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Buy Kansai Nerolac Paints Ltd For Target Rs.750

About the stock: Kansai is the global leader in industrial coatings (automotive). However, in the last 10 years, it has increased its decorative paint mix to 55% of its total topline. Currently, Kansai is the third largest decorative paint player in India.

* Strong distribution network of ~36,000 dealers across the country with 75-80% penetration of tinting machine.

* In the last two years, KNL has increased its total paint manufacturing capacity by 28% to 5.3 lakh tonnes at an investment of ~| 1100 crore.

Q1FY22 Results: Strong revival in decorative paints helped drive its performance.

* Favourable base and strong demand for decorative paints helped drive revenue up by 118% YoY to | 1301 crore.

* Improved operating leverage helped 92 bps rise in EBITDA margin to 14.4%.

* PAT jumped ~3x YoY to | 119 crore, supported by a favourable base and strong topline growth.

What should investors do?

Kansai’s share price has grown by ~2x over the past five years (from ~| 370 in July 2016 to ~| 630 levels in August 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Kansai at | 750 i.e. 48x P/E on FY23E EPS.

Key triggers for future price performance:

* We believe the decorative paint will continue to grow ~2x of GDP growth considering, shortening of repainting cycle, growing urbanisation and increased distribution reach of organised players

* Revival in passenger vehicle sales and strong demand momentum in industrial paints would help in a recovery in 45% of KNL’s revenue portfolio

* Focus on improving product mix towards premium products would help drive profitability, going forward.

Alternate Stock Idea: We also like Asian Paints in our coverage universe.

* Asian Paints is the market leader in decorative paint and is expanding its product portfolio along with dealer expansion in tier II and tier III cities

* BUY with a target price of | 3665

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