Kansai Nerolac shares shine on better earnings outlook

Why are investors excited? Kansai reported a solid June quarter (Q1FY23), with standalone revenue ahead of Street expectations. As per estimates by Nomura Financial Advisory & Securities (India), Kansai posted 30% y-o-y (YoY) volume growth in Q1 aided by a lower base and 18-20% in prices. increased. The brokerage said that Kansai’s decorative paints category has seen a good recovery in demand after a moderation in the fourth quarter.

Although gross margin decreased by 442 basis points year-over-year, it increased sequentially. A base is 0.01%. According to Kansai Management, while the inflationary trend continued, there was some moderation in input prices for crude oil based commodities at the end of the quarter, which is yet to be reflected in derivatives.

The reduction in gross margin pressure is positive not only for Kansai, but for the paint sector as a whole, which is battling severe cost inflation. In addition, improving outlook for the Industrial Paints segment is a contributing factor for the upbeat in Kansai stock.

Decorative paints account for about 55% of Kansai’s total sales and the rest comes from industrial paints. Within industrial paints, automobile paint is estimated to account for approximately 30% of total revenue. Maruti Suzuki India Limited is a major customer of Kansai.

For the past few quarters, Kansai’s industrial paint business has lagged behind mainly due to the problem of chip shortage in the automobile industry. Kansai management said there has been a revival in demand in industrial (paint) due to increasing demand in automotive due to gradual easing of chip shortages.

Varun Singh, analyst at IDBI Capital Markets & Securities, said, “Kansai stock was punished more severely by the Street this year due to higher exposure to the industrial paint segment, where price hikes are more difficult than for decorative paints. ” They said. That in July, monthly car sales hit a record high, and Kansai should benefit from the recovery in the passenger vehicle segment and the auto segment in general.

Meanwhile, Kansai stock is far from its 52-week high 675 seen in October. In addition to the automobile sales trajectory, improving gross margin and increasing competitive intensity are other key monitors for Kansai investors.

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