Kansai Nerolac Paints Ltd’s March quarter earnings bore the scars of the slowdown in the automobile sector. The company is the market leader in the industrial paints segment, which contributes 45% to its revenue, with the auto industry having the highest share.
What’s more is that Maruti Suzuki India Ltd, which has announced production cuts amid dismal sales, is Kansai Nerolac’s biggest client. In short, this is a double whammy for the company. As per analysts’ estimates, industrial paints volume fell by 5% in the March quarter.
While the management said that the growth momentum could be subdued for some more time, it is hopeful that in FY20, growth won’t disappoint.
Analysts warn of more pain for the Kansai Nerolac stock given the grim outlook of the automobile sector. Pre-buying of paints ahead of BS-VI norms implementation may boost near-term demand, but that won’t be enough. Also, slackening demand in non-auto paints is another damper. Since the drag in industrial paints won’t ease soon, some brokerage firms have also trimmed the stock’s target price.
As for decorative paints, volume growth of around 9% was lower than anticipated. Analysts said decorative volumes were impacted by increased trade promotion by competitors, besides the impact of recent disturbances in Jammu and Kashmir, where Kansai Nerolac has a strong foothold. Overall, the company’s volumes grew by a disappointing 4% in the March quarter.
Poor revenue growth in key business segments, volatility in crude oil prices and the exchange rate, also hurt its operating margins. Further price hikes may aid margin growth in the coming quarters, but a bigger worry is the slowdown in the auto sector.
“The company has been able to pass on the cost increase in decorative. In industrial, the company has only been able to partially increase the price to offset the increase in material costs," said the management.
All in all, the March quarter was a disappointment. It is not surprising that the Kansai Nerolac stock has bled the most compared to peers—Asian Paints Ltd and Berger Paints India Ltd. The stock has fallen nearly 17% since January. It also trades at a one-year forward price-to-earnings multiple of 35 times. Even though the multiple is lower compared to competitors, analysts still feel it is expensive and needs to correct.