Akzo Nobel India Ltd:Annual Report 2023-24 Analysis

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

Revenue #

• FY 2023-24: ₹39,616 million
• FY 2022-23: ₹38,021 million
• FY 2021-22: ₹31,486 million

Operating Profit (EBITDA) #

• FY 2023-24: ₹6,321 million
• FY 2022-23: ₹5,251 million
• FY 2021-22: ₹4,406 million

Profit After Tax (PAT) #

• FY 2023-24: ₹4,267 million
• FY 2022-23: ₹3,351 million
• FY 2021-22: ₹2,900 million

Return on Equity (ROE) #

• FY 2023-24: 32.3%
• FY 2022-23: 26%

Cash from Operations (before Tax) #

• FY 2023-24: ₹6,567 million
• FY 2022-23: ₹5,662 million

Business Segment Performance #

• Decorative Paints: Experienced double-digit volume growth.
• Coatings: Performance built around technology, sustainable products, and alliances.
• Automotive & Specialty Coatings (ASC): Showed strong performance due to growth in the Indian automobile industry.
• Powder Coatings: Demonstrated double-digit volume growth and expanded presence in Tier 2 and 3 cities.
• Marine & Protective Coatings: Benefited from a strong marine market and increased investment in wind energy.
• Industrial Coatings: The BPANI range within packaging coatings continued to grow.

Major Strategic Initiatives and Their Progress #

• Premium Product Portfolio Strengthening: Continuous introduction of differentiated offerings and investments in premium products.
• Mass Market and Value Segment Acceleration: Increased focus on entry-level retail and professional segments.
• Adjacent Categories Expansion: Widened the scope of play in related product categories.
• Distribution Expansion: Increased presence to over 5,000 towns.
• Sustainability-Driven Innovation: Launched products focusing on reduced carbon emissions and environmental sustainability.
• Digital Transformation: Initiatives to improve efficiency and customer experience.

Risk Landscape Changes #

• Increased Competition: New entrants in the Indian paints market intensified competition.
• Cybersecurity Risks: Continuous reinforcement of cybersecurity culture and monitoring.
• Regulatory Compliance: Increased regulatory scrutiny and evolving regulations.
• Talent Attrition: Ongoing efforts to build an employer brand.
• Data privacy and Information security - Continuous actions to embed in working process

ESG Initiatives and Metrics #

Environmental #

• 65% of raw materials sustainably sourced.
• 48% renewable energy usage.
• 80% circular use of materials.
• Zero Liquid Discharge and Zero waste to landfill.
• 33% of the portfolio comprises EPD (Environment Product Declaration) certified products.
• Reduction in relative energy consumption by 28%
• Overall relative waste by 44%
• 90% reduction in non-reusable waste to landfill

Social #

• CSR spending of ₹77.47 million.
• Focus on vocational skill training, education, and community healthcare.
• Emphasis on diversity and inclusion.
• Employee engagement platform launched, with high participation and engagement.
• Awarded Gold Award for Excellence in Business Responsibility and Sustainable Reporting from ICAI.

Governance #

• 100% Independent Audit Committee
• 50% of Board of Directors are Independant Directors.
• Comprehensive Prevention of sexual Harassment at workplace policy.

Management Outlook #

• The management enters FY'25 with confidence and optimism, acknowledging increased competition.
• The Company is considered “future-ready” and aims to build on its global expertise and differentiated strategy.
• Focus will be on innovation, customer-centric strategies, and leveraging its strengths to capitalize on growth opportunities.
• Expectation of consistent growth in the industry despite economic conditions.

Detailed Analysis #

Financial Position Analysis of Akzo Nobel India Limited #

3-Year Comparative Analysis of Assets, Liabilities, and Equity (Consolidated) #

(₹ in millions)

Significant Changes in Major Line Items (>10% YoY) #

(₹ in millions)

• Capital Work-in-Progress: Increased by H464 million (63.8%) from 2023 to 2024, indicating substantial ongoing investment in fixed assets.
• Other Non-Current Assets: Increased by H221 million (22%) from 2023 to 2024, Mainly due to the increase in Advance to customers
• Inventories:Slightly increase from 5979 in 2023 to 6,115 in 2024, indicating slighlty incresae raw material cost.
• Trade payables:Increased by H1,342 millions (15.54%) in the current year mainly due to increase in business
• Other non-current liabilities: Decreased by H56 million (-38%) mostly related to the fall in security deposits.
• Other Current financial liabilites:Increased by H122 million (13.77%), representing growth in statutory dues, liabilities towards customer and defered revenue.

Working Capital Trends #

(₹ in millions)

• Working capital has decreased by 1062 million, from 6,043 million in 2023 to 4,981 million in 2024. This is due to a greater increase in current liabilities compared to current assets.

Asset Quality Metrics #

• Property, Plant & Equipment: The net carrying amount increased, indicating continued investment. The significant increase in Capital Work-in-Progress suggests preparation for future capacity expansion.
• Allowance for Doubtful Debts: The provision for doubtful trade receivables is relatively low but increasing, indicating a need to monitor credit risk closely.
• Inventory Turnover: Increased in 2024 to 3.7 from 3.6 in 2023.

Debt Structure and Maturity Profile #

(₹ in millions)

• The Group’s debt consists solely of lease liabilities.
• The reduction in both current and non-current lease liabilities indicates payments made during the year.

Off-Balance Sheet Items #

• Contingent Liabilities: Total contingent liabilities decreased from ₹616 million in 2023 to ₹561 million in 2024. Major components are related to income tax and other tax matters in dispute.
• Guarantees: Akzo Nobel N.V. has issued bank guarantees on behalf of the Group, totalling H850 million

Akzo Nobel India Limited Financial Analysis (FY24) #

Revenue Analysis #

Revenue Breakdown #

• Segment: Operates as a single reportable segment: “Paints”.

Geographic Revenue #

• Domestic revenue grew by 4.0% (₹37,532 million vs. ₹36,094 million).
• Export revenue grew by 8.2% (₹2,084 million vs. ₹1,927 million).
• Exports contribute approximately 5% of total turnover.

Overall Revenue #

• Overall Revenue in FY24 increased by 4.2%.

Cost Structure Analysis #

• Cost of materials consumed decreased by 3.5% (₹20,093 million vs. ₹20,812 million).
• Employee benefits expense increased by 8.96% (₹3,271 million vs. ₹3,002 million).
• Power and fuel cost increased by 2.3%.
• Other expenses increased by 13.5%.
• “Cost of materials consumed” represents 50.3% of total income in FY24 (down from 54.3% in FY23).
• Total expenses for the year ended March 31, 2024, increased by 1.5%.

Margin Analysis #

• Operating Profit Margin: Increased to 16.0% in FY24 from 13.8% in FY23.
• Net Profit Margin: Increased to 10.8% in FY24 from 8.8% in FY23.
• Profit before Tax increased by 25.7%.

EPS Analysis #

• Basic EPS: Increased to ₹93.70 in FY24 from ₹73.58 in FY23.
• Diluted EPS: Increased to ₹93.70 in FY24 from ₹73.58 in FY23.
• The increase in both Basic and Diluted EPS indicates improved profitability per share.

Quarterly Trends #

• Quarterly results were disclosed only for the following.
• First Quarter ended June 30, 2024, the publication of result is before August 14, 2024.
• Second Quarter ended September 30, 2024 the publication of result is before November 14, 2024.
• Third quarter ended December 31st, 2024, the publication of result is before February 14, 2025.
• Other quarter financial data are not provided, preventing a detailed quarterly trend analysis.

Cash Flow and Liquidity Analysis of Akzo Nobel India Limited #

Operating, Investing, and Financing Cash Flow Components (Consolidated) #

• Operating Cash Flow (OCF): Increased to H 6,567 million in FY2023-24 from H 5,251 million in FY2022-23, driven primarily by higher operating profit before changes in working capital.
• Investing Cash Flow (ICF): Net outflow was H 860 million in FY2023-24, compared to an outflow of H 151 million in FY2022-23. This increase in outflow majorly reflected higher capital expenditure.
• Financing Cash Flow (FCF): Net outflow amounted to H 4,394 million in FY2023-24, increased from an outflow of H 3,017 million in FY2022-23, largely due to increased dividends paid.

Working Capital Management Efficiency #

• Debtors Turnover: Decreased to 7.0 in 2023-24 from 7.3 in 2022-23.
• Inventory Turnover: Increased to 3.7 in 2023-24 from 3.6 in 2022-23.

Capex Analysis #

Total expenditure towards R&D: J 114Mn, with 83% of capex invested towards improving processes and customer needs.

Nature of CAPEX:

• Payments for property, plant and equipment: J 1,185
• Installation of new machinery and production lines
• Process improvement equipments
• Supply Chain and Logistics optimization
• Packaging and labelling equipments
• Research and Development equipments.
• Automation and robotics integration

Dividend and Share Buyback Trends #

• Dividends: The company paid an aggregate dividend of H 75 per share for FY2023-24, the same as what was paid in FY2022-23, maintaining a sustained payout. A final dividend of H 25 per share was proposed.
• Share Buybacks: No share buyback program was executed or announced during FY2023-24.

Debt Service Coverage #

• Debt Service Coverage Ratio (DSCR): The consolidated DSCR increased from 37.3 in FY2022-23 to 50.6 in FY2023-24, signifying improved ability to cover obligations. The calculation utilizes EBITDA, not just EBIT.

Liquidity Position and Cash Conversion Cycle #

• Current Ratio: The consolidated current ratio decreased from 1.5 in FY2022-23 to 1.3 in FY2023-24.
• Cash and cash equivalents: J 2,737
• Number of Days of Account payables: Increased from 97 days in prior year to 111 days in current year.

Financial Analysis of Akzo Nobel India Limited #

Key Performance Indicators #

This analysis focuses on key financial ratios derived from Akzo Nobel India Limited’s annual report data.

Profitability Ratios (3-Year Trends) #

• ROE, ROA, ROCE, and Margins have consistently improved, indicating enhanced profitability and efficiency in utilizing equity, assets, and overall capital.

Liquidity Metrics #

• The Current Ratio has slightly decreased but remains above 1, indicating a reasonable ability to meet short-term obligations. A deeper analysis of the cash ratio would give more insight.

Efficiency Ratios #

• The Asset Turnover using total asset as a denominator.

• Asset and receivables Turnover ratios have slightly decreased. Inventory turnover has shown a slight increase. These indicate the assets are stable and well utilized.

Leverage Metrics #

• The Debt/Equity ratio is very low, indicating minimal reliance on debt financing. The Interest Coverage Ratio is high and has improved, demonstrating a strong ability to cover interest expenses.

Return on Capital Employed (ROCE) #

• Return on Capital Employed (ROCE): 46.2% (2023-24), 37.4% (2022-23),36.8%(2021-2022).

Working Capital Ratios #

The net capital turnover ratio has significantly increased due to the company improving their payable days

Industry Comparison and Observations #

Without specific industry average data, direct comparison is limited. However:

• High Profitability: Akzo Nobel India’s profitability ratios (ROE, ROA, ROCE, and margins) appear strong, consistently increasing over three years.
• Low Leverage: The very low Debt/Equity ratio suggests a conservative financial approach.
• Improving Liquidity: The Current ratio, while slightly decreasing, points to an improving management of current liabilities and assets.

Business Segments Performance Analysis #

Revenue and Profitability Metrics #

• Overall:
  • FY24 Revenue: ₹39,616 million (16% growth from prior record).
  • FY24 EBIT: Record high, contributing to the fifth consecutive year of double-digit profitability.
  • FY24 Profit After Tax (PAT): Record high.
  • Gross margin improved, supported by raw material deflation and favorable mix.
• Decorative Paints:
  • Double-digit Volume Growth: Driven by product launches, urban market growth and a project buisness.
• Coatings:
  • Double-digit volume growth.
  • Infrastructure, power, and automotive industries were major demand drivers.

Market Share and Competitive Position #

• Overall:
  • Cementing position as Top 2 in the Paints industry.
• Decorative Paints:
  • Gained market share in the Premium product portfolio.
  • Witnessed increased competition due to new market entrants.
• Powder Coatings:
  • Double-digit volume growth.
  • Faced Stiff Competition.

Key Products/Services Performance #

• Decorative Paints:
  • Dulux Assurance™: First warranty program in India, covering 17 products.
  • Dulux Weathershield Protect Rainproof: Specifically developed for high humidity and rainfall areas.
  • Sadolin (premium PU wood coatings): Expanded range with over 2,000 tintable shades.
  • Dulux Professional Interior A100: New affordable acrylic distemper.
  • Dulux PU Enamel 12-in-1: Upgraded with 12-in-1 value proposition.
  • Dulux SuperCover Ultra: Enhanced with Silicon Technology.
  • Dulux Weathershield Alkali Bloc Primer: Upgraded with PU technology.
• Automotive & Specialty Coatings:
  • Secured annual business tie-ups for over 200 OEM Authorized Bodyshops.
• Powder Coatings:
  • Resicoat EL series and Interpon A6000: Gaining market traction in the electric vehicle sector.
  • Interpon D3020: New hyper durable powder coating for architectural aluminum.
  • Interpon Futura Collection revealed three new, on-trend colour palettes.
• Marine and Protective Coatings:
  • International HullCare: Environmentally sustainable hull management package.
  • Interbond 1202 Universal Primer: designed for -165°C to 650°C.
• Industrial Coatings:
  • BPANI range in packaging coatings continued to grow.

Geographic Distribution and Market Penetration #

• Decorative Paints:
  • Presence in over 5,000 towns.
  • Distribution expansion in Tier 2 and 3 cities
• Powder Coatings:
  • Expanded presence in Tier 2 and 3 cities.
• Automotive & Specialty Coatings:
  • Working with 45 distributors across India to serve new geographies.

Segment-wise CAPEX and ROIC #

• Overall capex investments ~83% was in improving process and to meet customer needs in sustainable ways.
• Expanding Powder Coatings capacity.

Operational Efficiency Metrics #

• Overall:
  • Improved working capital, leading to stronger operating cash flow.
  • 80% circular use of materials.
• Digital Transformation:
  • Used digital tools and automation to improve operations.
  • Advanced Planning Transformation (APT) tool.

Growth Initiatives and Challenges #

• Growth Initiatives:
  • Strengthening Premium product portfolio.
  • Accelerating play in mass market and value segments.
  • Increasing width of play in adjacent categories.
  • Investing in marquee brands (e.g., Rocking Star Yash as brand ambassador for Dulux Weathershield).
  • Launched ‘My Interpon Portal’ for powder coatings.
• Challenges:
  • Industry-wide price corrections.
  • Renewed competitive intensity in the Indian paints market.
  • Fluctuations in raw materials prices
  • Strict VOC Regulations
  • Cybersecurity Risk

Risk Framework - Akzo Nobel India Limited (FY 2023-24) #

Strategic Risks #

• Severity: High
• Likelihood: High
• Trend: Increasing
• Mitigation Strategies: Strengthening brand attractiveness, competitive dealer profitability, accelerating reach in identified geographies, and intensifying participation in adjacent growth categories.
• Control Effectiveness: Partially Effective. The company is making progress in market share in premium products, but price corrections due to competition indicate ongoing challenges.
• Potential Financial Impact: Loss of market share, particularly in the Mass & Economy segments, could impact revenue and profitability, especially if price wars continue.

Operational Risks #

• Severity: Moderate to High
• Likelihood: Low
• Trend: Stable
• Mitigation Strategies: Adherence to HSES policy, continuous awareness and training, periodic risk assessments. Implementation of smart factory initiatives, use of IoT for efficiency and safety.
• Control Effectiveness: High. The company is reporting very few incidents with Recordable work-related injuries at 1 employee and no workers.
• Potential Financial Impact: While incidents are rare, severity could be high, incurring cost in employee wellbeing programs, and automation.

Digital Disruption (Operational Risk) #

• Severity: High
• Likelihood: Moderate
• Trend: Increasing
• Mitigation Strategies: Investments in digital transformation, including e-commerce initiatives, social media presence, and Advanced Planning Transformation (APT) tool.
• Control Effectiveness: Partially Effective. The company is actively investing, but the success of these strategies depends on effective implementation and adoption.
• Potential Financial Impact: Loss of market share, increased operational costs, and reduced efficiency if digital strategies are not successful.

Financial Risks #

• Severity: Moderate
• Likelihood: Moderate to High
• Trend: Stable, but with potential for volatility
• Mitigation Strategies: Inventory management to address commodity price risk. Foreign exchange management policy.
• Control Effectiveness: Partially Effective. Raw material deflation has been favorable, but future volatility remains a risk. The company hedges foreign exchange risk.
• Potential Financial Impact: Changes in material and Forex may impact profit margins.

Compliance/Regulatory Risks #

• Severity: Moderate to High
• Likelihood: Low to Moderate
• Trend: Increasing
• Mitigation Strategies: Zero-tolerance policy against non-compliance, use of a third-party compliance tool, quarterly compliance reporting to the Board, and independent assessments.
• Control Effectiveness: High. No significant non-compliance issues were reported. Quarterly compliance reports were presented.
• Potential Financial Impact: Fines for non-compliance as reported by the appropriate authority.

Emerging Risks - Data Privacy and Information Security #

• Severity: High
• Likelihood: Moderate
• Trend: Increasing, as digital operations and customer data handling expand.
• Mitigation Strategies: Continuous embedding of actions in working processes, security operations monitoring, and privacy by design when implementing new solutions.
• Control Effectivness: Good, the report states 2 instances, that are disposed.
• Potential Financial Impact: Financial penalties, operational inefficiencies, intervention by regulators, and reputational damage if personal data is not protected and data privacy rules are not followed.

Strategic and Management Analysis of Akzo Nobel India Limited #

Long-Term Strategic Goals and Progress #

• Akzo Nobel India aims for a 50% reduction in carbon emissions across its entire value chain by 2030 (2018 baseline). The company is progressing toward this goal by increasing renewable energy consumption from 34% to 48%.
• The target is 100% circular use of materials by 2030. It stands at 80% in the fiscal year 2023-24.
• Growth in adjacent categories and mass market and value segments are being pursued.

Competitive Advantages and Market Positioning #

• Akzo Nobel India is leveraging AkzoNobel’s global brands (Dulux, International, Sikkens, Interpon) and expertise.
• The Company has shown double-digit profitability for five consecutive years.
• Company is Top 2 in incremental growth.

Innovation Initiatives and R&D Effectiveness #

• R&D spend for FY2023-24 was J 114 million.
• 33% of the portfolio now comprises of EPD (Environment Product Declaration) certified products.
• Focus on customer facing digital tools, such as “My Interpon Portal.”
• Dulux Assurance TM Warranty Program, and product innovations like Dulux Weathershield Protect Rainproof, and Sadolin’s tintable shades highlight a customer-centric innovation approach.

Management’s Track Record in Execution #

• FY2023-24 marked the fifth consecutive year of double-digit profitability, indicating consistent operational efficiency.
• The company achieved record highs in revenue, gross margin, EBIT from operations, and Profit After Tax (PAT).
• The company is expanding distribution, achieving presence in over 5,000 towns.

Capital Allocation Strategy #

• A final dividend of H 25 per share was recommended, taking total dividend of H 75 per share for FY 24.
• Investments in capacity and network expansion are evident, particularly in the Powder Coatings segment.

Organizational Changes and Their Impact #

• India became the regional headquarters for the ‘South Asia’ decorative paints organization within the AkzoNobel Group.
  • The Company now has faster speed to market with more decision making power.
• Launched brand new employee engagement platform, Voices.

ESG Framework #

Environmental Metrics and Targets #

• Akzo Nobel India aims for a 50% reduction in carbon emissions across its entire value chain by 2030 (baseline 2018).
• Renewable energy constituted 48% of total energy consumption in FY2023-24, increased from 34% in FY2022-23, heading towards the 2025 target of 50%.
• The company is aiming for a 30% reduction in relative energy consumption by 2030 (2018 baseline), with a 5% reduction target on year on year.
• 80% of materials were put to circular use during the year under report, towards achieving its aim of 100% by 2030
• Total Scope 1 emissions were 429 metric tonnes of CO2 equivalent, and Scope 2 emissions were 6,838 metric tonnes.
• Total Scope 3 emissions are at 726 kilo tonnes, reflecting a YoY increase.
• The company achieved ‘Zero Waste to Landfill’ status in 2022-23 and has maintained this in 2023-24.
• 65% of the raw materials are sustainably sourced.
• The company is compliant with the Plastic Waste Management Rules.
• All manufacturing sites have Zero Liquid Discharge.

Social Responsibility Programs #

• CSR spending for FY2023-24 was H 77.47 million, exceeding the statutory requirement of 2% of the average net profit of the last three financial years ( H 73.94 million).
• Vocational skill training programs (AkzoNobel Paint Academy) trained over 4,000 youth and painters, with a focus on women (50% of beneficiaries) and disadvantaged groups.
• The ‘Parivartan’ education project impacted over 7,900 underprivileged children.
• Community Healthcare project, using telemedicine, benefited more than 60,000 villagers.
• 11% Diversity Ratio among the permanent employees.
• CSR initiatives are focused in 3 Aspirational Districts.

Governance Structure and Effectiveness #

• The Board of Directors comprises 50% independent directors.
• The Board has established five committees: Audit, Risk Management, Nomination and Remuneration, Stakeholders Relationship, and CSR.
• The Audit Committee consists entirely of independent directors.
• The Company has a Vigil Mechanism/Whistle Blower Policy, overseen by the Audit Committee.
• Board evaluation is conducted annually, assessing board performance, committee effectiveness, and individual director contributions.
• A comprehensive Code of Conduct exists, applicable to all employees and Non-Executive Directors including Independent Directors.
• Compliance of all applicable laws is reviewed quarterly by the Board of Directors.

Sustainability Investments and ROI #

• Approximately 83% of capital expenditure (capex) investments in FY2023-24 were directed towards improving processes and developing sustainable solutions.
• R&D spending totaled H 114 million, focused on sustainable products and processes (e.g., bio-based materials, water-based paints, phasing out hazardous materials).
• 33% of the product portfolio is EPD (Environment Product Declaration) certified.

Regulatory Compliance and Future Preparations #

• The Company is compliant with all applicable environmental laws/regulations/guidelines in India, including the Water Act, Air Act, and Environment Protection Act.
• Extended Producer Responsibility (EPR) is applicable, and the Company is compliant with Plastic Waste Management Rules.
• The Company has complied with SEBI’s BRSR Core reporting requirements for FY2023-24.
• The Company has implemented a comprehensive Prevention of Sexual Harassment at Workplace Policy.
• The company has a Policy on Risk Management.

Akzo Nobel India Limited: FY 2023-24 Financial Analysis and Outlook #

Management Guidance and Assumptions #

• Management assumes continued strength in domestic demand and a rising working-age population will drive India’s economic growth, benefiting the paints and coatings industry.
• Management assumes fluctuations in raw material prices.
• Management assumes sustainability focus in the coating market is driven by expected GDP growth, increasing per capita income and urbanization.

Market Growth Forecasts #

• The Indian Paints and Coatings industry is projected to continue vibrant growth, driven by industrial segments and end-users.
• The coatings market is projected for a 6% CAGR from 2022 to 2026.
• Protective coatings market is projected to grow 8-10% in the next few years.
• Coated steel market supports growth of infrastructures.

Planned Strategic Initiatives #

• Strengthen the premium product portfolio with differentiated offerings.
• Accelerate play in mass market and value segments.
• Increase width of play in adjacent categories.
• Continued investment in marquee brands (e.g., Dulux Weathershield).
• Focus on sustainability-driven innovation, including products with reduced carbon emissions.
• Enhance customer experience through digital tools (e.g., My Interpon Portal).
• Expand geographic presence, particularly in Tier 2 and 3 cities.
• Continue CSR programs focusing on education, vocational skill training, and community healthcare.
• Prioritize innovation to ensure customers’ competitive advantage.
• Optimize supply chain using Advanced Planning Transformation (APT) tool.

Capital Expenditure Plans #

• 83% of CAPEX investments during the year were directed toward improving processes and developing sustainable solutions.
• Specific projects mentioned include expanding powder coatings capacity, investing in renewable energy, and improving water usage efficiency.
• Installation of Automated Guided Vehicles (AGV) in 2 of the manufacturing facilities.
• Implementation of Automated Storage and Retrieval System (ASRS) is in progress in Gwalior facility.

Efficiency Improvement Targets #

• Targeting a 50% reduction in absolute carbon emissions by 2030 (throughout the entire value chain).
• Aiming for 50% renewable energy usage by 2025, and 100% by 2030.
• Target of zero waste to landfill, which was maintained in 2023-24.
• Goal of 100% circular use of materials in operations by 2030 (80% achieved in 2023-24).
• Reduce relative energy consumption by 28% and relative waste by 44%.
• Reduce non-reusable waste to landfill by 90%.

Potential Challenges and Opportunities #

• Challenges:
  • Fluctuations in raw material prices.
  • Stringent environmental regulations regarding volatile organic compounds (VOCs).
  • Intense competition from existing players.
  • Potential disruptions from digital technologies used by competitors.
  • Shifting consumer preferences.
  • Occupational hazard.
  • Cyber security.
• Opportunities:
  • Increased government focus on affordable housing and infrastructure.
  • Robust real estate demand.
  • Higher per capita incomes driving new demand.
  • Shortened re-painting cycle.
  • Rise of new consumers in tier 3 and beyond geographies.
  • Growing adoption of eco-friendly paints.
  • Hyper fragmentation of channels through technology.
  • Government initiatives such as the $500 million Electric Vehicle Policy.

Scenario Analysis and Sensitivity to Key Assumptions #

• Raw Material Price Volatility: A significant increase in raw material costs would likely contract margins and reduce profitability, requiring pricing action or cost reductions.
• Competitive Pressure: New entrants in the market increase competitive pressure can lead to reduction in market share.

Audit & Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The Independent Auditor’s Report issued by Price Waterhouse Chartered Accountants LLP provides an unqualified opinion on the Standalone and Consolidated Financial Statements, stating they give a true and fair view in conformity with generally accepted accounting principles in India.
• Two factual observations are present: one on the internal control effectiveness (point 14(b)), and another on the backup of books of account and other papers (point 14(h)(vi)).

Key Accounting Policies and Changes #

• The financial statements comply with Indian Accounting Standards (Ind AS) notified under Section 133 of the Companies Act, 2013.
• The historical cost convention is used, except for certain financial assets/liabilities and defined benefit plan assets, which are measured at fair value.
• Amendments to Ind AS 1, 8, and 12 (accounting policy disclosures, definition of accounting estimates, and deferred tax) did not have any material impact.
• The company uses a third party for risk management (pages 23 and 24).

Internal Control Effectiveness #

• The auditor’s report includes a separate report (‘Annexure A’) on the adequacy and operating effectiveness of the internal financial controls over financial reporting, with a positive result.
• Internal financial controls related to maintaining a backup of accounts on servers. The audit log’s maintenance was deficient at the application and database level.

Regulatory Compliance Status #

• The Company has complied with all mandatory requirements of corporate governance specified in regulations 17 to 27 and clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 of the Listing Regulations, as reported in the Corporate Governance Report.
• The Company has complied with the applicable Secretarial Standards.
• The Company claims full compliance with all applicable environmental laws/regulations/guidelines in India (Principle 6 of the BRSR).
• No strictures or penalties were imposed on the Company by Stock Exchanges, SEBI, or any statutory authority.

Legal Proceedings and Their Potential Impact #

• The Company discloses the impact of pending litigations on its financial position in Note 27 of both the Standalone and Consolidated Financial Statements.
• There are outstanding disputed statutory dues, especially related to income tax, sales tax/VAT, excise, service tax, customs, and GST. Management made a judgement with tax and legal advisors to determine the outcome.
• A Supreme Court order regarding the definition of ‘Basic Wage’ under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952, is mentioned, with management assessing no significant financial impact.
• Two POSH complaints were reported and resolved.

Related Party Transactions #

• All Related Party Transactions (RPTs) were conducted in the Ordinary Course of Business and at Arm’s Length basis.
• No Material Related Party Transactions, as per the Board’s materiality threshold, were entered into.
• No materially significant related party transactions were made with the Promoters, Directors, and/or Key Management Personnel that could potentially conflict with the Company’s interests at large.
• Note 34 of both Standalone and Consolidated Financial Statements provides extensive details of transactions and balances with related parties (holding companies, fellow subsidiaries, key management personnel, and employee benefit trusts).

Subsequent Events #

• The subsidiary, ICI India Research and Technology Centre, received approval (dated 10th May 2024) from the Regional Director, Ministry of Corporate Affairs, for conversion from a Section 8 company to a private limited company. The process of obtaining a fresh certificate of incorporation is underway, and management said that there is no impact on consolidated reporting.
• The Board has recommended a Final Dividend of H 25/- per equity share, subject to shareholder approval at the ensuing AGM.

Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The unqualified audit opinion suggests a high level of accounting quality. The consistent application of accounting policies and the use of estimates and judgments are disclosed. The Company uses a moving weighted average for inventory costing, which, while standard, can be less precise than FIFO or specific identification in times of fluctuating costs. The level of detail in the disclosures relating to employee benefit obligations, including actuarial assumptions, suggests a robust approach.
• Regulatory Risk Assessment: The main area of regulatory risk identified relates to ongoing tax litigations. While the Company states its belief (based on expert advice) that these disputes are unlikely to result in a material outflow of resources, the amounts involved are material. There is a risk of adverse rulings, potential increases in provisions, and cash outflows related to these tax disputes. Compliance with environmental laws is stated, but specific quantitative disclosures of emissions are provided in BRSR, limiting the ability to independently assess the risk. The backup procedure and the inability of reporting is a source for concern.