Volume growth drives strong performance… • Kansai Nerolac :: ICICI Securities, PDF link

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Volume growth drives strong performance…
• Kansai Nerolac (KNL) reported a robust set of numbers with 17%
YoY topline growth on the back of 14% YoY volume growth led by a
revival in automotive paints segment demand and sustained growth
in the decorative paints segment
• We believe strong volume growth of 14% YoY mainly comprises
15% YoY growth in the industrial paints segment and 13% in
decorative paints. We expect the industrial paints segment to witness
volume growth of 15% and 16% YoY in FY16E and FY17E,
respectively, in line with automobile demand for the period
• Operating margins increased 146 bps YoY to 13% mainly due to a
100 bps and 103 bps YoY dip in employee expenditure and other
expenditure, respectively. Earnings growth of 40.5% was due to
higher EBITDA and a steep increase in other income
Increasing focus on decorative paints
KNL is India’s largest industrial paint company with ~35% market share in
industrial paints and third largest player with overall 14% market share.
With sustainable growth in decorative paints and subdued industrial
demand, KNL has increased its revenue contribution in decorative paints
from 50% in FY09 to 55% currently. It has strong brands in interior,
exterior and metal paints like Impressions, Excel, Surkasha, Satin Enamel,
Lotus Touch, Beauty, Pearl and Little Master. KNL continues to invest in
brands with 4-5% of sales going into advertisement and promotion. We
believe decorative paints would continue to grow strongly with the
presence of limited players and strong repainting demand. We expect a
revival in industrial paints demand (75% automotive paints), led by a
recovery in the automotive segment. We expect blended volume growth
of 14.5% and 15.5% YoY in FY16E and FY17E, respectively.
Leader in industrial paints
KNL is a leading industrial paints player with ~35% market share. The
company supplies paints to many automobile players. They account for
30-35% of its sales with Maruti Suzuki being its largest client. Automobile
demand has been subdued in the last two years as Maruti has seen ~1%
volume CAGR during FY12-14. However, we believe a revival in industrial
paints would lead to a recovery for KNL in the industrial paints segment.
Going forward, we believe there should be a resumption in industrial
paints growth as automobile growth is likely to be ~16% YoY in FY16E
and ~14.5% in FY17E. We expect revenue, earnings to grow at a CAGR of
20.2%, 32% respectively, during FY14-17E.
Maintain BUY
Despite the company consciously increasing its decorative paints
contribution to 55% of sales from 50%, we believe the stock is still trading
at a discount to Asian Paints. With improving margins, higher free cash
flows and expanding return ratios, we believe the discount to Asian Paints
would shrink and the stock would command a premium to its historic
average of 22x. Further, with an improvement in automotive paint
demand supported by higher demand for autos due to lower base effect,
we expect industrial and decorative volume growth of 16% and 15% YoY,
respectively, in FY17E. Simultaneously, higher operating leverage
coupled with stable raw material prices are expected to lead to an
expansion in operating margins by 250 bps by FY17E over FY14. At CMP,
the stock is trading at 28x its FY16E and 23x its FY17E earnings. We have
valued the stock on 27x multiple to arrive at a target price of | 2396.