Kansai Nerolac - SPA

Kansai Nerolac Paints (KNP) registered sales in line with our expectation but higher other expenditure resulted in lower
than expected PAT in Q1FY14. Company reported sales growth of 9% YoY in Q1FY14 to INR 7,919mn on the back of
sluggish auto paint demand and reducing demand in decorative paints segment. EBIDTA margin declined by 59bps YoY
to 12.80% on the back of higher growth in other expenditure related to the new plant at Hosur. PAT came in at INR 609mn
in Q4FY13, a YoY de-growth of 4%, also aggravated by lower other income. We maintain our SELL recommendation on
the stock owing to CMP being higher by ~10% from our target price.

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Sluggish economy to impact volume growth
KNP's Q1FY14 sales at INR 7,919mn grew by 9% YoY backed by ~7%
volume growth. Although company registered double digit volume
growth in decorative business, the overall performance was hurt
by slackening demand in auto and other industrial paints segment
which together constitute ~45% of the company's sales. Decorative
segment registered good growth on the back of lower base effect.
Auto sector overall de-grew by ~3.5% YoY in which passenger cars
registered a YoY decline by 10 percent in Q1FY14. Expected
improvement in economic environment supported by normal
monsoons would result in better second half of the current fiscal
for the company in terms of demand.
High other expenditure weighed on EBIDTA margin
Company registered YoY EBIDTA margin contraction by 59bps to
12.80% in Q1FY14, despite 53bps YoY expansion in gross margins,
due to high other expenditure. Gross margin expanded on the
back of sharp decline in key RM cost and simultaneous increase
in product prices by the company. However, other expenditure
registered a YoY growth of 18% on the back of commissioning of
new plant at Hosur and increasing power and fuel cost.
Depreciation of INR against USD by 10% since the beginning of the
current fiscal has reduced benefits that can be derived by the
company on the back of fall in international prices of the key RM
like TiO2 and crude derivatives.
Other Highlights
• Company took a price hike of ~1% in decorative and ~2-3% in
industrial paits segment in Q1FY14. It further plans to affect
price hike of ~1% in Aug 2013 in decorative paints segment
• Company has retrospectively changed its depreciation policy
on its fixed assets from the written down value to the straight
line method in Q4FY13. Had it not been the case, the PAT would
have been lower by 8% YoY in Q1FY14
Outlook & Valuation
Sluggish economic growth would continue to impact demand
environment resulting in lower sales growth for the company in
the short term. However, we expect volume growth to pick up in
second half of the current fiscal on the back of expected
improvement in the economy backed by election related spending
and favorable monsoon. Stabilization in exchange rate and benign
RM cost would aid margin to sustain at the current levels. At CMP,
stock is trading at 31x TTM EPS (historical avg. of 18-20x) and
~10% above our 18 months target price of INR 1,058 (20x FY15E
EPS). We, therefore, continue to recommend SELL on the stock.