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Gaining market share in the industrial paints...

Kansai Nerolac Paints (KNPL) is the market leader in industrial paints and the third largest decorative paint company in India.

* In Q4FY23, top-line grew by 13% YoY, led by

* In Q4FY23, top-line grew by 13% YoY, led by healthy demand in the industrial paints and decorative segment.

* Gross margin improved by 397bps YoY to 31.9% owing to price hike in industrial paints and benign raw material prices. EBITDA margin improved by 424bps YoY to 9.7% in Q4FY23.

* The decorative and industrial paints volume grew by double digit due to new product launches and strong demand from automotive OEMs.

* The management is focusing to improve its market share in decorative business and expects the segment to grow faster than industrial paints.

* We expect margins to improve in the coming quarters on account of price hikes from auto OEMs and a fall in input prices.

* We reiterate Accumulate rating and value KNPL at 32x on FY25E EPS with a target price of Rs. 459.

Industrial demand to drive growth...

The company reported a better than expected top-line growth of 12.8% YoY to Rs.1,734cr, supported by pick up in decorative paints demand led by new launches and healthy demand in industrial paints. The company has gained market share in passenger vehicle paints, two wheeler paints, commercial vehicle paints and tractor segment paints. KNPL has a market share of 20% in auto segment and non-auto segment, the market share is around 19% to 20%. The decorative segment constitutes 55% of the revenue and industrial segment contributes 45% in FY23. The management highlighted that the journey of exiting low margin paints is progressing well and they are focusing on adding more premium paints. We expect a revival in passenger vehicle sales and strong demand momentum in the industrial segment to drive top-line.

Margin recovery on cards...

KNPL’s gross margin improved by 397bps YoY to 31.9%, led by price hikes taken in the industrial paints category and healthy demand in decorative segment. The company has launched 14 new products in the decorative category, which has coloured the demand. EBITDA margin improved 424bps YoY to 9.7%, aided by –6% fall in employee costs. We expect some ease in margin pressure in the coming quarters due to the fall in oil prices and improving product mix

Key highlights...

* The management expects 8% –10% growth in industrial segment paints, going forward.

* The current capacity stood at 606 million litres in FY23 and the company is planning to increase it by 154 million litres with a capex of Rs316cr in the coming years.

* KNPL’s exit of low margin business in performance coating category will be completed in Q1FY24.

Valuation and Outlook

We expect an increasing demand outlook for auto with improved chip availability and introduction of new products to increase the growth in premium category. We reiterate Accumulate rating on the stock with a target price of Rs. 459, based on a P/E of 32x on FY25E EPS.

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