Event update: Akzo Nobel India (Neutral) - Sale of chemical business largely earnings neutral

Event

• Akzo Nobel India Ltd has announced sale of its specialty Chemical business to an affiliate of Akzo Nobel group.

Key details

• The sale of chemical business will result in proceeds of Rs3.2bn, subject to adjustment for working capital and for an economic effective date of 1 January 2018.
• The transaction involves transfer of the Mahad polymer manufacturing facility, chemical trading business and 80 employees related to the chemical division. The management expects transaction to be completed by March 2018.
• The chemical business reported sales of Rs2.64bn and profit of Rs215m for FY17 (sales of Rs1.15bn and profit of Rs41m for 1HFY18), accounting for 9.5% of sales and 6.3% of PBT (7.7% of sales and 3.6% of PBT for 1HFY18) of Akzo Nobel India ltd. The sale of chemical business would result in 8% cut in our sales estimates for FY19/20E. However, given the low margin nature of the business, coupled with likely increase in other income, we expect the division sale to be largely profit neutral (2% cut each in FY19/20E earnings estimates) for Akzo Nobel India.

Our view

The sale of specialty chemical division is inline with parent company’s (Akzo Nobel NV) strategy (announced in April 2017) to separate its Specialty chemicals business from its Paints and coatings business to create two focused businesses. Given the low margin nature of the chemical business, the sale would result in margins being optically higher for Akzo Nobel India. Further with internal accruals sufficing for capacity expansion, a likely special dividend is a possibility for shareholders of the Indian entity. However, the key concerns in terms of Akzo Nobel India’s volume underperformance and weaker execution compared to domestic peers remains unchanged. We maintain our Neutral rating on the stock.