Q2FY19 result highlights
Key negatives: Lower volume growth, decline in gross margins
Impact on financials: Factoring weak performance we have reduced our FY19/20/21E earnings estimate by 8%/7%/7%.
Valuations & view
KNPL reported disappointing set of results with volume growth as well as margins being below our estimates. Volume growth outlook in the decorative business remains strong though the industrial business could face a near term slowdown, primarily in the automotive business. While challenges in terms of higher input cost & rupee depreciation remain, we believe gross margins are near to bottoming out and expect margin trajectory to gradually improve on sequential basis as benefit of price hikes in the decorative business & likely hikes in industrial segment start to kick in. We are factoring 16% revenue CAGR, a modest 110bp improvement in EBITDA margins for KNPL, resulting in earnings CAGR of 18% earnings CAGR over FY19-21E similar to APNT. We have cut our target multiple to factor in the overall correction in the sector and value KNPL at a 20% discount to Asian Paints, which is higher than its 3, 5 or 10 year average discount to Asian Paints’ target multiple. However, the stock trades at 31.5xFY20E, below its 5 year average thereby restricting downside from current levels. Hence we maintain our Outperformer rating on the stock.
Kansai Nerolac Paints Limited (KNPL) is a paint company. The Company offers a range of products, including decorative, Automotive Coatings and Performance coatings. The Company has coating solutions across the Decorative, Wood Coatings, General Industrial, High Performance Coatings, Powder Coatings, Automotive and Auto Refinish market segments. The Company serves its customers through a network of approximately four manufacturing facilities located at Lote in Maharashtra, Bawal in Haryana, Jainpur in Uttar Pradesh and Hosur in Tamil Nadu and over hundred strategically located depots. The Company has a joint venture in Nepal with Kansai Nepal, which caters to customers in Nepal. KNPL also has a joint venture in Sri Lanka with Capital Holdings Maharaja Group to set up the paint business in Sri Lanka. The Company is a subsidiary of Kansai Paint Co. Ltd.
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