PL Stock Report: Kansai Nerolac Paints (KNPL IN) - Q1FY24 Result Update - Deco initiatives, Industrial recovery paying off - Accumulate

Kansai Nerolac Paints (KNPL IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs327 | TP: Rs351

Q1FY24 Result Update - Deco initiatives, Industrial recovery paying off

Quick Pointers:

§ Ex Putty Deco volumes up ~10%; Auto/ Industrial volumes remain healthy.

§ Non- Auto Industrial paints to grow in double digits led by Infra/Industrial growth

We are increasing our FY24/25 EPS estimates by 7.1%/6.8% and target price to Rs351 (Rs328 earlier at 32xFY25E EPS) following positive outlook led by 1) steady growth in decorative segment 2) expected 2W recovery in auto segment and 3) strong growth outlook for non-auto industrial paints. We believe Kansai is making right moves with 1) new variants in Impression Kashmir (high/mid sheen and matt) 2) complete product range in waterproofing supported with higher feet on street 3) focus on premium finishes and 4) emerging segments in EV, Premium Appliances, New ancillary products, Alloy wheels and Railways. The company expects increase in competitive intensity post entry of Grasim, but new entrant will grow market & penetration (50-55%) and gain share from smaller unorganized players.

We expect margins improvement to continue as higher cost inventory has been exhausted and demand environment has been steady. We estimate 423bps EBITDA margin expansion and 38.4% PAT CAGR over FY23-25 on a depleted base. Incremental market share loss and increasing competition from Grasim/JSW and JK Cement remains a key risk to our call. Accumulate.

Revenues up 6.5%; Gross margins improves YoY/QoQ: Revenues grew by 6.5% YoY to Rs20.7bn (PLe: Rs21.6bn). Gross margins expanded by 539bps YoY to 35.3% (PLe: 32.0%). EBITDA grew by 30.6% YoY to Rs3.3bn (PLe: Rs2.7bn); Margins expanded by 298bps YoY to 16.1% (PLe:12.5%). Adjusted PAT grew by 39.3% YoY to Rs2.3bn (PLe: Rs1.7bn). This quarter witnessed robust demand in Automotive & Performance coating. The company continued with growth initiatives in Decorative and Performance coatings.

Concall Highlights: 1) Premium/Economy salience has increased in 1Q24 2) Decorative market share at <10%; North market share at 15%+ 3) Reduced market share growth gap vs leader over the last 1.5 years; want to come in-line with market growth 4) Projects segment market share at <10%; has increased presence to 71 towns 5) RM basket remains volatile with FX rates/rise in crude oil prices 6) No price cuts in decorative/industrial business 7) Ad spends to remain elevated (4.5% in 1Q24) to communicate Paint+ proposition effectively 8) Industrial margins in double digits; any price cuts may take 3-6 months after RM stabilization 9) Share of exited (low margin) high performance coating biz at 2-3% of overall sales 10) Expect EBITDA margins to be higher than FY23 at 14%+ 11) Margins are highest in 1st/3rd quarters 12) Royalty is paid to parent only on certain products; many products have been developed internally 13) Adds 8-10% to dealer network every year; to add higher no in FY24 14) Innovation (products launched 3+ years)/Paint+ salience rate at 10%/8% 15) Cash on hand at Rs8-9bn which will be reinvested in the business; open to exploring acquisitions.

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