Kansai Nerolac (Neutral)  Dominant player :: HSBC

Kansai Nerolac (Neutral)
 Dominant player (42% market share) in industrial paint segment; leader in automotive paints (60% market share)
 Focus on decorative paints segment (14% market share; characterized by higher margins) through greenfield capacity in Tamil Nadu expansion which would come on stream by Q4FY13
 Kansai is valued at 20x Sept-14 earnings with a revised target price of Rs 1,125; Since stock has run up 21% since Aug-12, we rate the stock as ‘Neutral’

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 Dominant player in Industrial Paints segment
 Market share of >40% in industrial paint segment, contributes 50% to revenue
 Leader in automotive paints and powder coatings with market share of 60% and 27%, respectively; clients include major auto players like Maruti Suzuki, Toyota, Tata Motors, M&M, Hero Motors and Bajaj Auto
 Strong technological backup from its parent company Kansai (largest paint company in Japan with c50% market share in automotive paint segment) and is featured in top 10 paints companies in the world
 Focus towards increasing decorative paints contribution
 Market share of 14% in the decorative paints category; contributes balance 50% to its overall revenue; Emulsions contribute 32% of the segment revenues which is growing at a faster clip and have higher margins
 Setting up a greenfield plant in Hosur (Tamil Nadu) at an estimated capex of Rs.6bn; expected to be commissioned by Q4FY13
 Launched aggressive nationwide ad campaign and has aggressive plans to increase its presence in south markets
 2Q13 results – margin pressure persists
 Revenue at Rs6.8bn was up 10% yoy and down 6% qoq; revenue growth was modest on account of delayed festive season, decelerating industrial-auto sector growth and production shut down by a key client (Maruti) for a considerable period during the quarter
 EBITDA margin at 11.6% was down 348bps yoy and 183bps qoq higher raw material cost (titanium dioxide prices up 12% yoy and INR depreciation of 21%)
 Risks: Large increase in raw material prices, further depreciation of the rupee and loss of market share to competition poses downside risk
 Outlook and valuation: Kansai is expected to maintain its dominant share in the industrial paints segment and benefit from growth of automotive and consumer durables industry. As per Bloomberg estimates, KNPL is expected to post EPS CAGR of 17% over FY13-15e. We value the stock at 20x (which is 25% discount to our Asian Paints target multiple of 27x) on Sept-14 earnings with a revised target price of Rs1,125. Since the stock has run up 21% since Aug-12, we rate the stock as Neutral.