Kansai Nerolac to outshine peers: automotive growth to help maintain volume

Automotive growth, launches to help maintain volume

Kansai Nerolac Paints is expected to outperform peers Berger and Asian Paints on the volume front driven by higher automotive demand.

The company has been achieving double-digit growth across the two key segments — decorative and industrial — over the last 12 quarters.

Amit Agarwal of Kotak Securities attributes the robust performance to industry volume growth, innovative product launches, distribution network and aggressive marketing. Not surprising then that the stock has outperformed its peers on returns over the last one year. 

While Kansai Nerolac has made investors wealthier by 30 per cent, rivals have gained 10-14 per cent.

The management expects the growth momentum to continue in the medium term, given higher disposable income, healthy economic growth, higher automotive demand and capital expenditure by the private and public sector. The automotive sector should help the company achieve strong volumes.

Automotive paints volume growth has been on the rise since the March quarter last year and has grown fourfold since then to about 18 per cent for the March quarter 2017-18. The company gets over a third of its revenues from this segment and its strong presence here is boosted by the partnerships between parent Kansai and global car makers. Auto paints are part of the industrial segment, which accounts for about a third of the sector’s Rs 470-billion revenue.

The Street will also monitor the demand in the decorative segment (over two thirds of the sector). The demand in this segment has been growing at low double digits. 

Analysts said product launches, focus on weaker western and southern markets, dealer base and aggressive marketing should help the company maintain its growth trend, which was in low double digit in recent quarters. Though raw material costs have gone up, analysts expect the companies, including Kansai, to raise prices and thus, pass on the higher cost to customers, maintaining margins.

The near-term trigger for the stock, however, will be performance in the March quarter. 

Analysts at IIFL Institutional Equities expect it to report the highest sales growth at 14.9 per cent. 

Operating profit margins, too, are expected to come in at 16.7 per cent. Analysts expect the outperformance to continue with target prices in the range of Rs 550-600. Buy on dips.