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Shares of paint maker Kansai Nerolac Ltd fell around 3% on the National Stock Exchange in opening deals on Monday. The December quarter earnings of the company were lacklustre, especially as the industrial paints segment, where it is a market leader, continued to lag.
In a post earnings conference call, the management sai within the automotive segment, commercial vehicles did better than two-wheelers as the latter continues to struggle given the slowdown in rural markets. Cautioning about chip shortages, the management said the issue is yet to be resolved and will likely continue into FY23 as well.
Investors should note that Kansai generates around 40% of its revenues from the industrial segment, where passing-on the burden of increased prices is relatively slower than in the decorative segment. Within the industrial vertical, automotive paints contribute around 27% to its revenues. This compares with a 5-10% exposure of its competitors to the automotive paints segment.
Simply put, the company's automotive paints revenue growth could remain weak longer than expected.
But that's not all. Cost inflation and rising competition are the other headwinds.
"Kansai is facing the dual impact of intensifying competitive pressure and steep input inflation. We expect both these headwinds to persist in the near term. Moreover, Grasim's paint launch by H2FY23 is a challenge for the narrative," analysts at ICICI Securities Ltd said in a report.
These will keep Kansai's margins under pressure. In Q3FY22, its gross and Ebitda margins contracted over 700 basis points each, year-on-year. One basis point is one hundredeth of a percentage point.
According to analysts at Prabhudas Lilladher, Kansai's road to margin recovery might be longer than anticipated on sustained input cost inflation and carry over inventory. "Slower decorative growth in tier2/3 where Kansai has stronger presence leading to sustained loss of market share," they said in a report.
The company's management said input cost inflation has risen further in the months of December and January. Kansai hiked prices of decorative paints by 20% and industrial paints by 18% in the past few months. While price hikes taken by the company in Q3FY22 will show benefits in Q4FY22, they are not sufficient to offset entire impact of inflation, the management added.
In short, these downside risks keep the stock's near-term outlook muted.
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