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Benefits of investments in new initiatives from FY23 and onwards

Kansai Q1FY22 was in-line with our expectations (2-Year revenue CAGR was - 4.6% vs our expectations of -4.5%). Kansai is investing in (1) new segments (waterproofing, adhesives, wood coatings) as well as geographies (Sri Lanka, Bangladesh, Nepal). We note most of these initiatives are progressing well and reported strong growth in Q1FY22 and (2)

The initiatives in digital and technologically superior products are also doing well and are likely to report healthy growth with revival in auto sector and likely higher industrial production post PLI. In FY22, we expect tailwinds of (1) market share gains due to usage of powder coating instead of liquid paints and recovery in auto sector and (2) recovery in metros leading to higher revenues of premium paints. While we remain confident about strong recovery in revenues, steep input inflation will impact profit margin in FY22. Retain ADD; TP Rs680.

* Q1FY22 performance: Kansai reported revenue, EBITDA and PAT growth of 119.6%, 148% and 275.8%, respectively. Two-year revenue and PAT CAGR were - 4.6% and -12.3%, respectively. Decorative as well as Industrial paint segments reported strong volume led growth. Gross margin declined 730bps due to higher input prices but EBITDA margin expanded 160bps due to cost savings measures initiated post covid and operating leverage.

* Strong recovery across key segments and geographies: The company’s new segments such as construction chemicals, wood coating, adhesives did well during the quarter. The company has largely completed the product portfolio of construction chemicals now. While Bangladesh business did well, Sri Lanka and Nepal subsidiaries reported muted growth due to localized lockdowns.

* Steep input inflation remains cause of concern: The input prices have continued to move upwards. While the company has done three rounds of price hikes, it believes the industry (& Kansai) needs additional price hikes to pass on additional cost pressures to end consumers. It has also been able to raise prices in industrial segment too. We expect higher input prices to weigh on margins in FY22-23.

* Investments in digital and technology: Kansai is investing in digital initiatives which are expected to benefit all the important business functions. It also plans to invest in technologically superior products for its industrial customers. We believe technologically superior products can drive revenue growth of the company as the demand for industrial products/ durables is likely to increase post PLI.

* Maintain ADD: We model revenue and PAT CAGRs of 18.5% and 18% respectively over FY21-23E. We maintain ADD rating with DCF based TP of Rs680 (50x FY23E). Key risks: continued slow-down due to covid and steep inflation in input prices.

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