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Single digit revenue growth: Kansai Nerolac reported revenue growth of 5% YoY to Rs 1,918.7cr while sequential growth remained muted to the tune of 1.9%. Overall growth was driven by festive demand in both the decorative and automotive segment. Amongst, urban & rural market, urban market of Tier 1 & Tier 2 are growing at much better pace as compared to rural Tier 3 & Tier 4 while these are seeing some green shots which will aid growth going ahead.

Margin continuous to improve as compared YoY: The company’s Gross profit/ EBITDA grew healthy by 24.6%/24.8% YoY to Rs 692.2cr/Rs 244.0cr while gross/EBITDA margin came in at 36.1%/12.7% led by decline in raw material cost, better topline and mix. Thus, PAT too grew by 39.5% YoY to Rs 152.1cr. However, sequentially gross margin improved by 47bps but the growth remained muted by 0.6% while EBITDA was down by 10.7% QoQ with decline in margin by 125bps QoQ and PAT declined by 13.3% QoQ with decrease in margin by 104bps QoQ led by increase in advertisement spends to build brand visibility.

Key Highlights: 1) In the decorative segment, Paint plus is continuously gaining traction and Project business participation was lower but now it is gaining strength. 2) Price cut in decorative is ~3% for the quarter and plans are to maintain gross margin levels. 3) Launch some products under Kansai Japan which are select brands such as Designer finish, beauty little master sheen in the economy range. 4) Launch of Kashmir Sheen, Matt, etc. in the last quarter are gaining traction. 5) Amongst automotive, passenger vehicle, 2/3 wheeler and commercial vehicle gained good demand for the quarter. 6) Presence in more than 450 towns & 170 cities. 7) Demand in North & East is strong. 8) Architect interior designer business is gaining good traction. 9) In International business growth remained impacted because of economic challenges in Nepal & SriLanka, high inflation and political uncertainty in Bangladesh. 10) Expansion in Visakhapatnam is on track. 11) Management remains positive on the growth and expects volumes to grow by 8-10% for FY24.

Outlook & Valuation: Kansai Nerolac posted mixed numbers for Q3FY24, with better numbers as compared last year while subdued growth sequentially. Ahead, we believe government spending on infrastructure will aid overall growth for paints while increasing rural demand, innovations and plan is to grow largely in Industrial non-auto business along with its core segments will aid growth for top-line as well as aims to gain better margins. On the financial front, we have estimated its revenue/EBITDA at 9.3%/22.4% CAGR over FY23-26E and maintain a Buy rating with a target price of Rs 395.

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