Buy Kansai Nerolac For Target Rs.635 - Anand Rathi Share and Stock Brokers
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Softening input prices, better industrial demand; upgrading to a Buy
Despite its strong performance, Kansai’s Q1 decorative paints’ volume growth was weaker, at 20%+, than Asian Paints’ ~35%. However, it indicated some market-share gains in industrial paints, even after forgoing some low-margin business. It has yet to fully pass on higher input costs in industrial and automotive paints, which would drive margin improvement in coming quarters. Further, its expansion to new businesses (construction chemicals), consistent innovation and portfolio premiumisation, supported by higher brand spends should gradually narrow the revenue growth gap with competition. We are aligning our figures to reflect the healthier revenue momentum and weaker margins in FY23 (vs. earlier projected). Lower crude prices, recovery in industrial and automotive paints and attractive valuations drive our upgrade to a Buy, with a TP of Rs635 (39x FY24e, a 10-year average PE).
Healthy revenue momentum across key verticals. Sales rose 47% y/y, driven by 20%+ volume growth in decorative paints and ~30% in industrial and automotive paints. Growth was aided by the lower base and recovery in demand for industrial and automotive paints. We are projecting 23% revenue growth in FY23 on the back of price increases, healthy demand momentum and the foray into newer business segments.
Margins to revert to the mean in FY24. Management indicated further price increases in industrial paints and, to a lesser extent, in decorative paints. This, and the recent softening in input prices should enable the EBITDA margin to revert to the mean of ~15% by FY24, from ~10% in FY22.
Key risks: Persistently high input costs, slower-than-anticipated recovery in its automotive-paints category and market-share loss due to keener competition
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