Refinishes.
Globally it has 490 products – in India it sells 15‐20 products.
Akzo has five manufacturing facilities (in Hyderabad, Mohali, Thane, Bangalore
and Mahad), of which four are dedicated to coatings and one for chemicals.
No intention of getting into service based businesses (e.g. Asian Paints Home
Company expects to be in investment mode in the near future – higher than
average brand spends, distribution expansion etc.
11 Mar 2013

Akzo Nobel
Implications for Asian Paints: Likely volume deceleration ; margin expansion to
Competitive intensity, as seen in the recent past, is set to increase. Management
acknowledged the strength of Asian Paint’s equity with trade and consumers
and believes APNT’s activity is helping expand the pie for everyone.
Sustained lower Tio2 prices can help drive gross margins/accelerate brand
spends to encourage volume growth. We note that APNT has taken a marginal
0.2% price cut in Jan‐13‐ first price cut in nearly 4 years.
Near term demand environment could remain sluggish owing to weak macro
environment and anemic discretionary spending. For 3QFY13, APNT had
reported 14% decorative paints volume growth.
APNT’s strong first mover advantage and
brand equity built over
decades will stand it in good stead in an environment of elevated competitive
intensity and sluggish consumer demand, in our view.
APNT trades at 32.3x FY14 and 25.7x FY15 EPS. Maintain our BUY rating with
TP of INR5000.
ASIAN PAINTS: PE at all time high
PB at all time high
11 Mar 2013

Akzo Nobel
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Akzo Nobel
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11 Mar 2013