Maintain BUY on Kansai Nerolac - GM pressure palpable - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

KNPL's topline delivery of 118% YoY exceeded expectations (HSIE: 95%). In the decorative segment, volume lagged value growth as realisations were aided by (1) multiple price hikes, (2) make-up in recovery (urban performed better than rural) and (3) better mix. Decorative performance is likely to have lagged the market leader APNT. Industrial coatings recovered too (on a low base). GM was under pressure, given (1) higher industrial skew in the mix YoY and RM inflation (high double digits YoY). Price hikes (since Mar-21) remain incommensurate to the RM spike. We have marginally revised our FY23/34 estimates (+2/+3% respectively) to account for better cost control. Consequently, our DCF-based TP stands revised at INR675/sh (earlier INR650/sh, implying 50x Jun-23 P/E). Maintain BUY.

1QFY22 highlights: Revenue grew 118% YoY to INR 13bn (HSIE: INR11.7bn). In the decorative segment, volume lagged value growth as realisations were aided by (1) multiple price hikes, (2) make-up in recovery (urban performed better than rural) and (3) better mix (emulsions did well). Performance still lags APNT (HSIE: 2-yr CAGR: APNT: +5% vs KNPL: -2%). Management highlighted that dealer additions will pick up in 2H. Industrial segment recovered too (off a low base). New products now account for 10% of sales. GM contracted 744bps YoY to 34.2% (in-line), given (1) higher industrial skew in the mix and RM inflation YoY. Price hikes (since Mar-21) remain incommensurate to the RM spike. Better cost control cushioned the impact of EBITDAM (14.4%; +92bp). The 2-year PAT CAGR stood at -10% (INR 1.18bn).

Outlook: The double whammy of demand impact (courtesy the second and probable third waves) and runaway RM inflation are likely to be felt by KNPL the most within the top-tier paint companies, given it has an industrial-heavy revenue skew (already factored in). We have marginally revised our FY23/34 estimates (+2/+3% respectively) to account for better cost control. Consequently, our DCF-based TP stands revised at INR675/sh (earlier INR650/sh, implying 50x Jun-23 P/E). Maintain BUY.

Shares of Kansai Nerolac Paints was last trading in BSE at Rs. 635.25 as compared to the previous close of Rs. 628.65. The total number of shares traded during the day was 14254 in over 1042 trades.

The stock hit an intraday high of Rs. 639.75 and intraday low of 624.1. The net turnover during the day was Rs. 8993021.

Source : Equity Bulls

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