Kansai Nerolac's Industrial Segment Offers Good Growth Potential: Morgan Stanley

Kansai Nerolac Paints Ltd.'s industrial coating business offers favourable growth prospects even as the paintmaker is looking to boost its share in decorative paints, according to Morgan Stanley.

Industrial business is led by high growth in the non-automotive coatings segment as infrastructure investments grow, the research firm said in a Dec. 10 note citing the management's interaction with analysts. Better margin potential in the historically low-margin industrial business and the company's market leadership in the automotive and powder coatings segment will aid growth, it said.

Morgan Stanley has an 'underweight' rating on the stock with a target price of Rs 250, implying a downside of 24%.

The company is focused on expanding its portfolio in its core-economy and popular-price segments, while improving its presence in the premium segment under the 'Paint+' sub-brand. Eleven new products with have been launched so far and premium-product revenue salience has increased 150 basis points, the research firm said in a Dec. 10 note.

The paint company has been growing in double digits in the construction segment, with an addressable market of more than $1 billion, accounting for 10–11% of the total paints market, the company told analysts.

Waterproofing and construction chemicals account for 5% of Kansai Nerolac's decorative sales and have the potential to account for more than 10% in the future.

Morgan Stanley said urban demand is good and rural consumption, including the two-wheeler segment, has been weaker than expected, albeit better sequentially with some green shoots visible. Passenger vehicle-related automotive and non-auto industrial demand has been good.

• The company is engaging directly with consumers, influencers, painters, architects, offering painting services, and improving branding efforts.

• The projects business revenue salience has increased as the share of digital marketing spends has driven a twofold jump in website traffic and a four-time rise in lead generation.

• Kansai Nerolac has a better presence in north and east India, followed by west and is weaker in south India.

• The company has a better presence in rural markets over urban markets.

• Nepal, Bangladesh and Sri Lanka contribute less than 5% of the revenues.

• Any new player will take time to build strengths on brand, dealer and consumer/influencer relations.

• Faster-than-expected pickup in the gross domestic product/consumer sentiment and continued slowdown in the Covid-19 spread.

• Market-share gains from the unorganised sector.

• Faster-than-expected recovery in the automotive and non-auto industrial paints business.

• Market-share loss.

• Volume slowdown.

• Continued rise in input costs.

• Slowdown in automotive and non-auto industrial-paint business.

Eleven out of the 20 analysts tracking the company have a 'buy' rating on the stock, three recommend 'hold' and six suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 4.7%