Kansai Nerolac Paints Ltd : Auto-paints shine, margins to improve from Q4; maintaining a Buy - Anand Rathi Share and Stock Brokers
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Buy Kansai Nerolac Paints Ltd For Target Rs. 610
Kansai’s reported Q2 FY23 healthy 19% revenue growth was in line with leader Asian Paints’, driven by growth resurgence in auto-paints while decorative paint volumes were flat y/y. Early Diwali and the prolonged rains could mar Q3 demand but softening input costs are expected to provide some respite in margins from Q4. We have reduced our FY23e/24e EPS to reflect the weaker Q2, and introduce FY25e. The expansion to new businesses (construction chemicals), consistent innovation and portfolio premiumisation, supported by higher brand spends should aid in better decorative revenue growth. Also, softer input prices, industrial and automotive paint recovery and attractive valuations keep us positive on the stock. We recommend a Buy, with a TP of Rs610 (37x Sep’24e, a 5% discount to its 10-year avg. PE) vs. earlier Rs635 (39x FY24e).
Auto paints drive healthy revenue. Sales rose 19% y/y, driven by healthy volume-led growth in auto-paints, helped by easing supply-chain issues (semiconductor shortages). Decorative paint volumes were flat y/y due to the protracted monsoon. Management was cautious regarding decorative paints in Q3 owing to Diwali being earlier than last year. We are projecting a 15% revenue CAGR over FY22-25e on price increases, greater demand in auto & industrial paints and the foray into newer business segments.
Margins likely to improve from Q4. The company hiked prices 3% in H1 against 7-8% input cost rises. The focus on decorative & industrial premium paints, softening input costs (partly offset by the rupee depreciation & higher brand spends) should help expand margins in coming quarters, more so from Q4. Thus, we expect the EBITDA margin to revert to the mean of ~15% by FY25 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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