IGI Logo

Deco paints revival key to re-rating

Quick Pointers:

* 3Q/4Q to see better deco demand, auto/non-auto industrial to see mid-high single digit value growth in 2HFY26

* EBITDA margin guidance maintained at 13-14% for FY26

Kansai has cautiously optimistic outlook in near term given 1) strong growth in industrial paints, both automotive and general industrial (45% of its sales, highest contribution in Industry) 2) likely pick up in 3Q/4Q decorative volumes due to wedding and festive season and sustained gains from paint+ innovations and 3) sustained margin guidance of 13-14% led by better product mix and improving demand scenario in a favorable macro environment.

KNPL plans to maintain its decorative market share led by 1) Innovations and new launches under Paint + initiatives (10% of sales) 2) distribution improvement in Nextgen Nerolac Shoppe 3) rising scale and focus on projects business and 4) customer loyalty and influencer program. Outlook in non-auto industrials remains positive led by strong infra investments (Infra, Railways, marine etc.) and Powder coatings (positive outlook for durables).

We expect 8/9% volume growth and 70bps margin expansion over FY26-28. We estimate a CAGR of 7% in sales and 8.2% in PAT over FY26-28. We value the stock at 26xSep27 EPS (No change) and assign a target price of Rs265 (Rs272 earlier). Retain Accumulate.

Revenues grew 0.4%; Volume growth ~0.4%: Revenues grew by 0.4% YoY to Rs18.7bn (PLe: Rs19.2bn). Gross margins expanded by 107bps YoY to 35% (Ple: 35.6%). EBITDA declined by 1.5% YoY to Rs2.1bn (PLe:Rs2.46bn); Margins contracted by 21bps YoY to 11.3% (PLe:12.8%). Other income increased by 7.3% YoY while it declined by 46% QoQ despite much higher cash balance. Adjusted PAT grew by 5.2% YoY to Rs1.4bn (PLe:Rs1.69bn). Decorative business witnessed slight negative volume growth amidst extended rains and elevated competitive intensity.

Concall Highlights: 1) Demand in decorative business was affected in Q2 amidst heavy and extended monsoon while the company is doing well in Construction chemicals, waterproofing, wood finishes and projects with double digit growth 2) A shorter Diwali season and continued monsoons to impact growth in October, though Q4 to be better than Q3 led by favorable macro environment. 3) Raw material prices remained benign though considerable volatility was witnessed in the forex markets along with Geopolitical uncertainty. Going ahead Tarriff & rupee depreciation possess risk to RM prices in near term 4) Company added 2500 dealers in Q2 5) Industrial & automative growth was in low single digit however GST cut to push demand in near to medium term. 6) powder segment witnessed strong dealer sales while remaining affected due to lower AC sales. 7) Services continue to grow and contribute 5% to decorative business 8) Total of 4 New Products were Launched in H1 & New product now contribute ~10% of Decorative Business. 9) Competitive intensity in decorative segment continues to remain at elevated levels. 10) Urban did better than rural & region wise East performed very well with west was stable and north remained impacted due to heavy rain. 11) Nepal remains impacted due to geopolitical issue, while things are stabilizing there however Bangladesh market remain challenging. 12) Auto to show mid-high single digit value growth for 2HFY26 led by GST push.

Please refer disclaimer at https://www.plindia.com/disclaimer/

SEBI Registration No. INH000000271