Akzo Nobel India, a member of the multinational Dutch group Akzo Nobel, is well-known for its Dulux paints brand and is one of the top players in the country in decorative and industrial coatings.

The coatings segment contributes 90 per cent of Akzo Nobel India’s revenue while 10 per cent comes from specialty chemicals. The company has six manufacturing units across India and caters to several industries.

The company holds 11 per cent revenue market share in the paint industry in the country and has strong brand positioning, particularly in decorative paints.

The Akzo Nobel India stock has had a good run over the past few years. This has been aided by good operating performance and synergies from the merger of different Akzo Nobel verticals. Despite the run-up, the stock provides a good buying opportunity for investors with a long-term perspective.

One, valuations remain reasonable. At ₹1,830, the stock quotes at 34 times its trailing 12-month earnings, close to the average valuation over the past three years. This is cheaper compared to peers such as Asian Paints (55 times).

Also, Akzo Nobel India’s growth prospects look bright. The company is growing its presence in coatings across segments and sectors and is expanding to tier II and tier III cities. It is also tapping the potential in the specialty chemicals segments through expansion and acquisitions. The government’s push towards infrastructure development, benign costs and implementation of Goods and Services Tax (GST) should benefit the company. A strong balance sheet is also a positive.

Strong market presence

Akzo Nobel India is the second-largest company in the decorative paints segment in the country, after Asian Paints. Its wide dealer network of 8,800 dealers across the country has helped strengthen its market presence.

The coatings segment also caters to various industries such as oil and gas, construction, shipping, personal care, transport and mining. The company has a range of products from basic paints to luxury coatings.

Healthy demand potential in both urban and rural markets should help the growth in decorative paints continue at a healthy pace, aided by the company’s initiatives in the mid and mass market segments.

The government’s push to the housing sector through schemes such as ‘Housing for all’ should translate into good demand for paints. Growing income levels in the country and expectations of normal monsoon this year also bode well. Repainting demand should also continue contributing to volumes.

The implementation of GST may lead to near-term supply-chain disruptions but favour organised sector players such as Akzo Nobel India in the long run.

To strengthen its presence in industrial coatings, the company acquired BASF India’s industrial coatings business in December 2016.

This has added to Akzo Nobel India’s presence in segments such as construction, domestic appliances, wind energy and commercial transport.

The company has also begun its construction of powder coatings plant in Mumbai to better serve the architecture and automotive industries.

Akzo Nobel has over 2,000 products in its specialty chemicals portfolio with deep penetration across industries such as food, detergents, paper and plastic. The company opened its specialty coatings production facility and colour laboratory in Noida in December 2016 to cater to customers in consumer electronics and cosmetics industries. Also, it recently agreed to a joint venture with chemical manufacturing company Atul for production of monochloroacetic acid (MCA) in Gujarat by the first quarter of 2019. These initiatives should help the segment’s growth in the long run.

Cost benefits

The decline in crude oil since 2014 has significantly reduced the cost and aided the margins of Akzo Nobel. Crude oil derivatives such as titanium dioxide form a major part of the raw material cost. Crude oil prices should be in the range of $45-$60 per barrel due to global demand-supply dynamics. This should help the company keep costs under control.

Healthy financials

Akzo Nobel India’s consolidated revenue grew 7 per cent y-o-y to ₹2,800 crore in 2016-17 while profit grew 15 per cent to ₹247 crore. The coatings segment registered revenue growth of 5 per cent and profit growth of 13 per cent last year.

The performance was stronger in the specialty chemicals segment with revenue and profit growth of 34 per cent and 41 per cent, respectively.

Operating margins have improved in the last three years from 10 per cent in 2013-14 to 14 per cent for FY17. The company has negligible debt levels giving enough room for expansions.

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