Hold Kansai Nerolac; target of Rs 550: ICICI Direct
ICICI Direct’s research report on Kansai Nerolac
Kansai Nerolac’s (KNL) strong volume growth of 14.5% YoY (vs. I-direct estimate: 11%) was led by both decorative and industrial segment equally. This coupled with price hike of ~2% YoY (largely into decorative paint category) was to offset higher raw material prices. For FY18, the company has taken a price hike of ~4% in the decorative paint category (in two phases). Also, KNL has decided to take a price hike in the industrial paint category on a case to case basis. The company expects double digit volume growth across the paint category led by the decorative segment Downward pressure on gross margin was largely due to rising raw material prices & absence of price hike in industrial paint category. According to the management, supply disruption of key raw material from China was a key reason for higher titanium di-oxide and monomer prices in Q4FY18. EBITDA margin declined ~212 bps YoY despite saving in other expenses (as percentage of sales).
KNL is well placed in the industrial and decorative paints segment to benefit from a boost in consumption due to higher disposable income, GST and expectation of normal monsoon. This, coupled with capacity addition over the next two years, would help drive the volume growth of the company. However, a spike in raw material prices coupled with a change in the product mix would restrict the upward movement of EIBTDA margin. We model revenue, earnings CAGR of 17% and 16%, respectively, for FY18-20E. Despite being on a strong footing, we believe at the current market price the stock discounts all near term positives. We change our stance from BUY to HOLD and value the company based on FY20E earnings with a revised target price of Rs 550/share.
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