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Kansai Nerolac: Adding to productive capacity - Outside View by Luke Verghese

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Kansai Nerolac: Adding to productive capacity
Jun 25, 2012

A very well oiled company that is trying to make its mark in a very competitive industry

92 years young and making a go of it

The year 2011-12 has been a special year for Kansai Nerolac Paints, the 70% subsidiary of Kansai Paint Company of Japan, according to the annual report. The report says "What has been different about the growth achieved by Kansai in the financial year 2011-12 is that it has been multi-dimensional and it has been driven by pillars very unique to Kansai. It introduced better products for all segments, better processes in all spheres and optimised the consumption of resources at all levels. This was done by implementing world class IT systems to increase efficiency in every domain..." Ninety two years after inception as Gahagan Paints and Varnishes Co., Kansai is now going for the jugular it appears.

The report goes on to add that the paint industry market size is estimated at Rs 291 bn of which the organised sector accounts for 65% or Rs 189 bn. Kansai Paints toted up revenues of Rs 30 bn in 2011-12. In other words the company accounts for close to 16% of the organised industry market share. The industry in turn is divided into the decorative paints segment and the industrial paints segment. The decorative paints segment accounts for 77% of the overall market, while the industrial segment accounts for the balance 23%.

The new format balance sheet and profit and loss account completely revamps the manner in which the accounts of a corporate, especially balance sheet data are presented. It for example does away with the need to provide quantity disclosures on capacities, production and sales, opening and closing stocks, and, item wise sales. It also incorporates new classifications on long term and short term, current assets and current liabilities, and deferred liabilities. This makes for both plus and minus points from the analysts' point of view.

Debt free almost

The most purposeful aspect of this company is that it is almost debt free. Consequently the interest charges debited to the P&L account is close to negligible. At first sight this appears incongruous. For, at year end it long term debt of Rs 690 m against Rs 750 m previously. Separately it also had short term debt of Rs 56 m against Rs 74 m previously. So how come there were no interest charges paid out at all? It lies primarily in the constitution of long term borrowings. The entire long term borrowings entail either secured or unsecured sales tax deferral loans, and more importantly it comes without a coupon rate. Not bad going at all. This is one company which knows how to squeeze state governments to get its pound of flesh. The short term borrowings too (payable over the current accounting year) constitute the short arm of the long term dues. So it is a winner all the way.

Sizeable gross block addition

More importantly it has financed gross block addition of Rs 2.2 bn (a fairly substantial sum of money for a company with a pre-addition gross block size of Rs 6.7 bn) in a very enterprising manner too. This amount was apparently spent on its new paints factory at Hosur. (The company now makes do with five paints factories - two in the North, two in the South, and one in the West). The net funds generated from operations amounted to only Rs 1 bn. The balance came from drawing down its liquid investments from Rs 3.7 bn to Rs 1.8 bn. So there was no question of going to the lender on moneys for some extra dosh.

I do not know how capital intensive paint companies exactly are - but Kansai could rack up a turnover to gross block ratio of only 3.4 times against 3.5 times previously. This could also be because of the peculiar grouping of its gross block. Of its year end gross block of Rs 8.4 bn, the plant and machinery component amounted to 42%. A close second was Buildings with 29%. A peculiar item called Assets given on lease accounted for another 18%. (The company adds as a footnote, that it has given on lease, Colour dispenser to its dealers). These three terminologies accounted for the vast make up of gross block. It would appear from this grouping that the buildings are almost as sacrosanct as its plant and machinery.

Its operational results

And what of its claims of achieving multi-dimensional growth during the year through the modicum of ramping up its IT skills? Net revenues excluding other income rose 21.6% to Rs 25.8 bn, while the net revenues including other income rose 21.3% to Rs 26.2 bn. But the pre-tax profit rose only 15.7%, which was way below the rise in revenues. In other words, the margins were under some strain as the biggest consumption item by far - the cost of materials consumed - rose 24.2% to Rs 17.4 bn. One reason for its inability to rein in material cost increases to the level of the percentage increase that it clocked in revenues was the fact that imported raw material consumption accounted for 33% of all raw materials consumed. That is to say the bill for imported raw materials was a nice round figure of Rs 5 bn. The imported raw material input costs are contingent on the strength of the rupee - and the company is definitely going to take some beating in this aspect in the current year, if it persists with material imports. The raw materials consumed consist of pigments, resins, organic acids, anhydrides, solvents, oils and fatty acids in the main.

The imports however have not been sourced from group companies. The company has four fellow subsidiaries, and had an associate company till recently. The interaction between Kansai India, and the parent and the fellow subsidiaries, is kept to the bare minimum. Kansai India pays royalty fees, dividends, and technical fees in the main to the parent.

The other two principal items of cost-Employee payouts and Other expenses-rose at a lesser pace than the growth in sales. But that was not quite enough to stymie the profit growth. But creditably enough the company was able to restrict year-end inventory and trade receivables to the same percentage levels as in the preceding year. And, besides, trade payables almost matched the levels of trade receivables, though it was a significant comedown from that of the preceding year.

A commodity player

Paint companies are basically commodity players and have no specific USP offering on the products on offer. Hence it is a tricky exercise to keep ahead of the increase in costs as they lack pricing power at the retail end of the equation. But to its credit it is a well oiled machine and besides, against a paid up equity of Rs 538 m it boasted reserves and surplus of Rs 10 bn. That is to say the reserves are some 19 times the paid up equity. However, what exactly the company was implying when it proclaimed that it had achieved superior results by implementing world class IT systems to increase its operational efficiency, is not quite clear.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


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