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Kansai stock zooms 19%; improving auto sales brighten outlook

While the entire paint industry has been under pressure due to severe input cost inflation, shares of Kansai Nerolac have taken a sharper hit than peers Asian Paints Ltd and Berger Paints Ltd. (Photo: iStock)Premium
While the entire paint industry has been under pressure due to severe input cost inflation, shares of Kansai Nerolac have taken a sharper hit than peers Asian Paints Ltd and Berger Paints Ltd. (Photo: iStock)

  • Kansai's industrial paints business segment which has been a laggard compared to decorative paints, is expected to revive, thanks to improving performance of the automobile industry. Automobile paints are estimated to account for around 30% of the revenues of the industrial paints segment

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Kansai Nerolac Ltd., leader in the industrial paints segment, reported robust earning for the June quarter. Consolidated net profit at 152 crore rose 36.5% year-on-year (y-o-y) and revenue from operations increased 46.2% y-o-y to 2,051 crore. The company surpassed analysts' expectations on both these parameters.

Reacting to the earnings, the stock rose around 19% on the National Stock Exchange intraday Tuesday. 

Kansai's gross margins contracted 442 basis points (bps) y-o-y to 29.9%, but improved sequentially by 195 bps. One basis point is 0.01%. Ebitda margins fell by 121 bps y-o-y to 13.1% and rose quarter-on-quarter. Gross margins were hurt by higher crude oil prices and foreign exchange volatility.

The management said that softening of input prices witnessed towards the end of quarter, is yet to reflect in crude-based derivates. Ebitda is short for earnings before interest, tax, depreciation and amortisation.

More importantly, the company's industrial paints business segment which has been a laggard compared to decorative paints, is expected to revive, thanks to the improving performance of the automobile industry. Automobile paints are estimated to account for around 30% of the revenues of the industrial paints segment. Maruti Suzuki India Ltd is Kansai’s key client.

"This quarter saw a healthy demand for both Decorative and Industrial Paints. There has been a revival in demand in Industrial led by increased demand in Automotive due to the gradual easing of the chip shortages," said Anuj Jain, the company's managing director.

Further, in a bid to protect its margins, the company took price hikes in both decorative and industrial products. Also, it is in discussions with OEM customers for more price increases, the management said in a press release.

While the entire paint industry has been under pressure due to severe input cost inflation, shares of Kansai Nerolac have taken a sharper hit than peers Asian Paints Ltd. and Berger Paints Ltd. So far in this calendar year, the Kansai stock has declined nearly 20%. This compares with an 18% and 3% fall in Berger and Asian Paints, respectively.

"In July, the monthly car sales have hit a record high. The recovery in the passenger vehicle segment and auto segment, in general should benefit Kansai. Similar to Asian Paints, Kansai's revenue growth in decorative coatings is also a positive surprise," said Varun Singh, analyst at IDBI Capital Markets and Securities Ltd.

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