Kansai Nerolac Paints Q4FY16: Prabhudas Lilladher recommends 'Accumulate'

Prabhudas Lilladher | July 2, 2014, midnight

Kansai has reported overall volume growth of ~12% in Q4FY16 driven by 17% volume growth in the Decorative paints and 9% in Industrial business. Gross margin at 41% is at a life‐time high due to 1) benign input costs and 2) faster growth in higher margin decorative paints. Kansai’s increasing focus on increasing volumes by aggressive marketing, increasing distribution reach and ploughing back gains from lower input costs are yielding results in decorative paints. However, further margin expansion looks difficult, given subdued sales growth in the Industrial segment and recent upsurge in crude oil prices. We estimate 25.2% PAT growth in FY17 and 10.3% in FY18 on 50bps gross margin expansion in FY17 and 80bps contraction in FY18. Kansai trades at 32x FY18 EPS; Retain ‘Accumulate’.

- 260bps margin expansion enable 34.2% PAT growth: Net sales for Q4FY16 increased 10.3% to Rs8.9bn aided by strong performance in the decorative business. Gross margins, which are at a life‐time high, expanded by 710bps to 41% as fall in crude link inputs continued to aid margin expansion despite price cuts. EBITDA margins increased 260bps (down 10bps QoQ) as 380bps increase in other expenses and 60bps increase in staff cost curtailed input cost gains. EBITDA grew by 34% YoY to Rs1.32bn. Adj. PAT grew 33.2% to Rs804m as tax rate increased by 260bps to 34.2%.


- Decorative Volumes up 17%, Industrial up 9%: Q4 volumes grew ~ 12% aided by 17% volume growth in Decorative paints and 9% volume growth in Industrial segment. Overall FY16 volumes grew at 12%, while decorative volumes grew by 16% and Industrial grew by 9%. Decorative segment is expected to post high double‐digit volume growth in FY17. Industrial segment should post subdued performance for 1HFY17; however, a good monsoon and pick‐up in overall economic activity can lead to a better H2FY17.

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