Experts have observed an inverse correlation between paint stocks and crude oil prices. That, along with other technical factors, could provide impetus and drive the Kansai Nerolac stock towards Rs 705 levels.
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Kansai Nerolac has underperformed the Nifty 50 so far in 2021 but appears set to retest a 52-week high and surpass the Rs 700 mark in the next two to three months.
With a market capitalisation of more than Rs 33,000 crore, Kansai Nerolac has gained a little over 2 percent so far in 2021, compared with a 13 percent rise in the Nifty 50 and a 16 percent increase in the S&P BSE 200 Index.
The stock, which hit a 52-week high of Rs 679.60 on the BSE on January 21, dropped to Rs 522 in March before bouncing back. The recent breakout from a higher base formation indicates the resumption of a primary uptrend, which could take the stock above Rs 700 in the next two to three months, experts said.
Mumbai-based Kansai Nerolac is the second-largest coating company in India and a market leader in industrial coatings.
Strong support from the parent company helps Kansai to develop cutting-edge technology solutions. Kansai is debt-free with strong liquidity, as indicated by its net cash position of Rs 650 crore, ICICIdirect said in a report.
“The parent company (Osaka-based Kansai Paint Co.) brings forth strong reputation and helps lower borrowing costs. Lower operating leverage accompanied by higher RoCE (~18% for FY21) indicates that Kansai can handle near-term demand shocks and still come out strong,” it said.
On the technical front, the outperformance of the paint sector has endured in CY21. However, Kansai Nerolac has relatively underperformed peers.
The current breakout from a five-month base formation (Rs 610-520) above the 10-week EMA coincides with the long-term falling trendline breakout area, said Dharmesh Shah, Head–Technical, ICICIdirect.
“This makes us confident that the stock will accelerate upward momentum and witness catch-up activity in the coming months. Hence, it offers a fresh entry opportunity to ride the next leg of the up-move,” Shah said. “Empirically, we have observed an inverse correlation between paint stocks and crude oil prices. In the current scenario as well, we expect falling crude oil prices along with the aforementioned five months consolidation breakout to provide impetus and drive the stock towards our earmarked target of Rs 705 levels as it is the 123.6 percent external retracement of January-March 2020 decline (Rs 680-521).”
Highlighting the key points since June 2020, Shah said that on multiple occasions, the stock managed to hold the 10-week EMA. Subsequently, buying demand emerged, indicating a robust price structure.
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