the household paint manufacturer The coronovirus pandemic had to bear the brunt which affected their earnings as well as stock performance. But among the major major paint manufacturers, Kansai Nerolac Limited Asian Paints Ltd. and Berger Paints Ltd. saw a bigger impact than either, as Kansai is a leader in the industrial paint segment, whose performance had plummeted even before the pandemic. Over the past year, Asian Paints shares have gained 41%, far better than Berger’s and Kansai’s 16% and 13% returns over the same period.
Of course, the outlook for both decorative and industrial paints is improving gradually, which augurs well for the volume growth of these companies. However, higher cost inflation is likely to impact paint makers’ gross margins for a few more quarters. To deal with this situation, paint companies are increasing the prices wildly.
For example, Asian Paints Ltd, the market leader in decorative paints, grew a further 4% sequentially in Q2FY22 as its gross margin declined by 970 basis points year-on-year (YoY) in the said quarter. One basis point is one hundredth of a percentage point.
Kansai’s gross margin saw a sharp decline of 1040 basis points year-on-year in Q2 of FY12, mainly due to higher raw material prices, especially delayed arrivals in the industrial paint segment. Analysts say this could potentially put it under pressure for a longer period than its peers.
According to the company’s management, the industrial segment faced challenges in passing high raw material prices due to low demand. Automotive sector. Investors should note that Kansai generates 40% of 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.
“While higher input-cost inflation is expected to pressure gross margins in the near term, it increased the ornamental price of 1H22 (with some product growth over the industry) by about 7.5%, and compared/higher to peers.” Prices will increase. (around 9-10%) in November to moderate continued inflation. While its auto segment picks up in price inflation, it is confident of further hikes,” analysts at Nomura said recently. said in the report.
As far as the stock’s valuation is concerned, Kansai is trading at around 60x the one-year forward price-to-earnings ratio, which is well below Peer’s 85-90x valuation multiple. However, given the current backdrop, analysts say these valuations are costly and need to be corrected.
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