Paints – Consumer, Automotive, Industrials & Construction Chemicals
The simplest but most relevant analysis you will find on the Company. Read slowly, think carefully & you might agree !.... Do comment at the end for any clarification/ views.
If the economic revival is for real, Kansai Nerolac (KN) is bound to attract attention and the under performance vs the likes of Asian Paints (AP) is bound to narrow down.
- Infact, if the momentum picks up speed – it might just end up outperforming !
😇 Blessed with high demand from investors of all types.
😃 MNC (Japanese) run by professional management.
🙂 Consistent performer. Decent growth, margins, returns and cash flows. Net debt free.
😐 Not for deep value buyers. Most Paint Companies trade at premium and KN is not an exception.
🙂 Stock breaking out of a three year consolidating pattern.
🙂 Low float stock. 75% owned by parent and FIIs+DIIs hold just 16.5%. If institutions decide to accumulate, stock can move quickly.
- Established brand with decent customer recall, stabilized distribution network and B2B relationships.
- Leading player in the industrial paints segment (45% of KN’s total sales) and 3rd largest in the decorative segment (i.e., consumer paints). Overall market share – AP ~40%, Berger ~12% and KN ~11%.
- One of the best advertiser – Jab ghar ki raunak badhani ho, aaj careful toh kal colourful etc. It helps Company to retain it’s position in a competitive decorative segment.
- Technological support from Japanese Parent with extensive product portfolio including Automotive, Industrial, Decorative, Protective and Marine Coatings.
- Consistent financial performance and comfortable financial position.
- Being leader in the industrial paints segment, KN is more susceptible to overall economic performance vis-a-vis it’s competitors. (Refer to the below section on “Other Important Observations”)
- KN’s margins and return ratios in general are lower than say AP and Berger. This again being 45% of it’s revenues coming from Industrial Paints segment. It’s sort of a structural weakness to it’s business model and unlikely to drastically change in future. In fact, if economic revival plays out and KN benefits from it, the overall margins might suffer. I would be conscious of it but would not overweight it in my decision (there is a significant history to take cues from). They key question in my mind would be – whether I want to play on economic revival or not and there my comparison would not be just with Paint Companies – there are many other sectors linked to economic revival that would continue to majorly lag behind KN on most parameters.
- Significantly behind AP in the decorative segment. I don’t see it changing significantly.
- Management doesn’t build stories, which is typical of many Japanese owned entities. However, this keeps the investor community looking for cues and doubtful about it’s future growth. Company on the contrary keeps on building it brick by brick and when it continues to deliver, investors keep creeping in.
- If the recent economic revival doesn’t sustain and markets in general turn negative about the overall economic potential. KN’s stock price then might not do much in short to medium term.
- Increasing competition in the decorative paints segment both from existing and new players (JSW, Grasim). I would be conscious of it but would not over fear it unless there is some drastic product differentiation that becomes viral.
- Rising crude prices and hence impact on overall profitability. This again is structurally integral to running any business, and with some adjustments here and there, KN kind of decently sized companies do manage them reasonably well albeit with some short term lag. Raw material prices linked fear for me personally are more relevant for small size unorganized players who operate at wafer thin margins and have poor financial position (i.e. sizeable debt).
- In decorative segment, KN’s market share is significantly behind AP (11% vs 40%). It is trying to improve on these numbers by launching new products as well as addition of dealer network (currently KN is at 27,500 dealers vs 70,000 of AP). I am not currently overly bullish on this, except maybe couple of percentage points in best case. However, these measure are important for KN to atleast continue retain it’s market share.
- KN is also trying to penetrate deeper into construction chemicals business which is gaining higher traction in India. However, this is now a focus area of most of the the Paint Companies in India and it’s business in normal course.
- Potential to grow the overall industrial segment where KN is the market leader. For easy reference – Indian paints industry is ~ 75% decorative and 25% industrial. Within industrial ~70% is auto and balance others including consumer durables, pipes, machinery, infrastructure etc. Globally the mix of industrial and automotive is estimated at 50:50. So logically with economic growth and development, the composition should graduate towards global trends. Whether that plays out…. remains to be seen. Personally, I believe it should somewhat, but India is a unique country in many respects – so I will not go over excited dancing through the streets.
- KN is 74.99% owned by Kansai Paint Co Ltd – a Japanese chemical company whose main products are automotive, industrial and decorative coatings.
- The Japanese company is one of the world’s top ten paint manufacturers with manufacturing sites in over 43 countries across the world and is a member of the Mitsubishi UFJ Financial Group.
- KN is run by professional management who seems capable and reliable. I didn’t find any corporate governance related red flags.
- The management style and behavior is typical of Japanese Companies – focused with ears to the ground and who don’t like to over promise or build stories.
Auditors - S R B C & CO LLP
Bankers - Union Bank, Standard Chartered, HDFC, BNP Paribas
Credit Rating -
Crisil – AAA (Stable), A1+
Consistent reliable performer and comfortable financial position
- One can expect Company to deliver a 7-10% sales CAGR in normal course and with economic revival 12-15%.
- On conservative basis one can expect EBITDA margins of around 15%.
- Company doesn’t seem to have any significant capex plans in the foreseeable future. Internal cash flows should be adequate to take care of moderate requirements. Otherwise also, Company has sufficient financial flexibility to undertake any big capex if the situation demands.
- Return ratios should continue to be good.
- Cash flows sometimes can be volatile especially at year end to take care of any working capital requirements – Unlikely to be a structural concern.
- At Rs 583 (as on Feb 18, 2021), stock is trading at a trailing ‘normalized’ PE of about 55-60x. I for the time being have removed the December’ 20 quarter’s out performance while doing these calculations as the sustainability of that remains to be seen. However, if that continues, Company might suddenly start looking much better priced at a 1 yr fwd of about 40-45x … and therefore one’s call on economic revival is key to decide to buy or not.
- KN’s financial results, Investor PPT, Press Releases
- Nerolac Advertising Journey- a jingle that made history – till 1999, KN was part of Tata Forbes Group !