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Steady topline growth: Kansai Nerolac Q1FY25 revenue grew by 20.6% YoY but declined by 1.1% QoQ to Rs 2,133.1cr due to strong demand from Automotive Coatings. Demand for Decorative was muted due to unprecedented heat wave, labor shortages and elections. Looking forward, management anticipates with a favourable monsoon demand should improve for decorative. Given the continued thrust on infrastructure growth, new project and order pipeline will improve the demand for performance coatings.

Margins expanded YoY as well as sequentially: Its gross profit improved by 29.2% YoY to Rs 785.4cr while gross margin was higher by 246bps YoY due to a combination of measures like cost control, product mix and procurement efficiencies. Further, despite increase in overall cost, its EBITDA grew by 84.1% YoY to Rs 329.6cr with improvement in margins by 534bps to 15.5%. On the sequential front, its gross profit growth was grew by 3.2% and margins improved by 155bps while EBITDA declined marginally by 0.6% due to increase in overall cost as well as increase in marketing spends but margin improved slightly by 8bps.

Key highlights: 1) The size of domestic paint industry is estimated at around Rs. 75,000 crores as of March 2024. The good growth in infrastructure, core sector as well as automobile and real estate is likely to have a positive effect on the overall demand of paint for the industry in the long run. 2) Witnessed double digit growth in New Business. 3) New products contributed more than 10% of the Decorative Business. 4) Company has a market share of ~60% in automotive segment. 5) Company has implemented a 2% price increase and has another price hike planned. 6) Urban market is doing well while rural is witnessing some recovery. 7) Raw material prices have now gradually started to harden due to various geopolitical issues. The company is actively taking steps to mitigate this cost increase. 8) Amongst industrial, Passenger has seen a good growth & 2W is recovering well while CV & tractor growth remain muted. 9) Overall volume was in the mid-single digits, while the volume in the decorative segment was slightly lower. 10) Industrial & Decorative mix was between 53-55% & 47-45%, respectively. 11) Planning to expand its distribution network by 8-10% in FY25. 12) Management is confident of maintaining its EBITDA margin and expects high single digit volumes growth for FY25.

Outlook & Valuation: Kansai Nerolac posted strong quarterly numbers and expects demand to improve with a normal monsoon. Furthermore, given the continued emphasis on infrastructure growth, new projects, and a robust order pipeline, we believe demand will remain strong. The company is continuously innovating new products and categories, focusing on enhancing distribution channels, and increasing its presence in South India. Cost fluctuation will be key monitorable, while management expects steady volume and margins for the near future. On the financial front, we expect its revenue/EBITDA to grow at a CAGR of 9.2%/12.5% over FY24-26E and maintain strong Buy with target price of Rs 372, as we believe market share gain in industrial will continue along with strong demand for decorative segment.

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