Hold Kansai Nerolac; target of Rs 926: SPA Research

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Hold Kansai Nerolac; target of Rs 926: SPA Research

SPA Research has recommended hold rating on Kansai Nerolac Paints with a target of Rs 926, in its February 1, 2012 research report.

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SPA Research has recommended hold rating on Kansai Nerolac Paints with a target of Rs 926, in its February 1, 2012 research report.

"Kansai Nerolac Paints (KNP) reported Q3FY12 sales at INR 6,657mn, a YoY and QoQ growth of 18.79% and 8.06% respectively. The sales got impacted due to ongoing slowdown in auto industry which reduced the demand for auto paints. Higher raw material cost and company's inability to pass the same in industrial paints segment impacted EBIDTA margin which came at 12.11%, a decline of 16bps YoY and 274bps QoQ. PAT came at INR 527mn, a YoY growth of 26.67% in line with our expectation."

"KNP reported slightly lower than expected sales for Q3FY11 at INR 6,657mn on the back of moderation in volume growth in industrial paints, which accounts for ~50% of its revenues. Decorative paints continued to perform well on the back of good volume growth and higher realization. The blended volume growth for Q3FY12 has been ~6-7%, much lower than ~10% in Q2FY12 and ~15% in Q1FY12. The sales in industrial paints segment continued to suffer due to slowdown in auto industry. Volume of passenger vehicles registered a marginal growth of 1.45% in 9MFY12 dragged largely due to production cut on the back of labour issues at Maruti Suzuki. The weighted average price hike taken by the company is ~8-10% & 2-3% in decorative and industrial paints segment respectively 9MFY12. Going forward, although we expect some improvement in volume growth (on back of normalization in production in Maruti Suzuki) but lower growth in realization would reduce the overall growth in revenues for FY13."

"EBIDTA margins at 12.11% (-16bps YoY) and 13.70% (-72bps YoY) in Q3FY12 & 9MFY12 respectively, declined marginally (lower than our expectation) due to efficient management of raw material procurement and change in formulation by the company. Further, with expected moderation in RM cost inflation in FY13 on the back of higher base, we expect margins to inch up. Company's planned expansion (at Hosur) got delayed by 9-10 months than originally planned. Company will commence operations at its Hosur plant in Aug-Sep 2012. Other minor expansions at Bawal and Jainpur plant are expected to be completed by end of FY12."

"KNP is the market leader in industrial paints segment with market share of ~42% (~60% in auto paints). Company's sales largely got impacted due to production issues at Maruti Suzuki which accounts for ~45% of passenger car volumes in India. However, with normalization of production at the plant, we expect volume in industrial paints segment to be better in FY13 over FY12. At CMP of INR 836, stock is trading at 21.1x FY12E EPS of INR 40.51. We maintain our target price at INR 926 and recommend HOLD," says SPA Research report.   

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To read the full report click on the attachment