Prabhudas Lilladher's research report on Kansai Nerolac Paints
We are cutting our rating on KNPL from Buy to Accumulate even as we increase our FY23/24 EPS estimates by 21.1%/8.7% and target price from Rs 513 to Rs558 on account of a sharp 22.5% surge in stock price in past 3 sessions. Worst seems over given 1) Repositioning of Nerolac products as Paint + 2) exit from low margin segments in Industrial paints 3) focus on increasing direct distribution for decorative paints and market development in B2B segments 4) Further price hike in 2Q23 both in industrial & decorative segment 5) Strong outlook for auto paints given pent up demand and easing semiconductor shortage and 6) strong demand in non-auto industrial paints in powder coatings, infra coatings, metros & other industrial segments. We expect QoQ gross margins improvement from 2Q23, although volatility in commodity prices remains a key factor to watch out for.
We estimate PAT CAGR of 46.8% over FY22-24 on a depleted base and value the stock at 37xFY24 EPS assigning a TP of Rs 558 (Rs513 earlier). We expect moderate returns post sharp run in stock price in past few sessions. Incremental market share loss and aggressive entry by Grasim in decorative paints is a key risk to our call. Accumulate.
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