Event update: Kansai Nerolac Paints (Neutral) - Decorative demand stable, Automotive segment pressure to continue …

We attended Kansai Nerolac (KNPL) annual conference call. Following are the key takeaways

Demand trends in decorative segment remain stable- Management indicated that it has not seen any significant drop in the decorative segment & the demand environment remains stable in rural/urban markets. Further, given the relatively lower penetration levels, it expects double-digit growth to continue in the decorative segment. It has been able to pass on the input cost inflation in the segment through price hikes (~6.2% in FY19), albeit with a lag.

Lower rebates impacted decorative volumes in the quarter – KNPL’s decorative volumes grew in high single digit for the quarter, which were below the industry growth. The growth was lower as company reduced rebates during the quarter as it focused on overall profitability rather than chasing volumes. However, management indicated that reduction in rebate is not indicative of change in strategy or reduced focus on decorative volume growth.

Automotive business to remain under pressure – Industrial business declined in volume & value terms in the quarter and margins were further impacted as company was not able to pass a substantial part of cost inflation in the automotive business. Going forward, it expects pressure in Automotive paints to continue for another couple of quarters. Also given that end user is seeing demand pressure, passing on the cost inflation through price hikes will be challenging in the Automotive paint segment. Further, company will continue to focus on driving growth in niche markets (adhesives, construction chemicals, auto refinish etc) to curtail the impact of automotive weakness & protect industrial segment revenues.

Valuations & view

KNPL ended FY19 on weak note impacted by subdued performance in industrial segment. We remain positive on KNPL’s decorative portfolio, however, with management commentary remaining cautious on Automotive business, we believe, the ability to go aggressive on decorative volume growth gets curtailed as well as overall margin pressures will continue, resulting in earnings trajectory remaining weaker compared to peers. Maintain Neutral.