Kansai Nerolac: Volume growth shines but outlook on industrial paints remains dull1 min read . Updated: 30 Jul 2019, 10:17 AM IST
- Improvement in operating margins courtesy a stable currency and crude price helped the company
- Kansai stock is trading at one-year forward price-to-earnings multiple of 42 times
Mumbai: The Street rewarded the Kansai Nerolac Paints Ltd stock for its stellar June quarter earnings. Shares of company surged more than 7% on the NSE on Monday in reaction to its results. However, the stock gave up gains in early trade on Tuesday, falling over 2% on the NSE.
Kansai’s double-digit volume growth in the decorative paints segment compensated for the dismal performance of its industrial paints business. Another positive was improvement in its operating margins courtesy a stable currency and crude price. Other expenses declined by 100 basis points year-on-year, also aided margin growth. One basis point is one hundredth of a percentage point. But these factors aren't unique to Kansai, larger peer Asian Paints Ltd too saw its volumes and margins shine in the June quarter.
In Kansai's case, improvement in decorative paints segment brings limited cheer simply because the company is the market leader in the industrial paints segment. This segment forms 45% of its overall revenue, with the auto industry having the highest share. Further it should be noted that Maruti Suzuki Ltd is Kansai’s biggest client and the commentary on demand by Maruti’s isn’t upbeat. So, even though the company has managed to surprise investors on the volumes front, outlook on industrial paints is the key. And considering the ongoing turmoil in the auto sector, the road ahead is gloomy for this segment.
And the company's management acknowledges it. It expects demand in decorative segment to remain buoyant. However, foresees challenges to continue in the industrials business in the near future.
Foreign brokerage house CLSA Ltd too remains concerned on Kansai’s exposure to auto original equipment manufacturers, which continue to face severe pressure. Also, given the slowdown and weak sentiment, CLSA has expressed worries about sustenance of demand for decorative paints. Although CLSA has raised target price on this stock to ₹390 from ₹385, it has retained sell rating.
Meanwhile, the Kansai stock is trading at one-year forward price-to-earnings multiple of 42 times. While the stock is cheaper than peers, in the current scenario, this valuation multiple is expensive and needs to moderate.