Demand for decorative paints was reviving, but demand for industrial paints continued to be impacted by covid-led restrictions, Kansai Nerolac said
The June-quarter (Q1FY22) earnings of paint maker Kansai Nerolac Ltd was a mixed bag. Elevated input cost inflation led to a steep contraction in its gross margins of over 700 basis points (bps) on a year-on-year (y-o-y) basis. One basis point is 0.01%. However, some of that impact was offset by a 160bps y-o-y expansion in operating margins, which was aided by a decline in employee and other expenses.
There was some respite on the volume growth front. The firm’s management said demand for decorative paints was reviving, but demand for industrial paints continued to be impacted by covid-led restrictions.
“On a low base of -60% volumes in Q1FY21, we estimate volumes in this segment to have grown more than 90%. We feel that the sales volumes in the industrial vertical, although improving, is yet to reach its pre-covid levels," said an analyst with a domestic brokerage house requesting anonymity.
Peer Asian Paints Ltd saw its decorative paints volume more than double y-o-y in Q1FY22.
While Kansai’s decorative paints volume is recovering, higher exposure to industrial paints would keep its share performance trailing peers. Analysts point out that Kansai tends to underperform during periods of high raw material inflation. This is because it generates 40% of its revenues from the industrial segment, where passing on the burden of increased prices is relatively slower than in the decorative segment.
Within the industrial vertical, automotive paints contribute around 27% to its revenues. This compares with a 5-10% exposure of its competitors to the automotive segment. Again, while there has been some recovery in automobile sales, the near-term outlook is still not very encouraging.
It should be noted that the Kansai stock is 19% up from its pre-covid highs. Competitors Asian Paints and Berger Paints India Ltd have seen much sharper rise from their pre-covid highs. Similarly, in the past one year, shares of Kansai are up 49%; whereas shares of Asian Paints and Berger have rallied 71% and 60%, respectively, during the same period.
Analysts said this gap in stock performance and valuations is likely to persist unless there is a meaningful recovery in industrial paints. Bloomberg data shows the Kansai stock is trading at a one-year forward price-to-earnings (PE) of 45 times, a discount to both competitors, whose shares are trading at a PE of above 60 times.
The company’s management said raw material prices further hardened in Q1FY22, which resulted in extremely high inflation coupled with supply constraints. Prices of key inputs such as crude-based monomers and titanium dioxide have risen sharply in the recent past. So, akin to peers, the Kansai management said that it has partly increased prices in decorative and industrial paints. Furthermore, it is making sustained efforts to obtain price increases to offset the impact of inflation, the management added.
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