How Covid-19 impacted Kansai Nerolac in Q4

The impact of the Covid-19 pandemic has taken a toll on the performance of Kansai Nerolac, one of the largest paint companies in the country, during the March quarter of FY20. The revenue for the quarter was down 11.6 per cent y-o-y to ₹1,080 crore. The lacklustre demand due to the lockdown as well as the prolonged slowdown in the automobile industry has hit the company’s revenues. While the benefit of low raw materials costs is a breather for the company, its profit has fallen 23.4 per cent to ₹65.4 crore in Q4 FY20, compared to same period last year. This is due to an increase in employee costs, depreciation and other expenses.

The stock of Kansai Nerolac had corrected 34 per cent in the last six months. At the current price, the stock quotes at 36 times the trailing 12-month earnings, cheaper than its three-year average of 52 times its earnings. Its competitor, Asian Paints, trades at 56 times its trailing 12-month earnings.

The paint demand for the company could remain subdued for the next few quarters, since there could be a postponement of painting/re-painting requirements and slow pick-up in industrial paint demand, including for automobiles. While the short-term environment is challenging, the fundamentals of the company remain strong. Kansai Nerolac has negligible debt levels and healthy cash flow in the quarter.

Product expansion

Kansai Nerolac derives its revenue from the decorative segment, which contributes to 55 per cent of revenues while the remaining 45 per cent is from the industrial segment. Though the overall revenue was down in the recent March quarter, the decorative business segment registered low single-digit volume growth (6 per cent) due to the company’s diversification towards low-end emulsions, distempers and putty.

According to the management, decorative sales volumes were growing in January and February, but fell in March due to Covid-19. Further, given the traction in decorative paint demand, including low-end products, the company plans to focus more on the decorative paint segment going ahead.

Though pent-up demand for decorative paints could be released as the lockdown is lifted gradually, the pace of demand pick-up could be slower due to the deferment of new painting demand and slowdown in real estate demand, including affordable housing segment. But the company has started its billing in the green zones and in Tier-III and -IV cities as the spread of the virus is lesser there compared to the metro cities.

On the industrial paints, Kansai Nerlac is the market leader, and this segment contributes to 45 per cent of revenue (70 per cent from automobile industry and 30 per cent from non-auto industry). The company registered a revenue decline of 19 per cent (volume) in the recent March quarter of 2020. However, the company started to expand its product portfolio in this segment as well — from automobile base to the non-auto industry such as coatings, coil, floor, rebar and powder and wood finishing — along with auto-refinish. It will continue expansion in this line going ahead.

Crude oil impact

For paint companies including Kansai Nerolac, crude oil is one of the key ingredients for raw materials such as titanium dioxide, zinc oxide and solvents and additives. The steady decline in crude oil prices since November last year, from around $62 a barrel to around $30 per barrel (during March 2020), has helped the company save on its input costs. For the March quarter 2020, raw material costs (as a percentage of sales) stood at 65 per cent, about 200 percentage points lower than same period last year.

The operating margin (EBITDA) of the company remained flat at around 12 per cent in the March quarter, aided mostly by lower raw materials costs, increase in employee costs and fall in other income. The company passed on the benefits of lower input costs to its customers (both decorative and industrial paint segment).

The company has also undertaken aggressive promotional and marketing initiatives, and has been expanding its dealers’ network. This could drive revenue growth for the company, particularly in the rural areas and Jammu and Kashmir (where the company is expanding market share).

Going ahead, input costs for paint-makers such as Kansai Nerolac should stay benign for the next few quarters. However, revival in automobile is key for the company to register strong double-digit volume growth.