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The decorative paints segment is expected to see a faster recovery driven by demand in tier-2 and tier-3 cities
The decorative paints segment is expected to see a faster recovery driven by demand in tier-2 and tier-3 cities

The results of Kansai’s focus on decorative paints yet to be seen

Analysts warned of cutthroat competition in the decorative biz from peers Asian Paints and Berger Paints India

For Kansai Nerolac Ltd, the industrial paints segment has been a pain point for some years. The segment contributes as much as 45% to its revenues. The demand slump has aggravated this pain. In a post-earnings conference call, the management said industrial paints volumes fell 80-85% year-on-year (y-o-y) in Q1FY21.

This decline was led by automobile paints, which is a major contributor to industrial paints revenues. It is not surprising considering the current state of the Indian passenger vehicle industry. While volumes jumped in July, it may be due to pent-up demand, and may not sustain, said analysts.

On the other hand, the decorative paints segment is expected to see faster recovery driven by demand in tier-2 and tier-3 cities. Smaller towns are said to be less affected by the crisis.

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As a result, Kansai is working towards reducing its dependence on the automobile sector. It is increasing focus on decorative paints and related products. In the June quarter, the double-digit volume growth in Kansai’s decorative paints segment was led by low-end products such as enamel, putty and primer. Kansai has launched new products in the low-end category, as it expects them to perform better than premium products, the management said.

While this is a step in the right direction, analysts warned of cutthroat competition in the decorative business from peers Asian Paints Ltd and Berger Paints India Ltd. Kansai’s aggressive price cuts over the last two years has aided the company to gain market share, but beating peers will be challenging, they added. It should be noted that Asian Paints and Berger have more than 70% of their overall revenues coming from decorative paints.

Kotak Institutional Equities (KIE) Ltd analysts said that despite higher exposure to the rural regions, Kansai’s decorative sales performance was weaker than Asian Paints. As per KIE estimates, on a y-o-y basis, Asian Paints’ decorative paint volumes fell 38% and Kansai’s 44%. Berger is yet to announce its Q1FY21 results.

It’s little wonder that Kansai is trading at a one-year forward price-to-earnings (PE) multiple of 37 times, which is lower than 49 times of Asian Paints and Berger’s 59 times.

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