Maintain BUY on Kansai Nerolac - Raw material cost pressure palpable - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

KNPL's 4Q topline grew 34.7% to INR13.3bn (in-line). Decorative segment is estimated to have clocked volume/value growth of +37/32%. Performance is likely to lag market leader APNT. Industrial Coating is estimated to have clocked 39% (off a low base). GMs contracted ~410bp YoY to 34.4% (HSIE: 36%). GM miss was largely a function of higher-than expected impact of rising commodity prices. Strong cost control cushioned the impact on EBITDAM (15.3%; in-line). We've tapered down FY22/23 EPS expectations (- 10/-5% resp) to account for (1) the second wave's impact on demand and (2) lower GMs due to rising RM inflation. While KNPL did take price hikes in Mar-21, they remain inadequate to cover the RM spike. Our DCF-based TP stands revised to INR625/sh (earlier INR650/sh, implying 50x FY23 P/E). Maintain BUY.

4QFY21 highlights: Revenue grew 34.7% YoY to Rs. 13.3bn (in-line). Decorative business grew 37/32% (HSIE) in volume/value terms and industrial business grew by 39% (off a low base). Recovery was strong across price points in decorative segment courtesy strong recovery in metros and healthy rural demand. For FY21, dealer base remained stagnant. While GMs contracted ~410bp YoY to 34.4% (HSIE: 36%), strong cost control cushioned the impact on EBITDAM (15.3%; +235bp; in-line). 2-yr Adj PAT CAGR stands at a reasonable 17% for 4Q. Note: RM pressure is palpable as can be seen in the deteriorating working capital position. CC cycle is up from 83 days (FY20) to 90 days (FY21).

Outlook: The double whammy of (1) demand impact, courtesy the second COVID-19 wave and (2) runaway RM inflation is likely impact KNPL the most within the top-tier paint companies, given its industrial-heavy revenue skew. Hence, we have tapered down our FY22/23 EPS expectations (-10/-5% resp). Our DCF-based TP stands revised to INR625/sh (earlier INR650/sh, implying 50x FY23 P/E). Maintain BUY (note that TP change mimics EPS change).

Shares of KANSAI NEROLAC PAINTS LTD. was last trading in BSE at Rs.553.65 as compared to the previous close of Rs. 566.3. The total number of shares traded during the day was 24637 in over 2105 trades.

The stock hit an intraday high of Rs. 571.05 and intraday low of 551.25. The net turnover during the day was Rs. 13759694.

Source : Equity Bulls

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