Buy Kansai Nerolac Paints; target of Rs 520: Prabhudas Lilladher

Prabhudas Lilladher's research report on Kansai Nerolac Paints

KNPL’s strong performance continued with 16.2% sales growth led by 18% volume growth. Early onset of festival season and post GST re‐stocking enabled 20% volume growth in decorative paints. Strong durable re‐stocking and strong auto OEM volumes provided flip to Industrial paints. While KNPL’s raw material basket witnessed some relief in Q2 with TiO2 prices declining by 7.7%, overall input cost inflation and availability remains an issue due to geo‐political uncertainty. Given higher YoY input costs and 2‐3% higher taxes under GST, we expect some price increases post festival season. Demand outlook remains positive due to expected uptick in real estate, infrastructure and automobiles; KNPL expects double‐digit volume growth to sustain for quite some time. Although margin expansion from current levels looks difficult, strong volume growth will prevent any sharp decline in margins.

Outlook

We estimate 13% PAT CAGR over FY17‐19 and arrive at 18‐month price target of Rs520 based on 37xFY20 EPS. Maintain ‘BUY’.

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