Result Update: Kansai Nerolac Paints Ltd - BUY - TP Rs.485 - Kotak

Stable volume growth in the decorative segment, weakness in the industrial segment, continued raw material price inflation, small price hikes in Q2FY19, extended monsoon in key geographies and delayed onset of festive season in CY18 were the highlights of the results for KNPL during the quarter.

Key Highlights

- As per management commentary, KNPL experienced 9% volume growth YoY growth across segments led by decorative segment. Management commented that inflation (including Raw material cost), volatility in crude prices and INR movement was more pronounced this quarter which impacted the operating margins. Management is making efforts to increase product prices and reduce various costs to counter the situation.

- Sales (excluding GST) was reported at Rs 12.94 bn (+11.1% YoY) with 9% overall volume growth. Raw material price inflation and weakness in the industrial segment (especially Auto) impacted the Gross margin and EBIDTA margin for the quarter.

- In H1FY19, company had taken a price hike of just 2% to counter the steep increase in raw material (RM) prices including crude derivatives. Post further sharp increase in RM prices, company has taken another price hike of 2/3 % across segments on October 1st which should reflect in the performance of Q3FY19.

- Management mentioned that the industrial segment including automotive segment is weak and it is difficult to pass on the RM hikes in this segment. While decorative paint segment is strong for the entire paint industry including KNPL.

- Consequently, PAT was reported at Rs 1.22 bn vs. our expectation of Rs 1.42 bn

Valuation and Outlook

- We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of KNPL also indicated that the volume trends remain strong for the company in the decorative segment and expect the trend to continue in medium term. However, industrial segment is weak and expected to remain weak in rest of FY19. We also estimate the gross margin of the company to remain under pressure with continued RM inflation and the company's restricted ability to pass on cost inflation to its industrial paint clients (45% of revenue). In view of the impact on gross margins and weakness in the industrial segment, we cut our EPS forecast for FY19E and FY20E by 9% each and assign a lower PE multiple to the stock in a weak macro environment. On the flip side, the stock remains one of the favored companies in the consumer space with a strong brand, credible history, sound management and BS and a reasonable outlook. Maintain BUY with a lower TP of Rs 485 (from Rs 540) at 39x FY20E earnings (from 40x).

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.366.85 as compared to the previous close of Rs. 367.25. The total number of shares traded during the day was 6461 in over 380 trades.

The stock hit an intraday high of Rs. 374.95 and intraday low of 360.4. The net turnover during the day was Rs. 2368073.

Source : Equity Bulls

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