Prabhudas Lilladher's research report on Kansai Nerolac Paints
We change FY23/24/FY25 EPS estimates by -19.8%/2.2%-8.0% on account of tepid growth in higher margin decorative segment, increased investments in marketing & advertising and delayed margin recovery due to higher priced raw material inventory. 3Q margins were largely unchanged QoQ despite price hikes from key OEMs. Worst seems over given 1) repositioning of Nerolac products as Paint + 2) exit from low margin segments & further premiumisation in Industrial paints 3) focus on increasing direct distribution and B2B segments in decorative paints 4) further price hikes received in industrial/Auto paints 5) strong outlook for auto paints given easing semiconductor shortage and 6) strong demand in non-auto industrial paints in powder coatings, infra coatings, & other industrial segments. We expect QoQ gross margins improvement to continue in 4Q, although major recovery in EBIDTA margins will materialize from 1Q24 only.
Outlook
We estimate PAT CAGR of 32.4% over FY22-25 on a depleted base and value the stock at 30x Dec24 EPS assigning a TP of Rs 485 (Rs563, 35x Sept24 earlier). Incremental market share loss and increasing competition from Grasim/JSW and JK Cement remains a key risk to our call. Accumulate.
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