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Better product mix will colour the margins...

Kansai Nerolac Paints Ltd (KNPL) is the market leader in industrial paints and the third largest decorative paint company in India.

*  In Q1FY25, revenue de-grew by –1.1% due to muted decorative demand on account of heatwaves and election. The decorative volumes grew by mid single digit and expects to grow in high single digit in FY25.

* Gross margin improved by 155bps YoY to 36.8% aided by benign input prices and a better product mix, while EBITDA margin remained flat at 15.5%.

* The company has taken a price hike of 1.5-2% and hinted for further price hike in coming months to mitigate input price inflation and guided for ~13.5% margin in FY25.

* Auto segment did well in Q1, aided by 2W, PVs, and KNPL expect volume to grow by ~7% in Q1FY25.

* Improving margins due to superior product mix and a resurgence in industrial paint business keep the outlook positive. Therefore, we revise our rating to BUY and value KNPL at 33x on FY26E EPS with a target price of Rs. 355.

Healthy product mix supports margins..

Despite an increase in oil prices in Q1FY25, KNPLs gross margin improved by 155bps YoY to 36.8% (improved 246bps QoQ) largely due to superior product mix and a resurgence in industrial paint demand post election. While higher promotional activity (4.9% of sales) and staff costs (16% YoY) restricted EBITDA at 15.5% vs 15.4% in Q1FY24. The company has taken a price hike of 1.5-2% and hinted for further hikes in coming months to mitigate the input cost pressure. The company mentioned that the entry of new player has not created much impact and the management is moving ahead with its strategies. We marginally improved FY25/FY26 margin estimate by 10bps YoY and 20 bps YoY to 13.5%/13.7%, respectively

Mid-single digit volume growth...

The company reported –1.1% de-growth in top-line in Q1FY25 due to severe heat wave and election. The volume growth was subdued at ~5% while the industrial segment, automotive coating saw good demand, especially in 2W and PVs. KNPL expects 8 –9% volume growth in FY25 aided by a resurgence in auto demand and decorative business on account of upcoming festival season. The decorative paint contribute 55% of the overall sales mix while 45% is from industrial segment and with in that, 70% is from auto. KNPL enjoys a 60% market share in auto paints over the last 2-3 years

Key highlights...

* The outlook for decorative paints is better for H2FY25 due to strong urban demand and some green shoots in rural spending.

* KNPL is looking to add over 30% capacity in water based paints. The Q1FY25 capacity utilisation is at 60%.

* Advertisement expenses were 4.9% of sales in FY24 and Q1FY25

Valuation and Outlook

We expect the company can withstand the current competition in the decorative paints with its product mix and the resurgent demand in the industrial segment (45% of the mix). We therefore revise our rating to BUY from HOLD with a target price of Rs. 355, based on a P/E of 33x on FY26E EPS.

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