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IDBI Capital Report
Kansai Nerolac Paints Ltd.'s Q2 result was below our estimates due to steep rise in raw material cost. Demand in decorative coating business remained resilient while industrial coating segment continues to be subdued. The issue of chip shortages led to 40-50% drop in production of passenger vehicle in Q2 FY22 which has significantly impacted KNPL's industrial coating business. Demand for 3 wheeler and tractor remains promising. Management expects chip-shortage issue to impact auto-volume at least for next one year, given it takes up to 2 years to come-up with new facility.
In decorative coatings business; distribution expansion remained healthy at 10%. Steep rise in the inflation of raw material cost significantly impacted gross margin. However, KNPL expects to offset the impact (of inflation up to 2Q FY22) by taking judicious price hikes. Further, management expects raw material inflation to persist in near term. Accordingly, as per revised business outlook we have revised our EPS estimates for FY22E by 18%.
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