Industrial segment drives performance… • Kansai Nerolac :: ICICI Securities, report

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Industrial segment drives performance… • Kansai Nerolac (KNL) reported its Q3FY15 results wherein the topline grew ~8% YoY supported by 6% YoY volume growth. We believe the decorative segment recorded muted growth (2% YoY) during Q3FY15 while a revival in automotive paints segment demand helped in achieving Industrial paint volume growth of ~11% YoY • Operating margins increased 162 bps YoY to ~12% mainly due to a 243 bps YoY dip in raw material cost on account of benign raw material prices. Earnings growth of 34% was due to higher EBITDA and an increase in other income • We have modelled volume growth of 12.8% YoY and 13.8% YoY for FY16E and FY17E, respectively, on the back of a revival in the industrial paint segment. For FY17E, we build industrial and decorative paint segment growth of 16% and 12% YoY, respectively 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 12.8% and 13.8% 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 in FY12-14. However, we believe a revival in industrial paints would lead to a recovery for KNL in industrial paints. Going forward, we believe there should be a resumption in industrial paints growth as automobile growth is likely to be ~15% YoY in FY16E and ~16% in FY17E. We expect revenue, earnings to grow at a CAGR of 18%, 32% respectively, during FY14-17E. Beneficiary of strong revival in industrial paint demand: reiterate BUY Despite KNL 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 it 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 12% 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 200 bps by FY17E over FY15. At the CMP, the stock is trading at 34x its FY16E & 27x its FY17E earnings. We reiterate our BUY rating on the stock with a revised target price of | 2671 (30x FY17E earnings).

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