Q4FY19 result highlights
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.
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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