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

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

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Kansai Nerolac Target- |2396 •• Diwali Muhurat Pick: ICICI Securities,

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Kansai Nerolac Target- |2396
• KNL is the biggest industrial paint company in India with ~35%
market share in industrial paints and third largest player with an
overall market share 14%. With sustainable growth in decorative
paints and subdued industrial demand, KNL has increased its
revenue contribution of decorative paints from 50% in FY09 to
55% currently. KNL has strong brands in interior, exterior and
metal paints like Impressions, Excel, Surkasha, etc. and continues
to invest in brands with 4-5% of sales going into A&P. 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 automotive segments. We expect
blended volume growth of 14.1% and 15.5% YoY in FY16E and
FY17E, respectively
• 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
and better 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, we expect industrial and
decorative volume growth of 16% and 15% YoY, respectively, in
FY17E resulting in revenue CAGR of 19.3% in FY14-17E.
Moreover, stable raw material prices are expected to lead to an
expansion in operating margins by 250 bps by FY17E over FY14.
At the CMP, the stock is trading at 27.4x its FY16E earnings and
22.2x its FY17E earnings. We value the stock on 28x multiple to
arrive at a target price of | 2396/share



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KANSAI NEROLAC PAINTS --- BUY: Kotak Sec, PDF link

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KANSAI NEROLAC PAINTS LTD (KNPL)
PRICE: RS.1900 RECOMMENDATION: BUY
TARGET PRICE: RS.2250 FY16E P/E: 25.9X
In the last 6 months, the following has emerged as positives for KNPL 1)
Falling Titanium Dioxide Prices (price have corrected by 15%) 2) Regular
price hikes taken by the company 3) Improving Auto Demand and 4)
Improvement in demand of decorative paints. Under such circumstances, we
expect the company to report strong set of numbers over FY14 to FY16E. We
estimate KNPL to report topline CAGR of 23% with improvement in margins
by 200 bps from FY14 to FY16 at 12.9% leading to earnings CAGR of 44%.
We also estimate the return ratios to improve for the company.
The stock price has increased by ~20% in the last one month and by 50% in
the last six months and currently trades at 25.6x FY16E PE. With
improvement in business environment , we now value the company at 30
times one year forward FY16E P/E which is at ~20% discount to the average
of multiple commanded by Asian Paints and Berger Paints for the last 3
years. Recommend BUY with an increased price target of Rs 2250. (Earlier Rs
1870).


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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.

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’

Buy Kansai Nerolac; Target :Rs 1016 ::ICICI Securities

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M a r g i n s   u n d e r   p r e s s u r e …
Kansai Nerolac reported its Q3FY12 results with net sales growing by
18.8% to | 665.5 crore from | 560.1  crore in the corresponding quarter
led by decent volume growth and moderate price hikes. The volume
growth was mainly contributed by decorative paints. Raw material cost
(as percentage of sales) increased to 66.4% compare to 67% due to
continuous increase in titanium dioxide prices. Simultaneously, crude
based derivative also remained higher further aggravating pressure on
margins. Higher EBITDA led to net profit growth of 26.7% to | 52.7 crore
compared to | 41.6 crore in Q3FY11.
Operational performance
The company has witnessed strong growth in the decorative segment on
the back of repainting demand led  by high festive season dispatches.
However, automotive paints demand has witnessed slower growth due to
muted passenger vehicle growth. With automobile sales witnessing
slower sale of 5.0 million vehicles in Q3FY12 compared to 5.1 million
vehicles in Q2FY12, a slowdown in industries paints demand is evident.
We believe demand for decorative paints would also be subdued in
Q4FY12 and Q1FY13 as housing sales demand have taken a beating.
However, any interest rate cuts can result in a revival in demand for new
housing and automobiles and, hence, volume growth for paints.
Valuation
At the CMP, the stock is trading at 20.1x and 18.0x its FY12 and FY13
estimated EPS of | 43.1 and | 48.3, respectively. With the slowdown in
automobile sales and considering automotive paints constitutes biggest
chuck of the sales for the company, we believe volume sales growth in
the coming quarters would be weak. Simultaneously, rising commodity
prices of crude oil and titanium dioxide would keep the margins under
pressure.  Given,  margins  pressure  in  the  near  term,  we  have  valued  the
stock at a 20% discount to market leader Asian Paints at 21x its FY13E
EPS and assigned it a BUY rating with a target price of | 1016.

Buy Kansai Nerolac; Target : Rs 1,016::ICICI Securities

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M a r g i n s   t o   r e m a i n   u n d e r   p r e s s u r e …
Kansai Nerolac’s Q2FY12 results were inline with our estimates. Net sales
witnessed a growth of 15.5% on the back of strong growth in decorative
segment. Raw material cost to sales has increased from 68.8% to 69.5%
resulted in EBITDA margins dip to  14.9% from 15.2% in Q2FY11, but it
was above our estimates of 14.4%. The company was holding large
amount of raw material inventory,  which has helped it to maintain
margins in the current quarter. Dip in EBITDA margins has resulted in
moderate earning growth of 6.7% to | 57.1 crore.
Operational performance
The company has witnessed a strong growth in decorative segment led
by the high festive season demand. However industrial paints demand
has witnessed slower growth due to muted passenger vehicle growth.
We believe demand for decorative paints would continue to be strong in
Q3FY12. However expected flat growth from Maruti (which is one of the
bigger clients on Kansai) due to Labor unrest in October would also
impact automotive paints growth  in Q3FY12. Simultaneously sharp
increase in Titanium dioxide prices and Rupee Depreciation would also
impact margins in Q3FY12.
Valuation
At the CMP, the stock is trading at 19.4x and 17.1x its FY12 and FY13
estimated EPS of | 44.8 and | 50.8, respectively. With the company being
the leader in the industrial paints segment and extending its reach in the
decorative segment, we believe that sales growth would continue to
remain strong in next quarter. However, with rising commodity prices,
crude oil and titanium dioxide and impact of rupee depreciation would
pressurize margins going forward. However we believe commodity prices
would cool off by first quarter of FY13, which should bring back margins
at  16%  in  FY13.  Considering  margins  pressure  in  near  term,  we  are
valuing  Kansai  at  20%  discount  to  the  market  leader  Asian  paints  at  20x
its FY13E EPS, and assigned it a BUY rating with a target price of | 1016.

Buy Kansai Nerolac; Target : Rs 1048:: ICICI Securities

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S t r o n g   s a l e s   g r o w t h ,   m a r g i n s   s t i l l   a   c o n c e r n …
Kansai Nerolac reported healthy growth in its topline for the quarter
ended Q1FY12, reporting a growth 24.1% to | 651.7 crore over | 525.1
crore in the corresponding quarter last year. We believe this was led both
by increase in realisation as well as higher volumes. However, margins
continued to remain under pressure, declining by ~110 bps (YoY) from
15.3% to 14.2% in Q1FY12 but improving by 285 bps (QoQ) from 11.3%
(lowest in the past eight quarters) in Q4FY11. Higher sales led to earnings
growth of ~18% to | 61.2 crore over | 51.9 crore in Q1FY11.
ƒ Operational performance
During the quarter, the company witnessed strong demand in the
decorative segment. However, industrial paints demand witnessed
moderation led by the slowdown in demand for automobiles, white
goods and electrical appliances.
Higher raw material cost continued to impact margins. Raw material cost
to sales ratio for the quarter stood at 65.6% compared to 64.5% in
Q1FY11 and ~67% in Q4FY11. Though the company has been able to set
off the impact of higher material  costs by increasing prices thereby
improving its margins on QoQ basis; margins on a YoY basis continued
to witness a slowdown.
V a l u a t i o n
At the CMP, the stock is trading at 19.7x and 17.1x its FY12 and FY13
estimated EPS of | 45.5 and | 52.4, respectively. With the company being
the leader in the industrial paints segment and extending its reach in the
decorative segment, we believe that sales growth would continue to
remain strong. However, with commodity prices, crude oil and titanium
dioxide expected to rise further we believe that margins would remain
capped at current levels. With the  company having no interest cost
burden, an improvement in margins and sales would directly boost the
earnings growth. Hence, we have valued the stock at 20x its FY13E EPS,
and assigned it a BUY rating with a target price of | 1048.

Kansai Nerolac: Higher raw material costs dampen margin… ICICI Securities,

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Higher raw material costs dampen margin…
Kansai Nerolac’s Q4FY11 results were below our expectations on the
back of volume growth that was leaner than expected. The company’s
topline grew ~24% YoY to | 520.5 crore vs. | 420.9 crore in Q4FY10.
Though the company took several price hikes during the year (~12.5%
YTD), the proportionate increase in raw material costs (~14% YTD)
remained higher, hence pulling down margins to the lowest in the last
eight quarters at 11.3%. Margin pressure continued to strain its
bottomline also and it declined by ~| 3 crore to | 33.5 crore against |
36.3 crore in the corresponding quarter last year.

Kansai Nerolac - Margin pressure to prevail… ICICI Sec

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Kansai Nerolac - Margin pressure to prevail… 
Kansai Nerolac reported its Q3FY11 results. The topline was in line with
our estimates witnessing growth of ~33% (27% volume growth) to  |
560.1 crore against  | 420.9 crore in Q3FY10. The higher raw material
costs continued to pressurise the margins that dipped by 220 bps to
12.2% from 14.4% in Q3FY10. Margin pressure continued to drag the
net profit margins also that, consequently, slipped by ~162 bps to 7.4%
(| 41.6 crore) from 8.6% (| 36.3 crore) in Q3FY10. Though the company
managed to pass on 80% of the hike in raw material prices for the
decorative business (50% of sales), passing on the costs to industrial
customers (50% of sales) was difficult. Hence, the earnings remained
staggered during the quarter.

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).