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Savings in other costs offset gross margin pressure…

Kansai’s Q4FY21 volume growth at ~31% YoY along with cumulative price hikes of ~3% YoY was better than our estimate. Strong topline growth at 35% was largely on account demand revival and on a favourable base. However, gross margin were down ~410 bps YoY due to a delay in price hikes in the industrial paint and higher raw material cost. On the positive side, EBITDA margin was up 235 bps YoY to 15.3%, led by saving in other costs.

Key conference call takeaways: 1) Challenging demand condition in the near term due to lockdown, 2) more price hikes in future to offset inflationary pressure, 3) continuous focus on cost saving measure, 4) plans of various new launches and market share gain in both decorative & industrial segments, 5) initiated technology tie-ups with overseas group companies (Europe, Africa, Turkey) to strengthen global procurements process and get easy approval from European automotive companies. We believe the short term demand outlook is challenging. However, the long term focus of the company to gain market share by launching new products alongside keeping EBITDA margin at elevated level would help drive revenue, PAT CAGR of 22%, 21% in FY21-23E, respectively.

Focus on new launches in non-automotive segment

The company has guided for market share gains in both its decorative and industrial paint category by new launches in the non-automotive segments like construction chemical business. The Indian construction chemical business is pegged at | 7000 crore. Kansai entered it in FY20. The company will leverage its existing dealer networks (of ~27500) to push new products in FY21-23E thereby aiming to gain market share. The construction chemical business commands similar margin of decorative paints.

Strong balance sheet to navigate short-term challenges

Kansai is the third largest decorative paint players with organised market share of ~10%. While the sales recovery was 95% in FY21, the EBITDA margin of the company increased 200 bps YoY at ~18%. This has helped in a ~100% bottomline recovery for the company in FY21. On the balance sheet front, Kansai maintained its debt free status with net cash balance of | 650 crore. We believe the company’s strong balance sheet, supported by a strong promoter pedigree would help it to navigate short-term demand related challenges.

Valuation & Outlook

We believe the recent correction in stock price (down 16% from its recent peak), discounts all near term negatives such as lockdown impact and tapering of EBITDA margin from its peak in FY21. Strong brand and robust balance sheet will help the company to recoup its lost sales, going forward. We reiterate our BUY recommendation on the stock with a revised target price of | 655 (earlier TP | 675).

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