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Home / Markets / Mark To Market /  Why investors are excited about Kansai Nerolac

Kansai Nerolac Paints Ltd’s shares hogged the limelight on Tuesday, rising nearly 18% to 508.3, reversing to a good extent, the sharp losses seen prior to this in CY22 so far. As things stand, the stock is 14% down in 2022.

Why are investors excited? Kansai reported solid June quarter (Q1FY23) results with standalone revenue ahead of Street expectations. Going by the estimates of Nomura Financial Advisory and Securities (India), Kansai clocked 30% year-on-year (y-o-y) volume growth in Q1 aided by a low base and took price hikes of 18-20% y-o-y. The brokerage points out that Kansai’s decorative paints category saw healthy demand recovery after a subdued Q4, along with better mix, which had deteriorated markedly in Q4.

Regaining the gloss
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Regaining the gloss

Although gross margin contracted by 442 basis points y-o-y, it rose sequentially. One basis is 0.01%. According to the Kansai management, while inflationary trend continued, there was some softening of input prices for crude-based items towards the end of the quarter which is yet to be reflected in derivatives.

Easing gross margin pressure is positive not only for Kansai, but for the entire paints sector, which has been battling severe cost inflation. Further, improving outlook of the industrial paints segment is one factor contributing to the exuberance in the Kansai stock.

Decorative paints contribute around 55% to Kansai’s overall sales and the balance comes from industrial paints. Within industrial paints, automobile paints are estimated to account for around 30% of total revenues. Maruti Suzuki India Ltd is Kansai’s key client.

From the past few quarters, Kansai’s industrial paints business has been a laggard, mainly due to the chip-shortage problem in the automobile industry. The Kansai management said that there has been a revival in demand in industrial (paints) led by increased demand in automotive due to the gradual easing of the chip shortages.

“The Kansai stock was punished more severely by the Street this year due to its high exposure to the industrial paints segment, where taking price hikes is more difficult than decorative paints," said Varun Singh, analyst at IDBI Capital Markets and Securities. He added that in July, monthly car sales hit a record high, and recovery in passenger vehicle segment and auto segment, in general, should benefit Kansai.

Meanwhile, the Kansai stock is far away from its 52-week high of 675 seen in October. Apart from the automobile sales trajectory, improvement in gross margins and rising competitive intensity are the other key monitorables for Kansai investors.

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