Prabhudas Lilladher's research report on Kansai Nerolac Paints
We are cutting our FY23/24/FY25 EPS estimates by 5.9%/7.4%/1.1% on volatile RM environment and delay in gross margin recovery. 2Q margins were impacted by seasonal downtrading & extended rains which hampered demand. 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 for decorative paints and market development in B2B segments 4) Further price hikes expected in 2H23 both in industrial 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 4Q23, although volatility in commodity prices remains a key factor to watch out for.
We estimate PAT CAGR of 36.1% over FY22-25 on a depleted base and value the stock at 35x Sept24 EPS assigning a TP of Rs 563 (Rs523 earlier). Incremental market share loss and aggressive entry by Grasim in decorative paints remains a key risk to our call. Accumulate.
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