ADD on Kansai Nerolac - Performance lags leader - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

KNPL's 3Q performance (18% YoY; Rs. 14.7bn vs HSIE: Rs. 14.3bn) was nothing to scoff at. However, it's decorative segment (volume/value growth estimated at 23/18.6%) did lag that of market leader APNT (33/26% YoY). Industrial Coating grew at 17% (off a low base). Performance gap was attributed to higher primers/putties sold by the leader. GM expansion lagged that of APNT's (93bp YoY to 39.2% vs APNT +207bp) as mix continues to normalise in favour of low-margin industrials business. While the all-round demand recovery is heartening, RM inflation could weigh on profitability, going forward (already factored in). We largely maintain our EPS estimates and DCF-based TP of Rs. 650/sh (implying 51x Sept-22 P/E).

3QFY21 highlights: Revenue grew 18% YoY to Rs. 14.7bn (HSIE: 14.3bn). Decorative business grew 23/18.6% in volume/value terms and industrial business grew by 17% (HSIE) as pent-up demand timing, strong festive season, share gains from unorganised, recovery in metro/tier-1 catchments, and strong Auto sales underpinned growth. Within Non-Auto Industrials, Powder Coatings continues to do well. On the international front, Nepal clocked strong double-digit growth (led by pent-up demand) post market re-opening in Dec-20. Sri Lanka remains impacted, though it is witnessing signs of recovery. Bangladesh sustained its growth momentum (high double-digit growth YoY). Among subsidiaries, Marpol and Perma grew in high double digits. GM expansion lagged that of APNT's (93bp YoY to 39.2% vs APNT +207bp) as mix continues to normalise in favour of lower- margin industrials business. EBITDAM expanded 430bp to 19.7% (HSIE: 18.6%). as company continued to keep a tight lease on costs. PAT grew 65% to Rs. 2bn (HSIE: Rs. 1.75bn).

Outlook: While all-round demand recovery is heartening, RM inflation could weigh on profitability, going forward (already factored in). While 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. We largely maintain our EPS estimates and DCF-based TP of Rs. 650/sh, (implying 51x FY23 P/E).

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.589.8 as compared to the previous close of Rs. 584.4. The total number of shares traded during the day was 9664 in over 477 trades.

The stock hit an intraday high of Rs. 590 and intraday low of 579. The net turnover during the day was Rs. 5640196.

Source : Equity Bulls

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