Kansai Nerolac Paints - Better-than-expected trajectory in decorative paints -

Decorative paints reported double digit volume growth in May and June'20. That's the key insight from Kansai's Q1FY21. Given the lower salience of ancillary products (putty, waterproofing, adhesives etc), decorative paints performance is commendable (including pent up demand and channel filling). Industrial paints (including automotive paints) decline was higher than overall revenue decline (Our view). Opening up of the economy, improvement in automotive demand and likely commodity tailwinds augur well. Our earnings estimates for FY21-22 are upgraded by 28.9-10.5%. Maintain HOLD with target price of Rs460 (40x FY22E).

- Q1FY21 performance: Kansai reported revenue, EBITDA and PAT decline of 58.6%, 69.7% and 79.5%, respectively. While gross margin expanded 320bps due to lower input prices and higher revenue share of decoratives, EBITDA margin declined 440bps due to stable fixed costs. Employee cost and Other expenditure as % of net sales were up 670bps and 90bps, respectively. Kansai initiated some cost saving programs and ad-spend was also lower (Our view).

- Decorative paints reported volume growth in May-June'20: While Apr'20 was completely washout due to lockdown, there was double digit volume growth in decorative paints in May and June'20. We believe there was some pent up demand as well as likely channel filing. Industrial paints (including automotive paints) continued to revenue report decline even in May-June'20.

- Expect delayed recovery in Industrial paint segment: Kansai has limited presence in waterproofing/exterior paints segment which is expected to recover the fastest. While its value-for-money paint Soldier may report some recovery, we expect recovery in the industrial and projects business only by H2FY21.

- Performance of new segments crucial: The company has entered waterproofing and adhesive segment in FY19. These segments are relatively more resilient due to 'problem solution' nature. We believe performance of these new initiatives will be crucial for the growth of the company in coming decade.

- Maintain HOLD: We model revenue and PAT CAGRs of 5.4% and 8.9% respectively over FY20-22E. RoE is expected to be above cost of capital in FY22. While revenue performance is likely to be weaker in FY21, we note tailwinds such as: (1) market share gains from smaller/unorganized sector in FY21-22; and (2) lower input prices. Maintain HOLD with a target price of Rs460 (40x FY22E).

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.432.3 as compared to the previous close of Rs. 445.3. The total number of shares traded during the day was 8820 in over 649 trades.

The stock hit an intraday high of Rs. 442.5 and intraday low of 430.5. The net turnover during the day was Rs. 3832756.

Source : Equity Bulls

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