Kansai Nerolac: A lasting impression

The stock of paint maker Kansai Nerolac Paints Limited (KNPL) has been on a roll the past few years, aided by healthy demand and cost benefits due to the crude oil rout since 2014.

The stock, which slipped last November after the demonetisation move by the government, has recouped almost all its losses. Still, it presents a good buying opportunity for investors with a long-term perspective. Its valuation, while not cheap, is reasonable.

At ₹360, the stock quotes at about 41 times the trailing 12-month adjusted earnings. In the past three years, it has traded in the range of 17-52 times earnings. The company’s prospects remain bright.

Expected healthy demand for both decorative and industrial paints, benign costs, expansion plans and a healthy financial position bode well for the company.

KNPL is the market leader in industrial paints. This segment contributes almost 45 per cent of the company’s revenue, with the chunk coming from automotive coatings. KNPL counts dominant car maker Maruti Suzuki among its clients. With the auto sector, especially passenger cars, on a growth path since the last two years, KNPL is in a sweet spot.

The company has also been doing well in the decorative paints business, aided by economic growth. Volume growth in both these businesses has been in double-digits so far in 2016-17. Growth, while subdued in the December quarter due to the impact of demonetisation, has still been in double digits.

The company expects demand to get better. Expectations of continued growth in the auto sector, infrastructure development push by the government, impetus to the housing sector and growing spending power should help.

The GST should also aid organised sector players such as KNPL, given the expected shift from the unorganised sector. The company also has a strong presence in niche segments such as wood, powder and floor coatings. This has helped it tap new customer segments across sectors such as auto ancillaries, electricals, railway and petro-products.

A key factor that aided paint companies was the crash in crude oil prices over the past three years. This slashed the cost of raw materials, much of which are crude oil derivatives such as titanium dioxide.

KNPL’s material cost as a percentage of sales reduced to 57 per cent in 2015-16 from 61 per cent in 2014-15. This further fell to 54 per cent in the nine months ended December 2016 from 59 per cent in the year-ago period. This has helped profit grow much faster than sales.

While crude oil price has risen to about $55 a barrel levels since last November due to the output cut deals among OPEC and non-OPEC nations, it is unlikely to go beyond $60 a barrel, thanks to global supply responses, especially from US shale oil. Costs for paint makers such as KNPL should stay benign.

KNPL, with four manufacturing units and a wide distribution network across the country, is expanding its capacity.

The company is setting up a new plant in Andhra Pradesh with a capacity of 60,000 kilolitre a year at an outlay of about ₹300 crore. The company plans to use the proceeds from the sale of the Chennai plant last fiscal to set up a plant in Gujarat.

There are also plans to set up a plant in Punjab. It has also launched new marketing initiatives to expand reach in the decorative segment. Besides, the company has presence in Nepal and Sri Lanka through joint ventures.

KNPL’s consolidated revenue grew at about 8 per cent y-o-y to about ₹3,860 crore in 2015-16. Lower costs and profit on gains from sale of its Chennai plant (₹535 crore) saw profit more than triple to ₹893 crore.

Excluding profit from the plant sale, profit grew at about 62 per cent to ₹445 crore. In the nine months ended December 2016, standalone revenue rose 7 per cent to ₹3,050 crore while its profit grew 40 per cent to ₹390 crore.

Operating margin improved to 21 per cent in the nine months ended December 2016 from 16 per cent in the year-ago period. Negligible debt levels give the company enough headroom to fund expansion plans.