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Buy Kansai Nerolac Paints Ltd.  For Target Rs.705

Strong demand will lead the way

Established in 1920, Kansai Nerolac Paints Limited (KNPL) is a subsidiary of Kansai Paint Co. Ltd., Japan. It is the second largest coating company in India and a market leader in Industrial Coatings. KNPL has well established products in both the decorative and industrial segments. It has pan-India presence with 6 manufacturing plants, 104 depots and 27,500+ customer network. In international markets it expanded in Nepal, Bangladesh and Sri-lanka.

Investment Rationale:

* Huge scope for growth in the Paint sector: The Indian paints industry is estimated to be Rs 52,000 cr in FY20. Going forward, it is expected to grow in double-digit ~12-13% CAGR led by an increase in rural spending, boost in infra and real estate projects and favourable trends in the automobile industry. Within the industry, decorative commands a higher share of ~75% and is driving the sector growth led by rising demand for houses on the back of nuclearization of families, government initiative and consumer preference towards branded and premium products. Further, the industrial segment with ~25% share too has started gaining strength on the back of re-opening of the economy, improvement in consumption in the rural economy and higher demand for personal mobility in the automobiles sector. This is likely to benefit KNPL as it has a presence in both segments.

* Strong demand recovery will continue to drive growth for the company: KNPL is a leader in the industrial segment with a strong presence in coatings (across automotive, general industrial and powder divisions) and the third-largest player in decorative with ~15-16% market share in the segment. Due to Covid-19, the paint sector witnessed a slowdown in Q1FY21 however demand and volumes have seen pickup for both segments in Q2 & Q3FY21 with unlocking taking place. Also, the company efforts for cost-saving have helped margin growth. Going forward, the company is expected to strengthen its core product portfolio in decorative and industrial segments as well as introduce innovative products in the newer category such as the construction chemical business, which is growing at a faster pace. Besides, the company also plans to grow its coating segment such as wood, coil, floor, pipe to strengthen its industrial segment. All these would help KNPL to gain market share and deliver double-digit growth.

Outlook & Valuation

KNPL is one of the strong players in paints sector wherein it garners 45-50% of revenue from industrial and 50-55% from decorative segment. Over the years, the company has maintain its leadership position in industrial segment as it has strong backup for developing paints and resin formulation from its parent Kansai Paint Co. Ltd. Japan, which is one of the Global Leaders in Industrial coating segment. Going ahead, its strategy is to grow in both segments as well as gain market share from unorganised players on the back of positive sector trends, innovative products, focus on non-auto segments, increase distribution network and expand in newer geographies and in semi-urban and rural areas. Moreover its recent foray into adhesives and construction chemicals segment would aid benefits in the coming quarters. Besides, its control on cost and price hike due to increase in raw material prices would aid margins to remain firm. We have a positive view on KNPL hence we are initiating with a Buy rating on the stock with a target price of Rs. 705.

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