Hold Kansai Nerolac Paints Ltd For Target Rs.440 - ICICI Direct
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Demand recovery drives topline…
About the stock: Kansai Nerolac (KNL) is a global leader in industrial coatings (auto). However, in the last 10 years, it has increased its decorative paint mix to ~55% of its topline. Currently, KNL is the third largest decorative paint player in India.
* Strong distribution network of ~28,000 dealers across the country
* In the last three years, KNL has increased its total paint manufacturing capacity from 5.47 lakh KL to 6.06 lakh KL at a cumulative investment of ~| 543 crore
Q4FY23 Results: Revenue growth supported by better demand across segments.
* Revenue grew ~13% YoY to ~| 1734 crore on the back of improved demand and new product launches across decorative & industrial paints
* Gross margin improved ~397 bps YoY supported by lower raw material prices and price hikes in industrial paints. As a result, the EBITDA margin improved 424 bps YoY) to 9.7%. This is still lower than its pre-Covid range of 12-13% due to higher advertisement expenditure
* On a favourable base, PAT grew ~5x YoY to | 96 crore tracking EBITDA margin expansion
What should investors do? KNL’s share price has given negative return over the past five years (from | 506 in May 2018 to | 407 levels in May 2023).
• We maintain our HOLD rating on the stock
Target Price and Valuation: We value the stock at 35x P/E FY25E EPS and revise our target price to | 440.
Key triggers for future price performance:
* We believe regaining lost market share in decorative paint (~55% of total revenue) will be a key trigger for the company’s future revenue growth
* 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 gross margin, going forward
* Higher ad expenses to keep overall EBITDA margin expansion under check
Alternate Stock Idea: We like Supreme Industries in our coverage.
* Supreme is market leader in the plastic piping segment with ~15% market share. Robust b/s with average RoE, RoCE of 23%, 26%, respectively
* BUY with a target price of | 3200
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