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Kansai Nerolac Paints Ltd>
  • CMP : 494.3 Chg : -6.10 (-1.22%)
  • Target : 360.0 (10.45%)
  • Target Period : 12-18 Month

13 May 2022

Volume dip, cost inflation dents profit…

About The Stock

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

  • Strong distribution network of ~28,000 dealers across the country with 75-80% penetration of tinting machine
  • In the last two years, KNL has increased its total paint manufacturing capacity by 28% to 5.3 lakh tonnes at an investment of ~₹ 1100 crore
Q4FY22 Results

Lower volume offtake (in both decorative and industrial) and delay in passing of higher raw material prices dented profitability

  • The company reported price led revenue growth of 4% YoY to ₹ 1413 crore in Q4FY22. However, the lower volume growth was led by ~8% drop in the volume of decorative paints
  • Sharp rise in raw material prices and delay in passing on the same dragged gross & EBITDA margin down by 660 bps and 937 bps YoY, respectively
  • PAT declined 81% YoY to ₹ 25 crore, tracking lower margins
What should Investors do?

Kansai’s share price has declined at CAGR of -0.39% over the past five years (from ~₹ 410 in May 2017 to ~₹ 402 levels in May 2022).

  • We change our rating on stock from HOLD to REDUCE
Target Price & Valuation

We value Kansai at ₹ 360 i.e. 30x P/E on FY24E EPS.

Key Triggers for future price performance
  • We believe regaining of lost market share in the decorative paint segment (~55% of total revenue) will be key trigger for 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 advertisement expenses will keep overall EBITDA margin expansion under check
Alternate Stock Idea

We like Supreme Industries in our coverage universe.

  • Supreme is market leader in plastic piping segment with ~14% market share. Robust b/s with average RoE, RoCE of 24%, 27%, respectively
  • BUY with a target price of ₹ 2320

Key Financial Summary

(Rs# Crore) FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 5,173.6 4,943.2 4,770.9 5,948.9 8.3 6,683.8 7,549.9 12.7
EBITDA 742.0 781.6 843.5 647.3 -2.4 838.6 1,013.2 25.1
EBITDA Margin (%) 14.3 15.8 17.7 10.9 - 12.5 13.4 -
Net Profit 467.3 535.4 530.6 374.3 -5.8 524.4 651.2 31.9
EPS (|) 8.7 9.9 9.8 6.9 - 9.7 12.1 -
P/E (x) 46.4 40.5 40.8 57.9 - 41.3 33.3 -
Price/Book (x) 6.3 5.7 5.3 5.2 - 5.2 4.9 -
Mcap/Sales (x) 4.2 4.4 4.5 3.6 - 3.2 2.9 -
RoE (%) 13.6 14.1 13.2 9.2 - 12.7 14.6 -
RoCE (%) 20.2 17.5 17.2 12.1 - 16.8 19.5 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY22 Results:

  • Revenues increased albeit a slow pace of 4.2% YoY to ~| 1413 crore led by only price hike. We believe the company has reported overall volume dip of 5% YoY led by 8% dip in the volume of decorative paints. The industrial paint demand remained muted due to lower demand from automotive segment. The company has taken price hike of 21% and ~18% in the decorative and industrial paints segments, respectively, during FY22
  • The company has clocked one of its lowest EBITDA margin of 5.9% in Q4FY22, down by 937 bps YoY. This was led by 660 bps YoY drop in gross margin and one-time retirement benefit of ~             | 24 crore. The company was unable to pass on complete price hike in the industrial paints segment
  • PAT       declined sharply by ~81% YoY to ~| 25 crore, tracking lower margins

Q4FY22 Earnings Conference Call highlights

  • Demand Outlook:

Decorative Paints Segment:

  • Kansai Nerolac lost its market share in decorative paints segment as the leader was very aggressive in the economy product category
  • Delay in launching of new products in both premium and economy products along with lower advertisement expenses (declined from 5% in FY20 to 3% in FY21) led to market share loss for the company
  • The management is aiming for single digit volume growth in FY23E supported by corrective measures in the decorative paints
  • For the future, Kansai Nerolac aims to regain the lost market share through product differentiation and competitive pricing
  • The company is also planning to increase its focus on adding more products in the premium and super premium category along with increasing its advertising expenditure
  • The management expects waterproofing and construction chemical to be 5% of company’s total topline by the end of FY23
  • The management suggested that its influencer programme (through influencer Pragati APP) will drive demand in coming years

Industrial Paints Segment:

  • The industrial paint volume growth was impacted due to lower demand from automotive segment.
  • For this segment, the company has taken price hike of 18% in FY22. The company is in negotiation with its key clients for further price hike in this segment (largely to offset cost inflation)
  • The company aims to continue market share gain in the automotive paint segment. In the non-automotive category, the company plans to launch premium products
  • Margins:
    • Going forward, improved product mix (launch of premium products in decorative paints segment) and gradual price hikes in the industrial paints segment will help company to recover gross margin at pre-Covid level
    • The company plans to increase its advertisement expenses in FY23E to regain lost market share
  • Distribution expansion:
    • Kansai Nerolac currently has ~28000 dealers and aims to increase its dealer base by 8-10% in FY23
    • Tinting machines account for around 80-85% of the company’s dealer base
Variance Analysis
  Q4FY22 Q4FY22E Q4FY21 YoY (%) Q3FY22 QoQ (%)   Comments
Net Revenue 1,412.8 1,424.0 1,355.8 4.2 1,693.7 -16.6   Topline growth was mainly driven by industrial paint, however decorative paint revenues were impacted by sharp volume dip
Other Income 7.6 10.3 12.4 -38.7 9.3 -18.1    
Raw Material Exp 1,017.7 955.1 887.3 14.7 1,162.7 -12.5   Delay in price hike put dents on gross margin by ~660 bps YoY
Employee Exp 96.6 68.9 68.8 40.5 74.3 30.0   Employee costs includes one time retirement benefit of | 24 crore in Q4FY22 
Manuf & Other exp 215.6 219.2 193.1 11.6 246.7 -12.6    
Total Expenses 1,329.9 1,243.2 1,149.1 15.7 1,483.7 -10.4    
EBITDA 82.9 180.8 206.7 -59.9 210.0 -60.5    
EBITDA Margin (%) 5.9 12.7 15.2 -937 bps 12.4 -653 bps   Lower gross margins and higher employee costs resulted EBITDA margin decline of 937 bps YoY
Depreciation 39.1 39.0 42.9 -8.9 39.0 0.3    
Interest 2.6 4.0 4.2 0.0 2.3 0.0    
PBT 37.4 148.1 172.0 -78.2 178.1 -79.0    
Total Tax 12.9 38.1 43.5 -70.3 45.7 -71.7    
Adj PAT 24.5 110.0 128.5 -80.9 132.4 -81.5   Sharp decline in PAT due to margin pressure
Key Metrics                
 Volume Growth (%)  -5.0 -8.0 31.0   7.0     Overall volume de-growth was led by ~8% drop in volume of decorative paints. We believe,Industial paint demand was also impacted due to supply disruption
Realisation Growth (%) 9.7 16.3 2.8   5.7     Company has taken YTD price hike of ~21% in decorative paints and ~18% in Industrial paints respecively (major chunck of hikes taken in the middle of Q3FY22)

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