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Visible trajectory improvement under leadership of Anuj Jain; Upgrade to ADD

Kansai has introduced multiple DCF-accretive initiatives under the leadership of Mr. Anuj Jain, MD such as (1) steady expansion of innovative product portfolio across sub-segments, (2) relaunched brand as ‘Nerolac Paint+ with Japanese technology’ supported by higher brand and R&D spends, (3) investments in projects, Next-gen painting services and influencer reach to connect with customers and generate pipeline, (4) Kansai has also expanded dealer reach to 31,000 outlets in FY23 from 19,000 in FY19 and has also leveraged distribution model to improve coverage of smaller cities and rural markets. We also believe differentiated product offerings in Industrial coatings and industry tailwinds like automotive recovery and commodity price correction offer growth and margin tailwinds. Upgrade to ADD as risk of higher competition appears priced in after flat one-year stock performance.

Aggressive investments in multiple growth initiatives

Kansai has invested in numerous growth initiatives such as (1) brand relaunch supported by higher R&D and ad-spends, (2) expansion of dealer network from 24,000 in FY19 outlets to 31,000 outlets in FY23, (3) leveraging distribution route to reach to customers in smaller cities and rural markets, (4) multiple programs to strengthen connect with influencers and (5) aggressive investments in product portfolio across sub-segments. It has expanded the reach for its Projects business. It has reached to 71 towns by end of FY23

Industry tailwinds

Kansai generates ~45% revenues from Industrial coatings and is likely to be the biggest beneficiary of revival in Automotive and Industrial segments. It has also invested in differentiated offerings which help its customers in energy efficiency. It will also likely benefit from commodity correction in FY24-25.

Lowest impact in vulnerability index

We calculate the vulnerability index as per competitive intensity and likely increase in competition in sub-segments of paints. In our view, Kansai is likely to be least impacted paint company even if competition escalates (link).

Upgrade to ADD

We upgrade Kansai to ADD to factor in (1) investments in decorative business (2) revival in Automotive sector and (3) correction in RM prices. We model it to report revenue and PAT CAGR of 11.4% and 27.1%, respectively over FY23- 25. We value Kansai at DCF based revised target price of INR 360.

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