Shares of paint maker Kansai Nerolac Ltd fell nearly 3% on the National Stock Exchange in opening deals on Monday. The company reported weak December quarter earnings, especially as the industrial paint segment, where it is the market leader, continued to lag.
In a post earnings conference call, management within the automotive segment said, commercial vehicles outperformed two-wheelers as the latter continues to struggle given the slowdown in rural markets. Cautioning about chip shortages, management said the issue is yet to be resolved and will likely continue into FY13.
Investors should note that Kansai generates about 40% of its revenue from the industrial segment, where the burden of increased prices is relatively slow compared to the ornamental segment. In the industrial sector, automotive paints contribute about 27% of its revenue. This compares with 5-10% exposure of its competitors in the automotive paints segment.
Simply put, the company’s automotive paints revenue growth may remain weaker for longer than expected.
but that’s not all. Cost inflation and increased competition are other adverse conditions.
Analysts at ICICI Securities Ltd said, “Kansai is facing the twin impact of competitive pressures and sharp input inflation. We expect both these adverse periods to persist in the near term. Also, Grasim’s paint launch by H2FY23 There is a challenge to the narrative,” said analysts at ICICI Securities Ltd in a report.
These will keep pressure on Kansai’s margins. In Q3FY22, its gross and Ebitda margin contracted more than 700 basis points year-over-year. One basis point is one hundredth of a percentile.
According to analysts at Prabhudas Lilladher, Kansai’s road to margin recovery could be longer than expected on sustained input cost inflation and carry-over inventory. “Slower ornamental growth in Tier 2/3 where Kansai has a strong presence has resulted in continued loss of market share,” he said in a report.
The company’s management said that input cost inflation has increased further in the months of December and January. Kansai has increased the prices of decorative paints by 20% and those of industrial paints by 18% in the last few months. While the price hikes made by the company in Q3FY22 will show gains in Q4FY22, they are not enough to offset the full impact of inflation, the management said.
In short, these downside risks keep the stock’s near-term outlook muted.
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