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Kansai Nerolec Paints

Painting A Pretty Picture

Here Is Why

• Fall in the key raw material price to boost margins.

• Economic and automotive sales’ revival to lift demand for paints.

• Available at reasonable relative valuation.

When threat to a company’s business becomes its opportunity, it gives investors the right occasion to exploit this investment gateway. Crude oil prices, which have always remained a cause for concern for a paint company, has seen its prices continuously falling in the last six months and is down by more than 50 per cent from its recent peak reached in June last year. Kansai Nerolec Paints (KNPL), one such paint company that uses derivatives of crude oil as its key raw materials, will be the primary beneficiary of this fall in the price of crude. Besides, an uptick in GDP growth and reasonable relative valuation makes KNPL a preferred pick among paint companies.

There has been a continuous fall in the prices of key raw materials of KNPL, which constitute around 60 per cent of its total expenditure. Apart from crude oil the other important raw material used in the paint industry, Titanium Dioxide, has also witnessed its price correcting by around 20 per cent in the last one year. The drop in the raw material prices will help KNPL to improve its margin going ahead. Last time when the crude oil prices were hovering around the same level in FY10, KNPL’s EBITDA margin was around 14.41 per cent compared to 9.96 per cent for FY14.  We believe that if the crude oil prices remain at this level we may see the margin catching up to the FY10 level soon.

In addition to margin improvement we may see KNPL’s topline increasing at an accelerated pace too. The company, which operates in the industrial segment (constituting 45 per cent of revenue) and in decorative segment (constituting 45 per cent of revenue) will see its revenue increasing going forward.

The primary reason being lower per capita paint consumption in India, which is expected to increase from the current 2.57 kg level and touch 4 kg in 2016, which is still low as compared to the developed western nations. Acceleration in the GDP growth, strong urbanisation trends, rising incomes, and changing lifestyle too will drive steady volume growth for the company.

The other advantage for KNPL in the industrial paint segment is the entry of more foreign players and a slew of new launches being lined up by major automotive companies. KNPL being the market leader (around 42 per cent market share) in the industrial paint segment with 75 per cent being contributed by the automotive sector is bound to grow. There is a huge opportunity in the auto-refinish market which KNPL can capitalize by leveraging its leadership position and parent Kansai’s association with global OEMs. Besides, we have seen that the demand for automobiles is gathering pace as reflected in car sales jumping up by 15.26 per cent on a yearly basis for December.

The company has already completed its major capex plan and the total installed capacity currently stands at around 4 lakh tonnes, which will suffice company’s medium-term growth demand. For Q2 FY15, the company reported a strong set of numbers with net sales increasing by 17.19 per cent on a yearly basis to Rs 915.18 crore for Q2 FY15, while the profit in the same period increased by 40.62 per cent to Rs 72.66 crore.

The operating margins too improved from 11.91 per cent to 13.63 per cent. Looking at the various tailwinds working for the company, we believe it will continue with its good performance going ahead and there is enough room for re-rating. KNPL’s share is currently trading at PE (TTM) of around 52x compared to more than 60x at which Asian Paints is trading. Hence, we recommend KNPL to our readers with a price target of Rs 3,100 in the next one year.