Financial Statement Analysis

Project Report on Financial

Health and Status of Kansai

Nerolac Paints Limited

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Table of Contents Indian Paint Industry ....................................................................................................................... 3

Sector trends and specifics .......................................................................................................... 3

Demand and Growth ................................................................................................................... 3

Threats ......................................................................................................................................... 4

Opportunities ............................................................................................................................... 4

Market Profile ............................................................................................................................. 5

Overseas Expansion & Current Trends ....................................................................................... 6

Kansai Nerolac Paints Limited ....................................................................................................... 7

The origin and evolution of Nerolac ........................................................................................... 7

Vision Values and Cultural Ethos ............................................................................................... 8

Product offerings ......................................................................................................................... 8

Organizational strengths .............................................................................................................. 8

Management ................................................................................................................................ 9

Overview of Annual Report .......................................................................................................... 10

Financial Highlights of KNPL in recent years .......................................................................... 10

Management Discussion and Analysis ...................................................................................... 10

Directors’ Responsibility Statement.......................................................................................... 11

The Company’s Independent Auditor ....................................................................................... 12

The Income Statement ............................................................................................................... 12

Significant Accounting Policies ................................................................................................ 13

The Balance Sheet ..................................................................................................................... 15

Cash Flow Statement ................................................................................................................. 16

Financial Health of the Company ................................................................................................. 16

Liquidity Ratios ......................................................................................................................... 17

Activity Ratios........................................................................................................................... 17

Leverage Ratios ......................................................................................................................... 18

Profitability Ratios .................................................................................................................... 18

Market Ratios ............................................................................................................................ 19

Summary ....................................................................................................................................... 19

References ..................................................................................................................................... 19

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Indian Paint Industry

The success story of the 100 years old Indian paint industry began when Shalimar Paints set up a

factory in Calcutta the way back in 1902. In the beginning the industry was mainly comprised of

number of small producers and very few major players. Immediately after the second world war,

though the Indian Paint Industry had seen numerous local entrepreneurs, the foreign companies

like Goodlass Walls (now Kansai Nerolac), ICI, British Paints (now Berger Paints), Jenson &

Nicholson and Blundell & Eomite have been dominating the market for many years.

Sector trends and specifics

The Indian paint industry is mainly segmented into two categories – industrial and decorative

paints. While industrial paints are used for protection against corrosion and rust on steel

structures, vehicles, white goods and appliances, decorative paints are used in protecting

valuable assets like buildings. In most developed countries, the ratio of decorative paints vis-à-

vis industrial paints is around 50:50. But, in India the industrial paint segment accounts for only

30% of the paint market while the decorative paint segment accounts for 70% of paints sold in

India. Within the decorative segment, the share of exterior paints is 21%, interior emulsions

11%, distempers 30%, solvent-based enamel paint 36% and wood finishes two percent. The

exterior category, particularly exterior emulsions, is the fastest growing segment at 20% for the

last three years. The industrial coatings segment includes high performance coatings with 30%

market share, powder coatings with ten percent, coil coatings with five percent, marine coatings

five percent and automotive coatings 50%.

Demand and Growth

The demand for decorative paints is highly price-sensitive and also cyclical. Monsoon is a slack

season while the peak business period is Diwali festival time, when most people repaint their

houses. The industrial paints segment, on the other hand, is a high volume-low margin business.

Total paint and coatings demand in India in 2008 amounted to 1.64 million tons, of which

decorative coatings represented 79% or 1.3 million tons. The industrial coatings market in India

still remains relatively small in comparison at about 340,000 tons, and this is dominated by

structural and infrastructural applications associated with the protective coatings market.

Despite having recorded a healthy growth of 13% annually in the 1990s, the per capita

consumption of paints in India is very low at 0.5 kg per annum as compared to 4 kg in the South

East Asian nations and 22 kg in developed countries. And the global average per capita

consumption is 15 kg.

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Threats

The industry is raw-material sensitive. Of the 300 odd raw materials, nearly half of them are

imported petroleum products. Thus, any deficit in global oil reserves affects the bottom-line of

the players. The demand for paints is relatively price-elastic but is linked to the industrial and

economical growth. Mainly the construction and automobile sector throws shades of grey across

the industry spectrum during recession in those sectors. Evidently the slowdown in automotive

business had a direct impact on the growth of Industrial paint sale business this year. Despite

having phenomenal real GDP growth at 9% for the last five years, the consumer durables basket,

that forms a part of Index of Industrial Production (IIP), has shown a negative growth during

2007-08. This had a direct impact on the paint sale business last year.

Opportunities

Although industry figures expect some modest abatement in growth in the Indian paint and

coatings market, particularly in the short‐term, the prevailing economic climate of infrastructure

investment and renewal holds the key to most of the growth in the Indian coatings market.

Other opportunities in India are pegged to the transport sector. Car ownership in India stands at

little more than one percent. However, rising affordability and the launch of economical cars

such as the Tata Nano are expected to propel the market for OEM coatings and refinishes in the

coming years. Higher demand for marine paints can be expected in the next decade, once

investments in ports and port development have started to reach fruition. As India is hopeful of

competing with other established shipbuilding nations, the multinationals are likely to find

plentiful opportunity in India, given the compliance requirements imposed by effects of

international legislation on marine paints.

Powder coatings are also a good growth market in India, growing at about ten percent per

annum, which is typical of the mean coatings segment growth in the country. This segment has

been finding new applications in India and represents one area in which the consciousness of

VOCs and the environment has been raised. Indian companies are now beginning to appreciate

the benefits of cleaner technology once initial investment in finishing in this area has been made.

However, it is in the decorative coatings market that the greatest volume growth can be expected.

Almost another 900,000 tons of decorative paints may well be in use by 2013, prompted by a

whole breadth of different applications, ranging from the construction of housing and apartment

blocks to civil and tourist amenities. The structure of the decorative paint market in terms of

quality is changing very slowly with growth in the premium and economy sectors squeezing the

intermediate quality segment to about 35‐40% of demand. Other habits are changing too

including the formal entry of Sherwin‐Williams, Jotun and Nippon Paint into the Indian

decorative sector, which has started to bring a much greater international dimension and much

bigger budgets to the Indian decorative paint market. Although the arrival of these companies in

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the segment has not had a major impact on the market yet, Indian consumers are becoming more

experimental and adventurous in their use of paint and as a result many traditional ideas are

being given up in favor of trying something different, especially as the Indian population is a

relatively young one.

Market Profile

The organized sector of India’s paint and coatings market holds a whopping 65% share of the

approximately Rs. 13600 crore industry, while the balance is made up of over 2000 unorganized

units. There are now twelve major players in the organized sector namely Asian Paints, Kansai

Nerolac, Berger, ICI, Shalimar, and so on. Recent years, the industry has attracted world leaders

like Alzo Nobel, PPG, DuPont and BASF to set up base in India to offer product ranges such as

auto refinishes, powder coatings and industrial coatings.

Asian Paints (APIL) is the industry leader with an overall market share of 33 per cent in the

organized paint market. It has the largest distribution network among the players and its

aggressive marketing has earned it strong brand equity. The Berger Group and ICI share the

second slot in the industry with market shares of 17 per cent each. GNPL has a market share of

15 percent in the organized sector.

APIL dominates the decorative segment with a 38 per cent market share. The company has more

than 15,000 retail outlets and its brands Tractor, Apcolite, Utsav, Apex and Ace are entrenched

in the market. GNPL, the number-two in the decorative segment, with a 14 per cent market share

too, has now increased its distribution network to 10,700 outlets to compete with APIL

effectively. Berger and ICI have 9 per cent and 8 per cent shares respectively in this segment

followed by J&N and Shalimar with 1 and 6 per cent shares. On the other hand, GNPL

dominates the industrial paints segment with 41 per cent market share. It has a lion's share of 70

per cent in the OEM passenger car segment, 40 per cent share of two wheeler OEM market and

20 per cent of commercial vehicle OEM market. It supplies 70 per cent of the paint requirement

of Maruti, India's largest passenger car manufacturer, besides supplying to other customers like

Telco, Toyota, Hindustan Motors, Hero Honda, TVS-Suzuki, Mahindra & Mahindra, Ashok

Leyland, Ford India, PAL Peugeot and Bajaj Auto. GNPL also controls 20 per cent of the

consumer durables segment with clients like Whirlpool and Godrej GE. The company is also

venturing into new areas like painting of plastic, coil coatings and cans. APIL, the leader in

decorative paints, ranks a poor second after Goodlass Nerolac in the industrial segment with a 15

per cent market share. But with its joint venture Asian-PPG Industries, the company is

aggressively targeting the automobile sector. It has now emerged as a 100 per cent OEM supplier

to Daewoo, Hyundai, Ford and General Motors and is all set to ride on the automobile boom.

Berger and ICI are the other players in the sector with 10 per cent and 9 per cent shares

respectively. Shalimar too, has an 8 per cent share.

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Overseas Expansion & Current Trends

Overseas Expansion

If the global Goliaths are foraying into the Indian paints market aggressively, the Indian paint

companies are also spreading their wings. Asian Paint exports its paints to over 15 countries. It

also has joint ventures in Fiji, Tonga, Nepal, Vanuatu, Solomon Islands, Australia, Oman and

Mauritius. In October 1999 it acquired 76 per cent equity stake in Delmege Gorsyth & Co

(Paints) Ltd, the second largest paint company in Sri Lanka with a 12 per cent market share in

Sri Lanka's Paint Industry. Within a short span of just five years, the company has emerged as

the number one player in these markets.

Current trends

The Indian paint and coatings industry is riding high on the growth in the Indian automobile

industry, new construction in the housing segment and improving infrastructure throughout the

country. Thirty percent of the paint business is comprised of new construction projects. GDP

growth projections of six to 6.5% in the current year mean a growth of nine to ten percent in

Indian paint business. The growth will be 12-13% in the industrial segment and eight to nine

percent for decorative paint. The Indian automobile industry has been performing remarkably

well and will benefit the market leader in the segment, Goodlass Nerolac.

As for the future, the industry has predicted a CAGR of eight to nine percent for the next five

years compared to last year's growth levels of 27.4% for cars and 8.9% for two wheelers. The

Indian housing industry is likely to do well in the current year as well, recording a growth rate of

35% last year. As a result of the overall health of India's economy, it is safe to predict a nine to

ten percent growth rate for the Indian paint industry in the next five years.

Consumers can look forward to new product launches, some for application in special areas.

Companies will be increasing the value added services available to customers by offering a

variety of finishes through specialized and trained applicators. There will be more options like

ranges of colors/finishes for wood applications through the tinting machines. Additionally, the

trend towards water-based coatings is likely to set in both for industrial and decorative

applications. While India has not yet embraced the DIY concept as cheap labor is still available,

exclusive retail chain stores sponsored and run by Indian paint companies will become a reality.

The Indian paint industry has progressed well and moving ahead is likely to be influenced by

several factors including new technologies, new innovative products, new associations,

consolidation of industry and poor performers getting out of the market. Ultimately, in the years

ahead there will be only four or five key players operating in the Indian paint market.

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Kansai Nerolac Paints Limited

Established in the year 1920, Kansai Nerolac Paints Ltd. (KNP) has built a good image in the

market. It is the #1 company (41% market share) in the industrial, automotive and Powder

coating business and #2 (18% market share) on an overall basis.

The origin and evolution of Nerolac

2006

GNP renamed to Kansai Nerolac Paints Ltd.

1999

Became a subsidiary of Kansai Paint Company Ltd as the later took over entire stake of Tata Forbes

1986

Became a joint venture of Tata Forbes and the Kansai Paint Co. Ltd

1983

Technical collaboration with Kansai Paints Co. Ltd., Japan

1976

Became a part of Tata Forbes Gokak

1957

Emergence of Goodlass Nerolac Paints Ltd. and it went public

1946

Company Renamed as Goodlass Wall Pvt. Ltd

1933

Emergence of Goodlass Wall (India) Ltd. as Lead Industries Group Ltd. acquired Gahagan Paints

1930

Three British companies merged to formulate Lead Industries Group Ltd.

1920

Journey began as Gahagan Paints and Varnish Co. Ltd in Mumbai

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Vision Values and Cultural Ethos

It is KNPL’s vision to leverage global technology, for serving the customers with superior

coating systems built on innovative and superior products and world class solutions, to

strengthen KNPL’s leadership in Industrial coatings and propel for leadership in Architectural

coatings, all to the delight of stakeholders. It’s worth mentioning some of the cultural ethos of

KNPL: a) Vision driven organization b) High Level of human dignity c) Transparency and

openness among employees at all hierarchical levels d) Performance linked reward system e)

Management and employee commitment to organization values and f) High autonomy in work.

Product offerings

Basically Kansai Nerolac Paints Limited is into the business of manufacturing and selling of two

types of paints namely decorative paints and industrial paints. Under decorative paints, it offers

1) Nerolac’s range of Decorative paints for inner walls and building exteriors 2) paints for woods

and 3) paints for metals. Also it offers water-based paints and solvent-based paints. Under

Industrial paints, it offers 1) Automotive coatings 2) General Industrial coatings 3) High

Performance coatings and 4) Powder coatings. It operates both B2B and B2C business model. In

other words, it targets both individual consumers and the corporates/or other industries especially

automobile industry.

Organizational strengths

KNP is known for transformation, innovation and style. It has always been the forerunner in

introducing new products, finishes and new technologies to the market. KNP is very strong at

systems and operates on SAP R-3 platform. The company uses the Advanced Planning

Optimizer (APO) for demand planning and demand fulfillment. Managers at KNP are very quick

at taking accurate decisions using real time data which is available through Business Intelligence

Warehousing (BIW). Ironically, this 75+ years old organization is young and vibrant with

average age of employees being 36 years. Not only the company has consistently been producing

good results, its CSR initiatives also are well-acknowledged by the stakeholders. Research &

Development function continues to perform well in areas of standardization of Raw Materials,

rationalization of resins and strainers, cost reduction, supporting Industrial Marketing on Value

engineering and technical services, development of new products, and Process Improvements.

One of the major projects, initiated by the technical function has been on making the

formulations of decorative products free of heavy metals (lead free), without compromising on

quality. The timely upgradation to new IT facilities has always been appreciated by different

agencies. Last year, KNP won the Hall of Fame Award from Jasubhai Digital. The company

continues to make investments aligned at providing relevant information to its business users on

a real-time 24x7 basis. The Bawal plant was awarded integrated EMS certification in 14001 and

OHSAS 18001 by BVQI. Also, the company’s annual environmental report bagged ABCI award

fourth time in a row.

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Management

Being the second largest paint company in India, it spread over the country with employee

strength of around 2000. An efficient management provides the conducive work atmosphere to

develop and grow.

Board of Directors

Name of the Person Designation

Dr. JAMSHED JIJI IRANI CHAIRMAN

MR. DEVENDRA MOTILAL KOTHARI VICE -CHAIRMAN

MR. HIROSHI ISHINO DIRECTOR

MR. YUZO KAWAMORI DIRECTOR

MR. PRADIP SHAH DIRECTOR

MR. HARISHCHANDRA MEGHRAJ BHARUKA MANAGING DIRECTOR

MR. SUSIM MUKUL DATTA DIRECTOR

MR. NOEL TATA DIRECTOR

MR. YASO TAJIRI DIRECTOR

MR. PRAVIN CHAUDHARI DIRECTOR

Management committee members

Name of the Person Designation

Mr. H.M. Bharuka Managing Director

MR. Pravin Chaudhari Director

Mr. Shrikant Dikhale Vice President - HR

Mr. Anuj Jain Vice President - Marketing (Decorative)

Mr. Mahesh Mehrotra Vice President - Technical

Mr. Hitoashi Nishibayashi Director Supply Chain & Auto Marketing

Mr. P.D. Pai Vice President - Finance

Mr. Jason Gonsalves Vice President - Corporate Planning & IT

Open Door Policy

At Nerolac they follow an Open Door policy. Any person is free and welcomed to share good

idea, suggestion, doubt, problem about job or work place, or uncertainties about one’s future in

the organization. An open and transparent communication is appreciated.

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Overview of Annual Report

Financial Highlights of KNPL in recent years

Gross sales for the year aggregated to Rs.1613 crores reflecting a growth of 8.7% over the

previous year. Raw material inflation during the year was high. Overheads were kept under

control. Overall overheads, as a percentage to Sales were more or less at the same level as

compared to last year. Profit Before depreciation, Interest and Taxes (PBDIT) (Without other

income) for the year is higher at Rs.186.55 crores as compared to Rs.171.44 crores in previous

year reflecting a growth of 8.8%. Depreciation for the year is higher at Rs. 39.60 crores as

against Rs.33.56 crores in the previous year due to commissioning of the Jainpur plant after

revamp. Other income is slightly higher at Rs. 24.85 crores as compared to Rs.24.05 crores in

previous year. Profit before Tax is at Rs. 170.39 crores as compared to Rs. 160.97 crores of the

previous year which is a growth of 5.9%.

Management Discussion and Analysis

The management throughout the discussion seeks for the opportunities to work upon and is very

optimistic despite a decline in profits last year. It believes that the nascent stage of Indian Paint

Market and the considerable improvements in income levels would lead to open up big

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opportunities for the paint players. Also the management is happy with the growth rate of the

Indian Paint Industry as a whole at around 15%. As earlier mentioned, there has been a decline in

net profit due to the negative growth in consumer durables basket and the slowdown in

automotive industry. In view of this, the management started leveraging on decorative business

whose growth is more than that of the market. They started looking for new avenues to improve

their presence in decorative business too without compromising its competence in industry paints

market. For example, now they started targeting the tier-II people whose income levels found a

significant increase in the recent years.

Also considering the bright future ahead, the company started investing in innovations to grab

the opportunities as and when comes. In one interview, the top management officials clearly

stated that “2008-09 will continue to be the year of opportunities as well as challenges for KNP.

The company will continue to step up investments in augmenting capacity and market

development activities and stress on the momentum for building its future growth path. And the

early benefits of these strategic investments will be seen in some new products and services”.

Apart from the numerous opportunities found, rising crude oil prices and resultant change in

derivatives’ prices is a big concern. All said and done, the company has not been considerably

impacted by the concerns posed by environment and political due to its brand equity, superior

technology, strong distribution network and proactive actions against hindrances. The initiation

on making the formulations of decorative products free of heavy metals without compromising

on quality could be one of the examples of its proactive steps.

Giving a special attention and respect to its people, KNP now focuses on the pulse of the

organization through Employee Satisfaction Surveys done on a periodic basis over the year. Also

company realized that any business can’t do away with triple-bottom line if it really wants to

earn in long run. Keeping this in mind, the company started engaging in many CSR activities.

KNP will continue giving highest priority to health and safety of its employees with due regard

to conservation of the environment.

Directors’ Responsibility Statement

As stipulated under the provisions contained in Section 217 (2AA) of the Companies Act, 1956,

the Directors hereby confirm as under:

(i) that in the preparation of the annual accounts, the applicable accounting standards

have been followed along with the explanation relating to material departures;

(ii) that the Directors have selected such accounting policies and applied them

consistently and made judgments and estimates that are reasonable and prudent so as

to give a true and fair view of the state of affairs of the Company at the end of the

financial year and of the profit of the Company for that period;

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(iii) that the Directors have taken proper care of the maintenance of adequate accounting

records in accordance with the provisions of this Act for safeguarding the assets of

the Company and for preventing and detecting fraud and other irregularities;

(iv) that the Directors have prepared the annual accounts on a going concern basis.

The Company’s Independent Auditor

The Company Auditors, M/s A. F. Ferguson & Co. Chartered Accountants, have examined the

compliance of the conditions of corporate governance by Kansai Nerolac Paints Limited for the

year ended on 31st March, 2008, as stipulated in clause 49 of the listing agreements of the said

company with relevant stock exchanges (hereinafter referred to as clause 49).

The compliance of the conditions of corporate governance is the responsibility of the

management. The examination by the auditors has been limited to a review of the procedures and

implementation thereof, adopted by the company for ensuring compliance of the conditions of

corporate governance. It is neither an audit nor an expression of opinion on the financial

statements of the company.

In auditor’s opinion and to the best of their information and according to the explanations given

to them and the representations made by the directors and the management, Auditors certified

that the company has complied in all material respects with the conditions of corporate

governance as stipulated in clause 49.

Also auditors stated that such compliance is neither an assurance as to the future viability of the

company nor the efficiency or effectiveness with which the management has conducted the

affairs of the company.

Lastly they retire at the conclusion of the forthcoming Annual General Meeting and are eligible

for re-appointment.

The Income Statement

It is observed that the major revenue comes from the sales of paints, varnishes and enamels

worth of Rs. 1502 crore. At the same time, raw material accounts for the major expense which is

valued at Rs. 700 crore. Being an innovation driven company, it spent almost Rs. 12 crore in its

research activities to develop various eco-friendly products. As mentioned earlier, the global

economy slowdown led the company to enjoy the lower growth in profit for consecutive years.

Also it is observed that there were no operations discontinued during the last fiscal years. The

company has been following the same accounting principle while accounting for revenues and

expenses. Though the company has proposed to pay dividend, it has not paid any interim

dividend paid during the last fiscal year.

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Significant Accounting Policies

a) BASIS OF ACCOUNTING

The financial statements are prepared under historical cost convention on an accrual basis

and are in accordance with the requirements of the Companies Act, 1956, and comply with

the Accounting Standards referred to in sub-section (3C) of Section 211 of the said Act.

b) FIXED ASSETS

Fixed assets are stated at their original cost including incidental expenses related to

acquisition and installation, less accumulated depreciation and impairment losses if any. Cost

comprises of the purchase price and any other attributable cost of bringing the asset to its

working condition for its intended use.

P&L account for the year ended 31.03.2008

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c) BORROWING COSTS

Borrowing costs that are directly attributable to the acquisition of qualifying assets are

capitalized for the period until the asset is ready for its intended use. A qualifying asset is an

asset that necessarily takes substantial period of time to get ready for its intended use. Other

borrowing costs are recognized as an expense in the period in which they are incurred. No

borrowing costs are eligible for capitalisation during the year.

d) DEPRECIATION

(a) Depreciation is provided on the written down value method at the rates prescribed in

Schedule XIV to the Companies Act, 1956, except that in respect of Colour Dispensers the

rate of depreciation applied is 45 per cent, which management considers as being

representative of the useful economic life of such assets.

(b) No write off is made in respect of leasehold land as these are long term leases.

e) IMPAIRMENT

The carrying amount of assets are reviewed at each Balance Sheet date if there is any

indication of impairment based on internal / external factors. Impairment loss is provided to

the extent the carrying amount of assets exceeds their recoverable amount. Recoverable

amount is the higher of an asset’s net selling price and its value in use. Value in use is the

present value of estimated future cash flows expected to arise from the continuing use of an

asset and from its disposal at the end of its useful life. Net selling price is the amount

obtainable from the sale of an asset in an arm’s length transaction between knowledgeable,

willing parties, less the cost of disposal.

f) INVESTMENTS

(a) Long term investments are stated at cost. A provision for diminution is made to recognize

a decline, other than temporary, in the value of long term investments.

(b) Current investments are stated at lower of cost and market value. Dividend income is

accounted when the right to receive payment is established and known.

g) INVENTORIES

(a) Stores and spare parts are valued at cost. Stock-in-trade comprising of raw materials

(including in-transit), packing materials, stock-in-process and finished goods are valued at

the lower of cost and net realizable value after making such provisions as required on

account of damaged, unserviceable, inert and obsolete stocks.

(b) Cost has been arrived at on the basis of weighted average method.

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h) SALES

(a) Sales are recognized in accordance with Accounting Standard 9 viz. when the seller has

transferred to the buyer, the property in the goods, for a price, or all significant risk and

rewards of ownership have been transferred to the buyer without the seller retaining any

effective control over the goods.

(b) Sales are inclusive of excise duty, export incentive, exchange fluctuation on export

receivables, processing charges, sale of scrap and income from services and are net of trade

discount and product rebate.

The Balance Sheet

Balance Sheet as At 31.03.2008

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Comments on Balance Sheet:

a) It has not raised any capital by issuing ordinary shared during the last fiscal year.

Shareholders’ capital in the beginning and end of the current year is totaled out to be 2694.6

lakhs. Company is authorized to issue up to 30000000 equity shares of Rs. 10 each. But, it

has currently issued only 26945986 equity shares which leaves an option to raise capital by

issuing fresh shares in near future.

b) Also there was no capital raised through bank loans, but part of the long term secured loans

have been repaid during the year.

c) Company has invested a significant amount in short term mutual funds.

d) Company’s current ratio is 1.852 for the last year. But, it is found that the current ratio for the

Indian Paint Industry is around 1.000. Comparing to the industry standard, Kansai Nerolac is

in good position to meet its short-term obligations. Since current ratio is also a measure of

margin of safety to the creditors, KNP gives the safety margin of nearly 85% to the creditors.

So in inter-firm comparison, KNP has better liquidity/short term solvency.

e) Company’s net working capital has come down as it decided to pay the dividend.

Cash Flow Statement

a) Net cash inflow from operating activities …………… 15008.17 lakhs

b) Net cash outflow from financing activities ………….. 1566.03 lakhs

c) Net cash outflow from investing activities …………... 12253.87 lakhs

Though there was an increase of 37% in cash inflow due to the operating activities, it has not

reflected in final cash at hand. This was mainly due to the investing activities that have been

carried out during the last fiscal. Since the dividend has not been paid during the last year, it has

helped in maintaining the adequate cash at hand.

a) Current year’s ending cash balance ...……………….. 3337.54 lakhs

b) Previous year’s ending cash balance ………………… 2149.27 lakhs

c) Change in cash balance during the current year …….. 1188.27 lakhs

Financial Health of the Company

For companies, being able to meet short-term financial obligations is an integral part of

maintaining operations and growing in the future. After all, if it's not able to meet today's debts, a

company might not live to see another day! That's why it's essential for investors to know how to

evaluate a company's short-term financial health.

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Kansai

Nerolac

ICI

(India)

Berger

Paints

Asian

Paints

Debt-Equity Ratio 0.19 0 0.38 0.13

Long Term Debt-Equity Ratio 0.18 0 0 0.13

Current Ratio 2.03 0.81 1.4 1.15

Fixed Assets Turn Over 3.57 3.9 5.88 4.68

Inventory Turn Over 9.12 9.04 5.84 8.39

Debtors Turn Over 7.92 8.62 10.08 16.74

Interest Cover Ratio 121.84 31.65 10.29 42.84

PBIDTM (%) 13.1 10 9.87 15.18

PBITM (%) 10.65 8.06 8.65 14.12

PBDTM (%) 13.02 9.75 9.03 14.85

CPM (%) 9.88 7.14 7.28 10.24

APATM (%) 7.43 5.2 6.05 9.19

ROCE (%) 26.16 11.46 30.65 60.92

RONW (%) 21.7 7.39 29.6 44.86

Liquidity Ratios

For industries that generally have a large portion of current assets tied up in inventory, a ratio

of 1.5 or even 2 might be a better standard.

Compared to the industry standard of 1, KNP with 1.852 is in good position to meet its short

term obligations.

Also with the quick ratio more than 1, it indicates that KNP, without selling its inventory, has

enough short-term assets to cover its immediate liabilities.

Activity Ratios

A low inventory turnover implies poor sales and, therefore, excess inventory. A high ratio

implies either strong sales or ineffective buying. Also high inventory levels are unhealthy

because they represent an investment with a rate of return of zero. It also opens the company

up to trouble should prices begin to fall. Considering this, KNP has a inventory turnover

which is comparable to Asian Paints, market leader.

By maintaining accounts receivable, firms are indirectly extending interest-free loans to their

clients. A high ratio implies either that a company operates on a cash basis or that its

extension of credit and collection of accounts receivable is efficient. In view of lower

receivable turnover, may be KNP should look into its credit policies in order to ensure the

timely collection of imparted credit that is not earning interest for the firm.

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Fixed Asset turnover ratio is often used as a measure in manufacturing industries, where

major purchases are made for PP&E to help increase output. When companies make these

large purchases, prudent investors watch this ratio in following years to see how effective the

investment in the fixed assets was. A higher fixed-asset turnover ratio shows that the

company has been more effective in using the investment in fixed assets to generate

revenues. Since KNP’s fixed asset turnover is relatively lower as compared to other

counterparts, it should formulate the strategies to use the fixed assets effectively to generate

more revenues.

Leverage Ratios

A high debt/equity ratio generally means that a company has been aggressive in financing its

growth with debt. This can result in volatile earnings as a result of the additional interest

expense. The debt/equity ratio also depends on the industry in which the company operates.

For example, capital-intensive industries such as auto manufacturing tend to have a

debt/equity ratio above 2, while personal computer companies have a debt/equity of under

0.5. KNP borrowed loans in such a way that the cost of this debt financing do not outweigh

the return that the company generates on the debt through investment and business activities

and become too much for the company to handle. Failing to maintain this can lead to

bankruptcy, which would leave shareholders with nothing.

The lower the interest coverage ratio, the more the company is burdened by debt expense.

When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses

may be questionable. An interest coverage ratio below 1 indicates the company is not

generating sufficient revenues to satisfy interest expenses. Kansai is far better in covering its

fixed cost with the interest coverage ratio of 121. Also it is three times higher than its

counterpart.

Kansai is employing the long term debt option.

Profitability Ratios

Profit Margin is 7.43% as compared to 9.19% for Asian Paints.

Return on Capital Employed for Kansai is 26.16% as compared to 60.92% for Asian Paints.

ROCE should always be higher than the rate at which the company borrows; otherwise any

increase in borrowing will reduce shareholders' earnings. Considering this Asian Paints is

safer than Kansai.

ROE, which measures a corporation's profitability by revealing how much profit a company

generates with the money shareholders have invested, is higher for Asian Paints as compared

to Kansai. This would imply that Asian Paints would generate more returns on shareholders’

funds than the Kansai.

19

Market Ratios

With the P/E ratio of 13, any investor is willing to pay Rs. 13 for Rs. 1 current earnings in

case of Kansai. On the other hand, the same investor is willing to pay Rs. 24.4. This would

imply that Asian Paints is more lucrative option compared to Kansai.

Summary

On a whole Kansai Nerolac Paints Limited has once again demonstrated its potential to ride

through the difficult times. Despite the slowdown in its growth, it has determined to grab

numerous opportunities that are facing Indian Paint Industry. As mentioned earlier, other

opportunities in India are pegged to the transport sector. Car ownership in India stands at little

more than one percent. However, rising affordability and the launch of economical cars such as

the Tata Nano are expected to propel the market for OEM coatings and refinishes in the coming

years. Higher demand for marine paints can be expected in the next decade, once investments in

ports and port development have started to reach fruition. As India is hopeful of competing with

other established shipbuilding nations, the multinationals are likely to find plentiful opportunity

in India, given the compliance requirements imposed by effects of international legislation on

marine paints. Also other segments also are showing promising opportunities to grow. With

these many opportunities at hand along with the potential player who would be able to make use

of the situation well, I would rather start looking at a career in KNPL.

References

1. http://www.coatingsworld.com/news/2009/04/14/indian_paint_industry_report

2. http://www.entrepreneur.com/tradejournals/article/170816143.html

3. http://www.business-standard.com/india/news/kansai-nerolac-paints-introduces-nerolac-

home-stylers/19/26/335614/

4. http://www.business-standard.com/india/news/paint-makers-shift-focus-to-smaller-

cities/19/26/331535/

5. http://www.business-standard.com/india/news/slowdown-in-auto-industry-squeezes-paint-

makers-margins/19/26/323817/

6. http://www.blonnet.com/2008/12/02/stories/2008120251890300.htm

7. www.bloonet.com

8. web.ebscohost.com

9. www.ipaindia.org

10. www.anagram.co.in

11. www.investopedia.com

12. www.nerolac.com

13. en.wikipedia.org

14. www.investorwords.com