Maintain ADD on Kansai Nerolac - In-line performance - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

KNPL's 2Q performance was largely in line with expectations. Revenue grew 3.6% YoY. The decorative business grew 15/7% in volume/value terms. The volume-value gap was higher vis-à-vis APNT due to inferior product mix and higher discounting. The Industrial business declined by -3% (implied). GM expansion lagged that of APNT (86bp YoY to 39.2% vs APNT +203bp and BRGR's +89bp). EBITDAM came in at 20.1% (in-line) as lower-than-expected opex made up for the GM miss. We maintain our ADD recommendation with a revised DCF-based target price of Rs. 520/sh (implying 45x Sept-22 P/E). Revision in TP mimics EPS change.

2QFY21 highlights: Revenue grew 3.6% YoY to Rs. 12.9bn (HSIE: 12.73bn). The Decorative business grew 15/7% in volume/value terms, underpinned by a strong pick-up in (1) Popular/economy emulsions and (2) expansion of construction chemicals portfolio. The volume-value gap was higher vis-à-vis APNT due to inferior product mix and higher discounting. The Industrial business declined by -3% (implied). Auto Industrials seems to have broadly tracked PV/2W growth in 2Q. Management highlighted that 3Q looks promising for Auto. Within Non-Auto Industrials, Powder Coatings continues to do well, while the off-take from Industrial adhesives remains slow. On the international front, Nepal and Sri Lanka continued to face demand headwinds, while Bangladesh smartly recovered. GM expansion lagged that of APNT (86bp YoY to 39.2% vs APNT's 203bp) and was in line with BRGR (+89bp). EBITDAM came in at 20.1% (in-line, HSIE: 20%) as lower-than-expected opex made up for the GM miss. Adj. for the Rs. 108mn provision towards the Kansai Paints (Lanka) investment, APAT declined 12% YoY to Rs. 1.69bn (HSIE: 1.77bn).

Outlook: While the Decorative business continues to perform well, and Industrial performance progressively improves, a secular recovery in the latter can't still be called out. Hence, we remain cautiously optimistic on KNPL and maintain our ADD recommendation with a revised DCF-based TP of Rs. 520/sh (implying 45x Sept-22 P/E). Revision in TP broadly mimics EPS change.

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.512 as compared to the previous close of Rs. 520.75. The total number of shares traded during the day was 10059 in over 888 trades.

The stock hit an intraday high of Rs. 528 and intraday low of 510.6. The net turnover during the day was Rs. 5182747.

Source : Equity Bulls

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