Kansai Nerolac Paints' Q4FY18 results (Outperformer) - Strong volume growth…price increases key to margin recovery

Q4FY18 result highlights

• Standalone net sales increased by 17% yoy to Rs10.9bn (est: Rs10.7bn), EBITDA increased by 1.5% yoy to Rs1.64bn (est: Rs1.8bn), PAT decreased by 8.9% yoy to Rs1.05bn (est: Rs1.2bn).
• Revenue growth was led by double digit volume growth (~14%) as well as benefit of price hikes in the Decorative segment and industrial segment. Decorative volumes were driven by good growth across premium as well as mass end brands and was healthy across regions.
• Despite price hikes in decorative segment, gross margins declined by 350bps yoy (150bps qoq) largely on account of higher input costs and lack of price hike in the industrial segment. Staff costs increased by 14.2% yoy and other expenses increased by 10.5% yoy. Resultant EBITDA increased by 1.5% yoy with a margin decline of 230bps yoy to 14.9%.
• Other income declined by 19% yoy, depreciation was up 12% yoy and effective tax rate was up 540bps yoy resulting in PAT declining by 8.9% yoy.

Key positives: Double digit volume growth in the decorative segment.

Key negatives: Weakness in margins.

Impact on financials: Factoring weaker margin performance, we have reduced our FY19/20E earnings by 7%.

Valuations & view

Revenue growth trajectory remains healthy led by continued double digit volume growth in the decorative segment. However, higher input costs (solvents) & lack of commensurate price hike in industrial segment resulted in earnings miss for the quarter. While input cost inflation remains concern, the benefit of further hike in decorative segment, gradual pricing recovery in industrial segment as well as operating leverage will result in sequential improvement in margins starting Q1FY19. Given the strong volume driven earnings trajectory (21% CAGR over FY18-20E), we maintain our Outperformer rating on the stock.