Published on 18/03/2017 12:16:02 PM | Source: Sharekhan
Positive On Kansai Nerolac Paints Ltd - Sharekhan
* Positives priced in the current valuation; book profit with a handsome gain of ~20%:
Since our initiation of viewpoint report on Kansai Nerolac Paints (KNPL) on June 21, 2016, the stock has delivered ~20% return and is currently trading at a premium valuation of 38x its FY2018E earnings. The current valuation has priced in all the positives like the improvement in demand for Decorative Paints (driven by a better monsoon and implementation of the Seventh Central Pay Commission awards) and improvement in the Automotive Paint sales (driven by uptick in auto sales). The company posted a strong performance in Q3FY2017 (despite demonetisation affecting sales) on the back of a material improvement in the Operating Profit Margin (OPM).
* Increase in raw material prices might put pressure on margins in near term:
Demand for Decorative Paints is discretionary in nature and therefore we expect it to take 2-3 quarters to return to pre-demonetisation level (unlike other Consumer Goods). Also, crude oil prices have shown an upward trend in the recent past, which would increase the prices of crude derivatives. Prices of Tio2 (~35% of raw material cost for KNPL) too are up by 7-8% in the recent past. This might put pressure on the company’s gross margins in the near future (in the absence of any price hikes).
* Book profit with handsome gains:
KNPL’s stock price is currently trading at 38x its FY2018E earnings, which is at a premium to its last three years’ average multiple of 34x. Therefore, we recommend investors to book profit with handsome gains of about 20% and wait for a better price point to re-enter the stock.
* Risk to our call:
Fast recovery in the demand environment from the current level or decline in RM prices would benefit KNPL’s earnings and would further drive the stock price upwards.
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