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Performance lags leader

KNPL’s 3Q performance (18% YoY; Rs. 14.7bn vs HSIE: Rs. 14.3bn) was nothing to scoff at. However, it’s decorative segment (volume/value growth estimated at 23/18.6%) did lag that of market leader APNT (33/26% YoY). Industrial Coating grew at 17% (off a low base). Performance gap was attributed to higher primers/putties sold by the leader. GM expansion lagged that of APNT’s (93bp YoY to 39.2% vs APNT +207bp) as mix continues to normalise in favour of low-margin industrials business. While the all-round demand recovery is heartening, RM inflation could weigh on profitability, going forward (already factored in). We largely maintain our EPS estimates and DCF-based TP of Rs. 650/sh (implying 51x Sept-22 P/E).

* 3QFY21 highlights: Revenue grew 18% YoY to Rs. 14.7bn (HSIE: 14.3bn). Decorative business grew 23/18.6% in volume/value terms and industrial business grew by 17% (HSIE) as pent-up demand timing, strong festive season, share gains from unorganised, recovery in metro/tier-1 catchments, and strong Auto sales underpinned growth. Within Non-Auto Industrials, Powder Coatings continues to do well. On the international front, Nepal clocked strong double-digit growth (led by pent-up demand) post market re-opening in Dec-20. Sri Lanka remains impacted, though it is witnessing signs of recovery. Bangladesh sustained its growth momentum (high double-digit growth YoY). Among subsidiaries, Marpol and Perma grew in high double digits. GM expansion lagged that of APNT’s (93bp YoY to 39.2% vs APNT +207bp) as mix continues to normalise in favour of lower- margin industrials business. EBITDAM expanded 430bp to 19.7% (HSIE: 18.6%). as company continued to keep a tight lease on costs. PAT grew 65% to Rs. 2bn (HSIE: Rs. 1.75bn).

* Outlook: While all-round demand recovery is heartening, RM inflation could weigh on profitability, going forward (already factored in). While Decorative business continues to perform well and Industrial performance progressively improves, a secular recovery in the latter can’t still be called out. Hence, we remain cautiously optimistic on KNPL. We largely maintain our EPS estimates and DCF-based TP of Rs. 650/sh, (implying 51x FY23 P/E).

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