Kansai Nerolac Paints - Strong sales growth but margins decline: Standard Chartered

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Kansai Nerolac Paints Limited
Strong sales growth but margins decline


 3Q results below expectations – net sales, EBITDA and
net profit grew 33.1%, 12.6% and 14.6%, respectively.
 Due to sharp rise in input costs, EBITDA margin
declined 223bps yoy to 12.3%. We reduce our EPS
estimates by 3%, 2.5%, and 2.5% for FY11E, FY12E
and FY13E, respectively.
 Given the high base and expected moderation in auto
sales growth, we estimate KNPL’s volume growth to
slow to ~14% from above 20% over the past 18 months.
 Maintain UNDERPERFORM with a revised 12-month
price target of Rs830 (from Rs852 earlier).

Decorative grew higher than industrial – Buoyant 

automotive and decorative demand along with seasonal 

issues (extended monsoons led to shift in decorative sales 

from 2Q to 3Q, timing of Diwali, etc) helped KNPL post 

strong gross sales growth of 33.8% yoy. Volume growth in 

the automotive segment is estimated at ~28%, while volume 

growth in decorative was greater than 30%. Given the high 

base and expected moderation in auto sales growth, we 

estimate KNPL’s volume growth to slow to ~14-15% from 

above 20% over the past 18 months. 

Rise in input costs hurt EBITDA margin – Raw material 

cost-to-sales in 3Q FY11 stood at 66.4% (up 275bps yoy 

and 240bps qoq). This led to EBITDA margin declining 

223bps yoy (and 350bps qoq) to 12.3% - the lowest in the 

past seven quarters. Operating profit grew a moderate 

12.6% yoy to Rs688m. Lower effective tax rate (30.7% in 

3Q FY11 versus 32% in 3Q FY10) and higher other income 

(up 18% yoy) resulted in higher recurring net profit growth of 

14.6% yoy to Rs416m.  

Maintain UNDERPERFORM – We don’t find KNPL 

attractive as 1) at FY12E P/E of 22.2x, valuations are 

expensive - it trades at a 28% premium to its historical 

median P/E and at an 8% discount to Asian Paints vs. 18% 

historically, 2) growth in automobiles is expected to 

moderate (~35% of sales) and 3) increase in raw material 

prices can lead to margin contraction especially in the 

industrial segment. Maintain UNDERPERFORM with a 

revised 12-month price target of Rs830 (valuing it at forward 

P/E of 18x).