FY20-22 forecasts cut due to host of factors; upgraded to ‘Buy’ with lower TP of Rs 485.
We upgrade KNPL to Buy with FV of Rs 485 (Rs 530) (35X FY2022e PE). Even as ST demand collapses due to Covid-19, the fundamentals of the company and the category are notably intact: volume-led growth potential and stable/improving margin profile arising from rational competition. We cut FY2020-22e forecasts to factor in Covid-19 impact, lower crude prices and weaker macro. The stock has corrected 35% in the past month notwithstanding significant RM tailwinds and it is trading at 24X FY2022e PE, implying 40% valuation discount to APNT versus 15-20% historically.
Baking in Covid-19 impact and lower crude prices: KNPL will see a material decline in sales in Q1 due to the ongoing nation-wide lockdown until April 15, 2020 and any 2-3 week extension of lockdown/ social distancing. A pick-up in sales, thereafter, could be slow as consumers may defer discretionary activities. We forecast a 65% y-o-y decline in revenues in Q1 (zero sales in April, sales at 30%/80% of the usual run-rate in May/June) and a gradual recovery from Q2. The sharp fall in crude would boost GM—say 500-600 bps GM tailwinds if crude stabilises at $45-50/bl and currency at Rs 75/USD. Of this, we expect 50/90% of RM savings in decorative/industrial coatings to be passed on.
Upgrade to Buy: We cut FY2021e revenues by 18%. We cut FY2022e revenues by 11% as we model (i) price cuts of 4% (RM savings would be partly passed on) versus price increase earlier and (ii) weaker macro. We increase FY2021-22e Ebitda margin by 30-180 bps; crude benefit would reflect from Q2/Q3. At CMP, KNPL is trading at 24X FY2022e PE versus 41X/45X of APNT/BRGR.