Rebound in auto industry set to brighten prospects for Kansai Nerolac

While decorative paints business remains strong, overall economic growth to aid industrial segment

Kansai Nerolac Paints is expected to be the biggest beneficiary in the paints sector of the rebound in the passenger vehicle (PV) segment. The company, which gets 30 per cent of its revenues from the auto segment, will gain from the 20-per cent year-on-year (YoY) uptick in PV sales in October, followed by initial estimates of robust growth in the recently concluded festival period. 

Brokerages estimate that PV sales during the festival period were up 10-15 per cent, with tractors also witnessing a double-digit growth. Though two-wheeler registrations have been lower, they have improved during the festival period. After the Q2 results, the firm had highlighted that the outlook for the December quarter (driven by a shift to personal mobility) remains strong. 

The other segment which could aid overall sales is industrial, which accounts for 15 per cent of revenues. With the economy opening up, analysts expect the industrial segment to recover in the second half of FY21. While demand from sub-segments such as powder coatings for consumer durables remains strong, high-performance coating is taking longer to rebound, given the lower capex intensity. While analysts at Nomura Research expect the firm to benefit from a good festive season in Q3, they point out that sustaining sales after the festive period would be key. 

After a 15-per cent volume growth in the September quarter, prospects in the decorative paints segment (half of revenues) are expected to remain steady. While growth in the quarter was led by faster demand revival in tier-2 and -3 cities, opening up of urban centres should help aid growth in all markets.

What should drive sales across segments are product launches and expansion of the distribution network. The firm recently launched ‘anti-viral paint’ and has also expanded its distribution reach in the September quarter by 4-5 per cent. It has plans to enhance its network by adding 10 per cent new outlets every year. 

The Street will keep an eye out for margins, which have been expanding, given lower input costs and cost rationalisation measures. Most brokerages have a buy rating on the stock, with analysts at Prabhudas Lilladher pointing out that its FY23 price-to-earnings estimates are at 30 per cent discount to market leader Asian Paints, as compared to the historical 15 per cent.