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Another (margin) miss story; not unexpected though

In our view, paint industry, particularly peers and larger players have likely outperformed Kansai Nerolac in 4Q. Highlights from its 4Q: (1) After strong Q4FY21 and healthy sales in three weeks of Apr’21, sales have declined. Almost 70% of depots and 90% of dealers are closed now, (2) Kansai has raised prices by 2.5% in Mar’21, partly covering input inflation of ~13%.

It is in discussion with Automotive OEMs for price hikes and have raised prices by 3-8% of some subsegments of Industrial paints and (3) it continues with the capex guidance of Rs2.8bn in FY22 as, part of it, is critical for value engineering. In FY22, we expect tailwinds of (1) recovery in automotive sector and likely market share gains due to usage of powder coating instead of liquid paints, (2) recovery in metros leading to higher revenues of premium paints and (3) higher contribution from new segments such as waterproofing and adhesives. Retain ADD; TP Rs625.

* Q4FY21 performance:

Kansai reported revenue, EBITDA and PAT growth of 35.1%, 59% and 89.1%, respectively. Decorative as well as Industrial paint segments reported volume led double digit growth. Gross margin declined 440bps due to higher input prices but EBITDA margin expanded 220bps due to cost savings measures initiated post covid and operating leverage.

* Localised lockdown impacting volume off-take:

While Kansai had healthy growth in three weeks of Apr’21, localized lockdowns impacted volumes post that. As of now 70% depots and 90% dealers of the company are closed. While Projects have continued, they are facing labour shortage. Some of the OEMs are closed/ slowed down the manufacturing activities. It has impacted Industrial paints segment too.

* Steep input inflation also a cause of concern:

While paint companies generally pass on the inflation, we believe inflation coupled with weak demand is a cause of concern. The input price inflation is ~13%. The company has raised prices by 2.5% of its decorative paints in Mar’21. If the inflation remains high even after lockdown is lifted, it may impact the gross margins. While the company is still in discussion with automotive OEMs regarding prices hikes, it has raised prices in powder coating by 8%, performance & general coating by 3% and refinish by 5%.

* Performance of new segments is crucial:

Kansai has entered new segments such as waterproofing, adhesives and putty in past three years. It is also focusing on popular and economy emulsions through ‘Soldier’ brand. It has also stepped up the investments in International subsidiaries (Sri Lanka, Bangladesh and Nepal). We believe performance of these new initiatives will be crucial in FY22.

* Maintain ADD:

We model revenue and PAT CAGRs of 15.4% and 16% respectively over FY21-23E. We maintain ADD rating with DCF based TP of Rs625 (47x FY23E). Key risks: continued slow-down due to covid and steep inflation in input prices.

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