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Developing market dynamics key to growth re-rating

Quick Pointers:

* Volume grew ~9% YoY, decorative volumes grew in double digits led by festive season, PV, 2W revival and coatings also did well

* High-single digit volume expected in FY25 with increased salience of NPD

We cut our EPS estimates by 1.5%/4.6%/0.4% for FY24/FY25/FY26 given 1) 14% margin guidance for FY24 2) limited scope of margin improvement since price hikes are not expected in near to medium term along with increased expenses on manpower/ad-spends 3) Expected increase in competitive intensity post Grasim’s entry in paints business remains a key monitorable.

Kansai continues to invest behind new products like paint plus, distribution expansion and NxtGen painting services and entry into new segments in industrial paints, profit growth will depend upon the competitive intensity post Grasim’s entry. We estimate 50bps margin expansion over FY24-26 which will enable 11.7% PAT CAGR. We downgrade rating from ACCUMULATE to HOLD with TP Rs341(earlier TP Rs346).

Revenues up 5.7%; Volume grew by 8.9% YoY: Revenues grew by 5.7% YoY to Rs18.1bn (PLe: Rs18.6bn) Gross margins expanded by 598bps YoY to 36.2% (Ple: 36%) EBITDA grew by 27.3% YoY to Rs2.4bn (PLe:Rs2.9bn); Margins expanded by 224bps YoY to 13.2% (PLe:15.8%) Adjusted PAT grew by 40.4% YoY to Rs1.6bn (PLe:Rs1.9bn) Decorative business recorded double digit volume growth driven by robust festive season while Industrial business witnessed good demand

Concall Highlights: 1) Rural demand is seeing green shoots, however urban markets continue to grow ahead of rural. 2) Co expects 8-10% volume growth with EBITDAM guidance of 14% for FY24. Industrial segment is expected to post value growth for ~8-10% in medium term 3) Project business is seeing good traction with opportunity to penetrate into more markets with increased presence to 80+ towns in Q3. 4) Paint service business is seeing good traction and has increased its silence to more than ~170 cities 5) Co launched range of new Italian designer textures under ‘Kansai Select’ 6) Premium portfolio contributes to ~30% of deco business 7) RM basket continues to decline which lead to GM expansion, however geopolitical crisis could impact crude oil prices going ahead 8) Co took low-single digits price cuts in 3Q while RM deflation could lead to further pass through to consumers 9) Ad spend increased to ~5.3% in 3Q in order to market new launches/visibility 8)Network expansion saw double digit growth in Q3 10) Q4 performance is expected to be in line with 3Q 11) New business is seeing good traction with contribution of ~10% in 3Q with business growing ahead of market . 12) Further growth would be volume led with elections are expected to have positive effect on demand

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