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Kansai Nerolac Paints Ltd>
  • CMP : 292.5 Chg : 2.45 (0.84%)
  • Target : 440.0 (8.11%)
  • Target Period : 12-18 Month

10 May 2023

Demand recovery drives topline…

About The Stock

Kansai Nerolac (KNL) is a global leader in industrial coatings (auto). However, in the last 10 years, it has increased its decorative paint mix to ~55% of its topline. Currently, KNL is the third largest decorative paint player in India.

  • Strong distribution network of ~28,000 dealers across the country
  • In the last three years, KNL has increased its total paint manufacturing capacity from 5.47 lakh KL to 6.06 lakh KL at a cumulative investment of ~₹ 543 crore
Q4FY23 Results

Revenue growth supported by better demand across segments.

  • Revenue grew ~13% YoY to ~₹ 1734 crore on the back of improved demand and new product launches across decorative & industrial paints
  • Gross margin improved ~397 bps YoY supported by lower raw material prices and price hikes in industrial paints. As a result, the EBITDA margin improved 424 bps YoY) to 9.7%. This is still lower than its pre-Covid range of 12-13% due to higher advertisement expenditure
  • On a favourable base, PAT grew ~5x YoY to ₹ 96 crore tracking EBITDA margin expansion
What should Investors do?

KNL’s share price has given negative return over the past five years (from ₹ 506 in May 2018 to ₹ 407 levels in May 2023).

We maintain our HOLD rating on the stock

Target Price and Valuation

We value the stock at 35x P/E FY25E EPS and revise our target price to ₹ 440.

Key Triggers for future price performance
  • We believe regaining lost market share in decorative paint (~55% of total revenue) will be a key trigger for the company’s future revenue growth
  • Revival in passenger vehicle sales and strong demand momentum in industrial paints would help in a recovery in 45% of KNL’s revenue portfolio
  • Focus on improving product mix towards premium products would help drive gross margin, going forward
  • Higher ad expenses to keep overall EBITDA margin expansion under check
Alternate Stock Idea

We like Supreme Industries in our coverage.

  • Supreme is market leader in the plastic piping segment with ~15% market share. Robust b/s with average RoE, RoCE of 23%, 26%, respectively
  • BUY with a target price of ₹ 3200

Key Financial Summary

(| Crore) FY20 FY21 FY22 FY23 5 Year CAGR (18-23) FY24E FY25E 2 Year CAGR (23-25E)
Net Sales 5,280.0 5,074.3 6,369.4 7,542.7 10.1 8,307.9 9,383.7 11.5
EBITDA 804.5 863.3 649.4 818.0 0.6 980.3 1,159.7 19.1
EBITDA Margin (%) 15.2 17.0 10.2 10.8 - 11.8 12.4 -
Net Profit 515.8 525.7 343.2 468.5 -1.8 574.9 686.9 21.1
EPS (|) 9.6 9.8 6.4 8.7 - 10.7 12.7 -
P/E (x) 42.5 41.7 63.9 46.8 - 38.2 31.9 -
Price/Book (x) 5.9 5.4 5.3 4.8 - 4.9 4.5 -
Mcap/Sales (x) 4.2 4.3 3.4 2.9 - 2.6 2.3 -
RoE (%) 13.8 13.0 8.3 10.3 - 13.0 14.1 -
RoCE (%) 17.7 17.5 11.7 14.0 - 17.4 19.0 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY23 Results: Healthy revenue growth, margin under pressure

  • Kansai Nerolac’s Q4FY23 revenue grew at a healthy pace of ~13% YoY to ~| 1,734 crore led by volume growth in both decorative and industrial paints segments. We believe the company reported ~12%, ~11% YoY volume growth in the decorative & industrial paints segment, respectively, led by new product launches and strong demand from automotive OEMs
  • Gross margin was up ~397 bps YoY supported by benign raw material prices and price hikes taken in the industrial paints segment. Although the company saw a 424 bps YoY improvement in EBITDA margin (base-period included one-time retirement benefit of ~| 24 crore), reported EBITDA margin of 9.7% is the lowest reported margin in FY23. This was mainly due to a sharp increase in other expenses (up 22% YoY) on account of higher advertisement expenditure
  • Favourable base and improvement in EBITDA margin led to ~5x growth in PAT to ~| 96 crore

Q4FY23 Earnings Conference Call highlights

  • Demand outlook & market share:
    • KNL has a better market share in North India followed by East, West & South region. The company’s popular & economy range of paints are more common than the premium range
    • KNL has a better presence in Tier 2, 3 & 4 cities and is working on improving its presence in Tier 1 cities
    • According to the management, the demand environment is stable and the paint industry is expected to grow ~200-300 bps higher than the GDP growth rate
    • The company has ~10% market share in construction chemicals
    • The company’s market share in performance coatings is ~20% and the management is focusing on improving it

 

  • Decorative Paints Segment:
    • The management indicated focus on growing decorative paints segment faster than industrial paints
    • In Q4FY23, the company introduced 14 new products in the decorative paints segment
    • The company’s digital platform, NextGen painting service has a presence in 450+ cities, 100+ dealers and has painted 20,000+ houses. According to the management, 500 homes are painted per day under this service
    • The company is focusing on gaining wallet share through its existing painters & influencers network and has been able to engage 1 lakh painters
    • KNL opened 100 shoppees in India and is aiming to increase the number
    • The company has introduced new branding in decorative paints segment named ‘Paint+’

 

  • Industrial Paints Segment:
    • KNL has gained market share in passenger vehicles, two-wheelers, commercial vehicles & electric vehicles categories in FY23
    • The company has introduced eight new products in the industrial paints segment
    • The management expects 8-10% growth in the industrial paints segment, going forward
    • As per the management, rural demand has continued to remain volatile
    • The company’s exit of low margin business in performance coating category will be completed in Q1FY24, which formed 10% of the revenue generated from performance coatings

 

  • Margins:
    • The company has completed its price hikes in the industrial paints segment and KNL has taken price hikes with 100% of its customers in the automotive segment
    • According to the management, the industrial paints segment margin in Q4 was close to double digits. Going forward, the company aims to achieve sustainable double digit margin in the industrial paints segment
    • As per the management, the sustainable EBITDA margin for the decorative paints business will remain 400-500 bps lower than the market leader
    • KNL’s high-cost inventory has got exhausted. The company has increased its marketing spend amid rising competition

 

  • Distribution & Expansion:
    • The company is growing its dealer network at a run rate of 8-10% per annum
    • KNL’s current capacity is at 6,06,000 KL. The company has envisaged a capex of | 316 crore to add capacity of 1,54,080 KL over FY24-25E
    • As a part of its backward integration strategy, the company has commenced production of resin and is further looking at expanding the resin capacity
    • According to the management, the total number of painters in India was at ~25 lakh, which includes small & big painters. Out of this, ~7.5 lakh painters drive 80% of the business. KNL has been able to reach ~3.5 lakh painters out of the 7.5 lakh painters

Disclaimer

RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

 

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

 

 

 

Pankaj Pandey

Head – Research

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