Report
Mehul Desai

Kansai Nerolac Paints' Q2FY20 results (Neutral) - Steady deco. volumes, Industrial continues to disappoint…

Q2FY20 result highlights

  • Standalone net sales declined by 3.8% yoy to Rs12.4(est: Rs13.5bn), EBITDA increased by 10% yoy to Rs2.06bn (est: Rs2.2bn), PAT increased by 58.5% yoy to Rs1.9bn (est: Rs1.8bn)
  • Decorative volumes grew in double digit but value growth was 8% yoy. Automotive business saw 22% yoy decline.
  • Gross margins increased by 300bps yoy to 38.1% led by benign input cost. Staff cost was up 10% yoy, other expenses were down 3% yoy. Resultant EBITDA margins increased by 210bps yoy to 16.7%. Adjusting for IND AS impact of Rs38m in other expenses, EBITDA increased by 8% yoy with margin expansion of 180bps yoy to 16.4%.
  • Depreciation was up 24% yoy, other income down 52% yoy. Tax credit of Rs64m vs tax outgo of Rs639m in base resulted in higher PAT growth

Key positives: Double-digit growth in decorative segment. Healthy gross margins

Key negatives: Continued weakness in industrial segment.

Impact on financials: Factoring weak 1H, we have cut our sales/EBITDA estimates for FY20/21E by 4-5%. However, earnings estimate for FY20/21E are up 15%/9% due to benefit of lower tax rate.

Valuations & view

KNPL’s 2QFY20 results were below expectations with continued weakness in automotive segment offsetting double digit decorative volume growth.  Management commentary remains cautious with near term challenges in automotive & slowdown in decorative business, which is likely to keep overall volumes/sales trajectory lower compared to peers. We remain positive on KNPLs decorative business & factor in double digit volume growth for FY20/21E. We are also factoring recovery in automotive segment in 2HFY20 & FY21E, resulting in overall sales CAGR of 9% over FY19-21E, which coupled with benign input cost & cost control measures will result in EBITDA CAGR of 18.6% over the same period. Given the steady performance in decorative & likely recovery in Automotive, we now value the stock at 15% discount to APNT’s target multiple compared to 25% earlier to arrive at revised target price of Rs570. Valuations at 44x/40x FY20/21E, provide limited upsides & we would  monitor the pace of recovery in industrial segment to change our stance. Maintain Neutral.

Underlying
Kansai Nerolac Paints

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.

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Mehul Desai

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