Kansai Nerolac Paints' Q3FY20 results (Neutral) - Weak quarter
Q3FY20 result highlights
- Standalone net sales declined by 7.7% yoy to Rs12.4 (est: Rs13.2bn), EBITDA grew by 8.4% yoy to Rs1.8bn (est: Rs1.97bn), PAT increased by 8.8% yoy to Rs1.2bn (est: Rs1.3bn).
- Decorative volumes grew by 1% yoy while Automotive saw a decline of 20%+ during the quarter.
- Gross margins increased by 290bps yoy to 37.1% led by benign input cost. Staff cost were flat yoy, other expenses were down 6% yoy. Resultant EBITDA margins increased by 220bps yoy to 14.8%. Adjusting for IND AS impact of Rs44.6m in other expenses, EBITDA increased by 5.8% yoy with margin expansion of 190bps yoy to 14.5%.
- Depreciation was up 34% yoy, other income down 37% yoy. PBT declined 1% yoy. Lower tax rate resulted in PAT growth of 8.8% yoy.
- Management commentary – Demand dip in both decorative (impacted by lower offtake in festive season & adverse monsoon) & industrial segment (impacted by weakness in automotive segment).
Key positives: Healthy gross margins and tight control over costs.
Key negatives: Weak revenue growth.
Impact on financials: Factoring weak performance, we have cut our FY20/21E EPS estimate by 11% each.
Valuations & view
KNPL’s 3QFY20 results were below expectations impacted by sharp moderation in decorative segment, continued decline in Automotive segment as well as high base. 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 are factoring double digit volume growth in decorative segment as well as recovery in Industrial segment for FY21/22E. However, given the lower visibility and inherent cyclicality of the industrial segment (~40-45% of sales) & weaker metrics compared to peers, we continue to value the stock at 15% discount to APNT’s target multiple and believe current valuations at 43x/37x FY21/22E earnings provide limited upside potential. We would monitor the pace of recovery in industrial segment to change our stance. Maintain Neutral 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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