Q3FY18 result highlights
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 FY18E earnings by 4%.
Valuations & view
The earnings miss during the quarter has been led by a weaker mix within decorative and the decorative and industrial segment growing at the same pace. Also, price increases have not come through as yet in either segments which have further pressurized margins. We believe that with industry leading volume growth continuing, the higher input cost pressure will be passed through in both segments through price increases over the next few months. We expect sequential margin recovery once price increases are effected which in an environment of strong revenue growth and overhead cost control will drive a 22% earnings CAGR over FY18-20E. We believe the current stock price correction of 20% provides a good opportunity to buy into KNPL for the longer term. Further, valuations at 33xFY20E earnings are reasonable. Maintain Outperformer.
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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