Lower repainting cycle (80% of demand), rising urbanisation, demand for branded products, more convenient/professional painting solutions, rising per capita income, real estate sector reforms, smart city mission, governments thrust on infrastructure, new product launches in the auto sector and strong GDP growth is expected to keep demand momentum strong for paint companies going forward including KNPL. Paint companies are also able to protect margins by increasing product prices to cover the increase in raw material prices. Overall we believe the situation is healthy for paint companies in every segment including decorative paints, industrial as well as auto paints. We introduce FY20 numbers and value the stock at 44x FY20E, which is the average (one year forward) for the company for the last 5 years and arrive at a TP of Rs 600 (from Rs 535) with an Accumulate rating, maintaining our positive stance on the paint sector and the company. Kansai Nerolac India dominates the industrial segment with 45% market share, which has increased over the years. It has a strong presence in most of the subcategories of the industrial space including powder coatings, high performance coatings and general industrial paints. It is a leader in the automotive space with 60% market share.
The company supplies to nearly all the major auto OEMs across the four, two wheeler and LCV segment. KNPL’s strong dominance in automotive paints segment is supplemented by its parent Kansai’s association with global OEMs that have a strong presence in India. High level of investments in technology and R&D act as a key entry barrier for this segment. Management of KNPL indicated that it enjoys strong relationships with its automotive customers which further aid market share gains for the company. Industrial segment contributes 45% to overall revenues. There is some recovery in the industrial segment in recent quarters led by improving auto sales. Management noted that while automotive demand has picked up, infra based paints demand is yet to witness significant improvement.