Financial Statement Analysis

Project Report on Financial

Health and Status of Kansai
Nerolac Paints Limited
 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

1920
Journey began as Gahagan Paints and Varnish Co. Ltd in Mumbai

1930
Three British companies merged to formulate Lead Industries Group Ltd.

1933
Emergence of Goodlass Wall (India) Ltd. as Lead Industries Group Ltd. acquired Gahagan Paints

1946
Company Renamed as Goodlass Wall Pvt. Ltd

1957
Emergence of Goodlass Nerolac Paints Ltd. and it went public

1976
Became a part of Tata Forbes Gokak

1983
Technical collaboration with Kansai Paints Co. Ltd., Japan

1986
Became a joint venture of Tata Forbes and the Kansai Paint Co. Ltd

1999
Became a subsidiary of Kansai Paint Company Ltd as the later took over entire stake of Tata Forbes

2006
GNP renamed to Kansai Nerolac Paints Ltd.

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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

10
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;

11
 (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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 P&L account for the year ended 31.03.2008

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.

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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 ICI Berger Asian
Nerolac (India) Paints 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.

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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

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