Kansai Nerolac Paints - TP Rs.1050 - SPA Securities

Kansai Nerolac Paints (KNP) Q1FY13 sales at INR 7,235mn, a YoY growth of 11%, was slightly lower than our expectation due to lackluster demand in decorative paints segment. EBIDTA margin at 13.39% was down by 84bps YoY but surprisingly up by 245bps QoQ on back of price hikes taken by the company. PAT at INR 449mn was up by 3.38% YoY, in line with our expectation. Going ahead, bad monsoon and slowdown in auto industry could pose significant headwinds to demand scenario but expected improvement in margins owing to moderation in RM cost and exchange rate stabilization would aid the profitability. We maintain BUY recommendation with the target price of INR 1,050, discounting FY14E earnings at 20x.

Price hikes supported sales growth

KNP reported 11% YoY growth in sales in Q1FY13 on the back of sluggish volume growth of ~4-5%, lower than our expectation. Volume growth came largely from industrial paints segment and was flattish in decorative paints segment. High proportion of price hikes in decorative paints (cumulative ~25% in last two years), persistent high inflation and higher stocking by dealers in previous quarter weighed on volume growth in decorative segment. Going ahead, bad monsoon could pose a dampner on overall demand for decorative as well as industrial paints. Beside ongoing trouble in Maruti Suzuki and general slowdown in auto industry volume would continue to suppress overall demand for auto paints that account for ~35% of company's sales.

Price hikes aided QoQ margin expansion

KNP took ~12% & ~3% average price hikes in FY12 and ~5% and ~4% in Q1FY13 respectively in decorative and industrial paints segment. Consequently, gross margins improved by 336bps QoQ but remained lower by 113bps compared to the corresponding quarter in previous year. Despite moderation in international prices of key RM like TiO2 and crude derivatives, depreciation in INR vis-à-vis USD erased any possible gains. Control on other expenditure helped the company to contain YoY decline in EBIDTA margin by 84bps to 13.39%. Going ahead, we expect stabilization in exchange rate will lead to moderation in RM cost that would aid margin expansion.

Acquisition of 68% stake in Nepal Shalimar

Company initiated process of acquiring 68% stake in Nepal Shalimar Private Ltd. (NSPL) in Q1FY13 to capture growth in Nepal market. Company expects acquisition to be completed by Q2FY13 for a sum of ~INR 75.5mn. Further, KNP would be giving a loan of ~INR 61.2mn to fund the working capital requirement of NSPL. With this, company came in par with its peers having manufacturing facility in the country. Previously, KNP used to export its products to Nepal primarily in premium segment due to 35-40% import duty on paints. NSPL had a turnover of ~INR 123.4mn in FY11 with a market share of ~8%.

Outlook & Valuation

KNP had been successful in taking price hikes of ~4% in industrial paints segment in Q1FY13 that bodes well for margin expansion going forward, provided exchange rate remains at current level. On the demand front, there had been some moderation owing to persistent high inflation and successive price hikes that impacted the overall consumer confidence in decorative paints segment, whereas slowdown in auto industry has had an impact on demand in industrial paints segment compared to previous year. Bad monsoon, however, could be a further dampner to overall demand scenario and therefore is key watchable. Despite slower growth, we expect profitability to be aided by margin expansion. We maintain BUY recommendation with 18 months target price of INR 1,050, discounting FY14E earnings at 20x.

Source : Equity Bulls

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