Kansai Nerolac Paints - Recovery in automotive segment and premium paints - ICICI Securities

Highlights: (1) Recovery in PV production after decline for 23 months helped Kansai report double digit volume growth in Industrial paints, (2) Decorative paints also reported double digit volume growth with recovery in metros and continued growth momentum in tier 2/3 cities and (3) Cost saving initiatives and operating leverage helped to report EBITDA margin expansion of 430bps while gross margin was up just 90bps. As Grasim plans to enter Decorative paints, Kansai's Industrial paints will likely remain insulated. We expect Kansai to benefit due to (1) recovery in automotive sector and likely market share gains due to usage of powder coating instead of liquid paints, (2) recovery in metros will lead to higher revenues of premium paints and (3) new segments such as waterproofing and adhesives to contribute positively in FY22E. We upgrade the stock to ADD from HOLD with DCF based target price of Rs650 (47x FY23E).

- Q3FY21 performance: Kansai reported revenue, EBITDA and PAT growth of 19.7%, 54% and 76.6%, respectively. Decorative as well as Industrial paint segments reported volume led double digit growth. The subsidiaries in Nepal and Bangladesh also reported healthy recovery in revenues. Gross margin expanded 90bps due to lower input prices but EBITDA margin expanded 430bps due to cost savings measures initiated post covid and operating leverage.

- Recovery in automotive business: After declining for 23 months, the passenger vehicle production reported growth in Oct'20. Revival in automotive sector will lead to higher revenues of industrial paints (45% of sales). Multiple auto and ancillary companies have started to prefer powder coating to liquid paints. We expect this trend will allow Kansai to gain market share. While powder coating is not cost effective to liquid paints, it improves efficiency and reduces VOC.

- Steep input inflation but expect operating leverage: While input prices are up c.10% YoY, we expect Kansai to benefit in FY22 due to (1) increase in revenue share of premium paints with recovery in metros, (2) cost saving initiatives, (3) operating leverage, (4) positive contribution from new businesses such as waterproofing and adhesives and (5) selective price hikes.

- Performance of new segments and products crucial: The company 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 in Q2FY21 under the brand 'Nerolac Excel Virus Guard'. We believe performance of these new initiatives will be crucial.

- Upgrade to ADD: We model revenue and PAT CAGRs of 18.5% and 22.1% respectively over FY21E-23E. RoE is expected to be above cost of capital in FY22. We upgrade the rating to ADD from HOLD with DCF based TP of Rs650 (47x FY23E). Key risks: Slow-down in rural markets and steep inflation in input prices.

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.574.65 as compared to the previous close of Rs. 577.4. The total number of shares traded during the day was 75963 in over 1852 trades.

The stock hit an intraday high of Rs. 590.1 and intraday low of 562.4. The net turnover during the day was Rs. 44179176.

Source : Equity Bulls

Keywords