Kotak gives ‘buy’ rating to Kansai Nerolac with TP at Rs 660

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Published: March 1, 2018 3:30:56 AM

KNPL has maintained a low double digit volume growth rate in the decorative segment for the last 12 quarters in the decorative segment outperforming the performance of market leader Asian Paints and peer Berger Paints driven by new product launches which are eco-friendly, lead free, low VOC, among others.

kotak, kansai nerolac, nerolac stock, nerolac shares, nerolac TPWe recently interacted with the management of Kansai Nerolac Paints (KNPL) to understand the developments in the company and in the sector. (Representative Image)

We recently interacted with the management of Kansai Nerolac Paints (KNPL) to understand the developments in the company and in the sector. KNPL has been experiencing double digit volume y-o-y growth across segments since the last 12 quarters surpassing the performance of Asian Paints and Berger. The strong outperformance is on the back of: 1) Strong volume growth witnessed by the paint sector, 2) New and innovative product launches by the company, 3) Strong distribution network of the company (20,000+ dealers and 102 depots), 4) Heavy promotion through multiple media platforms and 5) Sales aggression exhibited by the company. Management (and we agree) expect the growth momentum to continue in medium term as well with increasing disposable income, healthy GDP growth, strong automotive demand and private/public sector capex in the country. Maintain BUY with an unchanged TP of Rs 600 at 44x FY20E earnings.Industrial segment contributes 45% to KNPL’s revenues with automotive segment contributing 75% of the industrial segment revenues. 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.

KNPL has maintained a low double digit volume growth rate in the decorative segment for the last 12 quarters in the decorative segment outperforming the performance of market leader Asian Paints and peer Berger Paints driven by new product launches which are eco-friendly, lead free, low VOC, among others. Aggressive marketing by KNPL — KNPL is one of the largest spender on advertisement, which is around 9% of the decorative segment revenue as against 6% of Asian Paints and Berger. Improving geographical reach — north India is the strongest market for KNPL, now the company is focussing on West and South (which are strongholds of Asian Paints).

Huge Dealer Base — Company current has 20,000+ dealers which is growing at 10% CAGR. These dealers are serviced through 102 depots.
Aggressive sales pitch and higher dealer margins. Connecting directly with the customers through initiatives like tinting machines, 75% of the dealers of the company have tinting machines. Other factors like increasing disposable income, shortening painting cycle to 5 years (from 10 years over a decade) and increase in per-capita consumption to 3.3 kg (from 1.5 kg over a decade).

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