Kansai is a pure play on Paints demand in India, being the third largest player in decorative paints (Nerolac), 40 per cent share in industrial paints and 60 per cent share in automotive paints. Kansai gains from technology and innovation of its parent (Kansai Paints, Japan-71.3 per cent stake) which lists in top 10 paint companies globally.
Kansai has launched “Little Master” to compete with ‘Tractor’ in the lower end emulsions, thus, filling a portfolio gap. Kansai is improving efficacy of its distribution as the proportion of dealers with Tinting machines will increase to 80 per cent by FY18 (41 per cent in FY11). Product innovations, distribution and brand building will enable 17.5 per cent sales CAGR for Kansai post FY16.
Automotive paint sales should gain from expected demand recovery, imbibed service component in its OEM package and new client additions, more so among non-Japanese auto makers. Powder coatings offer immense scope once the consumer demand for white goods and home improvement picks up. Kansai should gain from emerging opportunities in railways, state transport, roads and infrastructure, given rising spends and introduction of e-bidding and payment system. Prabhudas Lilladher estimates 17 per cent sales CAGR in industrial paints post FY16.
Kansai is expected to post 30.9 per cent PAT growth on 500 basis points gross margin and 250 basis points EBITDA margin expansion in FY16. the brokerage house expect margin expansion of 50 basis points (bps) in FY17 and a decline of 80 bps in FY18 which would enable 25 per cent PAT growth in FY17 and 12.5 per cent in FY18. Kansai has ROCE of 25.8 per cent and ROE of 18.4 per cent, dividend payout of 33 per cent and net cash of Rs 600 crore.
Prabhudas Lilladher in a research note said, “Kansai trades at 30.4x FY18 EPS and trades at 15 per cent discount to Asian Paints as against 20 per cent discount in the last five years. We value the stock at 31x FY18 EPS and arrive at a target price of Rs 288. We initiate coverage on Kansai Nerolac Paints with an ‘Accumulate’ rating.”