Buy Kansai Nerolac Paints; target of Rs 675: ICICI Direct

ICICI Direct's research report on Kansai Nerolac Paints

Kansai’s Q3FY21 performance was ahead of our estimate with overall volume growth coming in at ~20% YoY (vs. I-direct estimate: 15%). Though on a low base, industrial paint segment volume growth at ~19% (I-direct estimate) was led by strong demand revival in automotive industry. On the decorative front, volume growth at ~21% YoY was supported by strong festive demand from rural and semi urban regions. Also, opening up of metro and tier 1 cities aided volume growth during the period. According to the management, KNL is going to continuously focus on launching new products in the decorative categories (that includes construction chemicals that is growing strongly on a relatively low base) and addition of dealer network (the company has ~27500 dealer network vs. 70,000 dealer network of industry leader). This, along with revival in industrial paint demand led by automotive industry (especially in tractor and passenger vehicle sales) and continuous demand from non-auto industry (like consumer durables, etc) would help overall volume growth for company, going forward. We model volume CAGR of ~12% for the company in FY20-23E.

Outlook

We value the company at 45xFY23E earnings (i.e. ~20% discount to leader) and reiterate our BUY recommendation on the stock with a revised target price of Rs 675 (earlier TP Rs 605).