Kansai Nerolac Paints Ltd. share price target

KNPL 4Q Mgt commentary reinforced our positive stance on the company given 1) successful launch of soldier in economy segment in emulsions 2) foray in coil coatings, floor coatings and rebar coatings 3) strong free cash flow with cash/investments of Rs4.7bn and 4) sustained higher than industry growth in decorative segment. Although near term outlook remains uncertain due to lockdown impact on sales and sentiments, we expect smart recovery from 2HFY21 given low base in Auto and impact of J&K; from 2Q20. Although...

Our interaction with managements and dealers indicates significant prebuying activity of consumer goods during January-February 2020 on fears of supply related issues from China. While companies have secured supplies to avoid any disturbance in sales in Q4FY20, demand was negatively impacted in March 2020 owing to holiday and post that lockdown across countries. We also believe a late recovery in demand for consumer goods will also impact Q1FY21 performance due to 1) shortage of workers (due to heavy migration), 2) shift in focus on essential goods compared to discretionary products and 3) streamlining of supply chain....

KNPL recorded revenue de-growth of ~8% YoY to ~| 1248 crore, below our estimate of | 1415 crore in Q3FY20. The muted performance was mainly led by a sharp decline in volume of industrial paint (owing to ongoing slowdown in the automotive industry). In addition to this, the slowdown in decorative paint demand in Q3FY20 was mainly due to extended monsoons and a delay in recovery of demand from north regions. We believe the performance of decorative paint segment would improve from FY21 onwards supported by strong demand from tier II, tier III cities and shorter repainting demand. On...

Expect pick- up in growth given low base on auto and expected pickup in decorative and other industrials in coming months We are cutting FY20,21 and 22 EPS estimates of Kansai by 8.7%, 6.0% and 3.3% respectively following disappointing performance during 3QFY20. Kansai reported 7.6% declined in sales as auto paint sales declined 20% even as decorative and industrial paints sales increased by 1% and 4% respectively. Kansai has not adopted aggressive approach in pushing Putty...

Decorative segment grows with strong volume growth KNL has recorded strong volume growth of ~12% YoY (I-direct estimate) in the decorative paint segments, despite extended monsoon and almost nil sales in the Jammu & Kashmir regions where company has a major presence. We believe the performance of decorative segment will remain strong in FY19-21E (with volume CAGR of 13%) supported by strong demand from tier II and tier III cities and shorter repainting demand. On the industrial front, the management expects improvement in the performance...

by ~30% despite double digit volume growth in decorative paints. Though decorative paint business has slowed down QoQ (prolonged monsoons, flooding in key states and lower off-take in Kashmir - KNPL has 60% share), structural drivers like shift towards organized sector, housing push in Tier2/3 cities and shorter painting cycle....

The recent tax cut by the government from 33% to 25.2% is likely to boost earnings of Kansai Nerolac (Kansai) by 3% and 6% for FY20E and FY21E respectively. We change our earnings estimates and target price accordingly. We believe a tax cut would help demand revival in both decorative and industrial paint demand (with revival in automotive industry). This would also help organised players to gain market share from the...

The industrial paint remained a drag for KNL due to the unprecedented slowdown in the automotive segment. However, a shift in focus towards other industrial categories like coil coating and functional powder coating helped offset poor volume demand from the automotive industry. This, along with strong growth in the decorative segment (despite a higher base of 14% growth in Q1FY19) drove its performance in Q1FY20. Strong demand for decorative paint would be largely driven by demand remaining intact in tier II, tier III cities and a shorter repainting cycle. We model revenue...

We expect automotive paints demand to remain under pressure in the near term with recovery unlikely before festive season in 3Q19 and improvement in consumer sentiments. Inputs costs have peaked out and remained relatively stable enabling 200bps QoQ gross margin expansion. We believe that worst seems over on the margin front. We adjust the numbers for IndAS 116 only and estimate CAGR of 13.5% in volumes, 11.7% in revenues and 15.6% in PAT over FY19-21. Kansai is trading at 37.4xFY21 EPS. We value the stock at 40xJune21 EPS of Rs12 and arrive...

KNL has increased its revenue contribution in decorative paints from 50% in FY09 to 55% in FY19. Further, capex of | 1100 crore to expand paint manufacturing capacity from 3.9 lakh tonnes (lt) to 5.5 coupled with strong decorative paint demands (at CAGR of 13%) would help drive overall volume CAGR at ~10% in FY19-21E. Strong demand for decorative paint would be largely driven by demand remaining intact from tier II, tier III cities and a shorter repainting cycle. Further, in the industrial paint category, KNL has not lost market share despite lower volume growth. We believe a gradual...