Kansai Nerolac Paints - Strong recovery in Decorative; Automotive and Industrial to follow in H2 - ICICI Securities

Three highlights: (1) In-spite of lower revenue salience of ancillary products, Decoratives business reported 15% volume growth, (2) The company has continued its investments even in these tough times and has expanded dealer count by 4-5% and has also launched an anti-viral paint and (3) There is MoM recovery visible in automotive, industrial as well as Projects business. Similar to the peers, the company has reported higher growth in tier-2 and 3 cities. However, it indicated that the recovery is now visible even in tier-1 cities and metros. Kansai is the biggest beneficiary of revival in auto and industrial sector among its peers. Maintain HOLD with DCF based revised target price of Rs510 (44x FY22E; Earlier TP-Rs460).

- Q2FY21 performance: Kansai reported revenue, EBITDA growth of 4.3%, 22.7%, respectively. However, PAT declined 11.6% due to tax adjustments in the base quarter. While gross margin expanded 90bps due to lower input prices and higher revenue share of decoratives, EBITDA margin expanded 290bps due to cost savings measures initiated post covid and lower staff cost.

- Decorative paints reported 15% volume growth: The recovery in economy and, popular emulsions as well as continued momentum in other sub-segments of decoratives have helped the company to post 15% volume and 7% value growth. Adhesives reported weak growth but the company has now rolled out adhesives through paint as well as plywood channel. Kansai also expanded distribution by 4-5% during H1FY21 which also contributed to revenue growth. Perma which focusses on Projects business reported healthy growth during the quarter.

- Recovery in Industrial paint in H2FY21: With opening up of the economy, most sub-segments of Industrial paints are showing MoM recovery. The automotive paints are expected to follow auto sector recovery with a lag of one month. However, high performance coatings which are used in capex has continued to report weak results.

- Performance of new segments and products crucial: The company has entered waterproofing and adhesive segment in FY19. It is also focusing on popular and economy emulsions through 'Soldier' brand. It has rolled out India's first anti-viral paint during the quarter under the brand 'Nerolac Excel Virus Guard'. We believe performance of these new initiatives will be crucial.

- Maintain HOLD: We model revenue and PAT CAGRs of 6.3% and 9.8% respectively over FY20-22E. RoE is expected to be above cost of capital in FY22. Maintain HOLD with DCF based target price of Rs510 (44x FY22E). Key risks: Slow-down in rural markets and inflationary pressures in input prices.

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.521.95 as compared to the previous close of Rs. 507.35. The total number of shares traded during the day was 16022 in over 1206 trades.

The stock hit an intraday high of Rs. 523 and intraday low of 494.45. The net turnover during the day was Rs. 8228453.

Source : Equity Bulls

Keywords