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Industrial segment drives performance

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 ~28,000 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

Q1FY23 Results: Favourable base and strong demand of industrial paints drives overall performance.

* Revenue increased 49% YoY to | 1945 crore in Q1FY23 led by volume growth of ~30%. As per our estimates, industrial and decorative paint volumes are up 40% and 23% YoY, respectively

* Gross margin remained under pressure due to delay in price hikes. However, EBITDA margin fall was restricted at 124 bps YoY to 13.1% through savings in employee costs and other expenses

* PAT up 37% YoY to | 163 crore, tracking topline growth

What should investors do: Kansai’s share price has grown at CAGR of ~2% over the past five years (from ~| 455 in August 2017 to ~| 502 levels in August 2022).

* We change our rating on stock from REDUCE to HOLD

Target Price and Valuation: We value Kansai at | 560 i.e. 42x P/E on FY24E EPS.

Key triggers for future price performance:

* We believe regaining of lost market share in decorative paint (~55% of total revenue) will be 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 advertisement expenses will keep overall EBITDA margin expansion under check

Alternate Stock Idea: We like Asian Paints in our coverage universe. Asian Paints (APL) is India’s largest decorative paint company. It derives ~98% revenue from the paints business. Robust b/s with RoCE, RoE of 30%, 25%, respectively

* BUY with a target price of | 3700

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