Auto sector pain rubs off on Kansai Nerolac, input costs compound woes

While the automobile sector accounts for a third of Kansai Nerolac's revenues, analysts are also skeptical about demand from the retail segment

The declining demand in the domestic auto market is forcing automakers to cut production. This is impacting auto suppliers such as Kansai Nerolac which shed 5 per cent intraday on Friday. Around one-third of Kansai Nerolac Paints' business comes from automobile sector and it has around 60 per cent market share in this segment.

The falling volumes in the industrial (including auto) segment poses a downside risk for the company’s top line. What aggravates the situation is that brokerages such as CLSA are cautious even on retail demand (decorative paints). It was the decorative segment which aided company’s December 2018 quarter results rising 21 per cent even as the overall sales were up18 per cent year-on-year.

Further, prices of key raw materials – titanium dioxide (TiO2) and crude oil derivatives – are on moving north. While TiO2 prices have risen by about 8 per cent since the close of December quarter, crude oil prices too have surged by 28 per cent from the its recent lows in January. TiO2 and crude oil derivatives such as monomers account for 90 per cent of the company’s raw material costs.

Yet, the silver lining is the improvement in rupee vis-à-vis the dollar. The former stands at around 68-69 to the greenback versus 72 in December last month. Given the muted demand in Kansai Nerolac’s key segment, the quantum of price hikes it will take will have a bearing on its margins.

Analysts are also worried about profitability from industrial segment given the muted volume growth.  Analysts at CLSA have cut their earnings estimates by another 2-3 per cent for Kansai Nerolac after 6-7 per cent cut in January this year.

Given the growth worries investors should avoid exposure to the stock until there is clarity on demand improvement of automobile and overall industrial segment. The stock currently trades at 39 times its FY20 estimated earnings and is at a 24 per cent discount to Asian Paints.