Kansai Nerolac Paints' Q4FY19 results (Downgrade to Neutral) - Disappointing quarter; weak outlook…

Q4FY19 result highlights

• Standalone net sales increased by 4% yoy to Rs11.4bn (est: Rs12.4bn), EBITDA declined by 15% yoy to Rs1.4bn (est: Rs1.7bn), PAT decreased by 12% yoy to Rs0.9bn (est: Rs1.1bn).
• KNPL indicated that Q4 volume growth was lower than gross sales growth of ~5% yoy. Decorative volumes grew in high single digits while industrial volumes declined by ~5% yoy during the quarter. Industrial volumes were impacted due to negative volume growth in automotive and sluggishness in other OEM segments.     
• Gross margins declined by 200bps yoy (but up 150bps qoq) largely on account of KNPL’s difficulty in passing on the entire RM price inflation in the industrial segment.
• Staff costs increased by 7% yoy and other expenses increased by 7% yoy. Resultant EBITDA decreased by 15% yoy with a margin decline of 280bps yoy to 12.1% (IDFCe: 13.7%)
• Other operating income was up ~2x while other income fell 22% yoy. Depreciation was up 19% yoy. Higher other op. income led to PAT falling only 12% yoy, lower than EBITDA decline.

Key positives:  Sequential improvement in gross margins.

Key negatives: Decorative volume growth below expectations, 5% volume decline in industrial segment.

Impact on financials: We cut our FY20E/21E earnings by 17%/18%

Valuations & view

KNPL’s Q4FY19 financial performance was disappointing with lower than expected growth in decorative segment as well as volume decline in industrial segment (~40% of total revenue). Although decorative business is expected to grow at a steady pace, the sharp slowdown in the automotive segment (pain expected for another two quarters, April has been very weak) would keep FY20E’s financials under check in our opinion. With increase in input costs & lack of price hike in industrial segment we believe margin trajectory is likely to remain weak, thereby impacting overall earnings trajectory.  Given the emerging headwinds, we now build in earnings CAGR of 16% over FY19-21E versus 29% earlier and assign a 30% discount to APNT’s target multiple, arriving at a revised target price of Rs 382. Downgrade to Neutral.