Volume gains in auto segment positive for paints major Kansai Nerolac

Among listed companies, Kansai Nerolac has the highest exposure to the auto segment, with 30 per cent of its sales coming from this segment

The stock of paint major Kansai Nerolac is up over 5.2 per cent in the past month, outperforming its peers, which have generated negative returns over the same period. While there are near-term headwinds for the company and the sector, a rebound in automotive (auto) volumes following the goods and services tax (GST) cut could improve the company’s performance. 

Among listed companies, the paint and coating manufacturer — specialising in industrial coatings — has the highest exposure to the auto segment, with 30 per cent of its sales coming from this sector. 

The medium-term trigger for the stock would be a reduction in GST rates across auto segments. Say analysts Amnish Aggarwal and Vishwa Solanki of Prabhudas Lilladher: “Given the sharp cut in GST rates for automakers, we expect a strong rebound in volume growth from the third quarter of 2025-26 (FY26) onwards, which would benefit Nerolac, as auto paints account for 30 per cent of total paint sales.” The brokerage has an ‘accumulate’ rating with a target price of ₹277. 

On the domestic decorative paint segment, Nerolac’s management said last month that performance was impacted by the early monsoon and border disruptions in North India, where it has higher exposure than its peers. The onset of the festival season is expected to drive higher demand and, therefore, improved volumes. 

Paint companies, according to Motilal Oswal, showed early signs of recovery, although momentum was affected by the early monsoon. Still, management sentiment appears more positive compared with a year ago, with the sector posting marginal growth after four quarters of decline. The early festival season (Diwali in mid-October) is expected to boost demand in September and could further lift performance in the October-December quarter of FY26. 

The extent of revenue and realisation gains will depend on competitive intensity, which remains high due to promotions, incentives, and the ongoing price war led by Birla Opus. For Nerolac, the industrial coating business has been resilient, given that competitive intensity in the segment is lower. 

Analysts Gaurang Kakkad and Upasana Madan of Centrum Broking believe that, on an incremental basis, competitive intensity will remain stable and may not see further escalation. With a relatively better demand outlook and stable competitive intensity, they consider paint stocks to be well placed. The brokerage has an ‘add’ rating on Nerolac, observing that current valuations reflect the muted performance in decorative coatings. 

A positive for the sector and the company is lower raw material costs. Crude oil prices are down 12 per cent from levels at the start of calendar year 2025, while titanium dioxide prices have remained soft. Gross margins are expected to improve over the year-ago quarter while remaining stable sequentially. While the company ended 2024-25 with operating profit margins of 12 per cent, it guided for margins of 13-14 per cent in FY26, driven by volume growth and a better product mix tilted towards more premium industrial coatings. 

Apart from these tailwinds, valuations are also favourable for Nerolac. At the current price, the stock is trading at a 24-30x band based on 2026-27 earnings estimates from various brokerages — well below its five-year average price-to-earnings ratio of 49x.