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Brush with competition could hurt paint maker Kansai Nerolac's margins

By Ram Prasad Sahu
May 23, 2024 13:56 IST
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Kansai Nerolac Paints has seen its market capitalisation (mcap) erode by over 5 per cent since May 3 after posting a subpar performance in the fourth quarter of 2023-24.


Photograph: Courtesy, Nerolac

Weighed down by stiff competition, the company has shed Rs 1,172 crore over the past two weeks in mcap.

India’s largest paint maker in terms of mcap, expects double-digit growth in the industrial segment and aims to maintain margins, but its performance in decorative paints could suffer amid competition.


The company's Q4 revenue rose by 3.5 per cent compared to the same period last year but was below consensus estimates.

The decorative paints business grew 10 per cent in volume but the value growth remained flat due to a negative price and product mix effect of 9-10 per cent.

The company reduced prices when it had a higher proportion of commodity products such as putty.

It reported single-digit value growth in the industrial segment in Q4 compared to the same period last year, driven by demand for automotive and performance coatings.

Such demand softened sequentially. In the automobile category, demand from passenger vehicle, two-wheeler, and three-wheeler segments was robust but tractors and commercial vehicles were weak.

The company expects double-digit volume growth in the decorative segment will continue in FY25, supported by rising rural demand.

Infrastructure growth and forecasts that monsoon rains will be good could drive demand in the Rs 75,000 crore domestic paint industry.

Kansai Nerolac said it has launched more than 15 new products in three years, did better than the industry in business-to-business projects, and seeks the largest market share in South India.

It highlighted initiatives in digital and influencer outreach.

Some brokerages believe the company needs to take additional steps to improve its market position.

“While Kansai Nerolac has stepped up brand investments to defend market share amid rising competition, we believe more needs to be done regarding the product range and increasing stickiness among dealers,” said Jay Gandhi and Tanuj Pandia, analysts with HDFC Securities.

The company reported a gross margin expansion of 320 basis points (bps) year-on-year due to a weak base and lower raw material prices.

Operating profit margin improved by 128 bps to 10.8 per cent, but it was limited by higher brand investments and rising employee costs.

Although the company expects the industrial segment to maintain double-digit margins, pressures may emerge in the decorative segment due to increased competition.

Analysts believe there could be downside risks to Kansai Nerolac's margins.

“Kansai Nerolac ended FY24 with a 13.2 per cent operating profit margin in a favourable raw material cost environment.

"We expect a similar margin profile in the near term. Marketing spend could increase further in H2FY25 (first half of FY25) as Grasim's promotional activities intensify, leaving room for downside risk to margins,” said IIFL Securities analysts led by Percy Panthaki.

The brokerage maintained its 'reduce' rating on the company due to a cautious outlook on the paints sector amid competitive pressures, challenging valuations, and moderate growth in the medium term.

Kotak Research also maintained its 'reduce' rating on the sector.

“Even as Kansai Nerolac's execution improved (and market share loss ceased) in FY2024, it remains more vulnerable to rising competitive intensity than the top two players in the industry,” said analysts, led by Jaykumar Doshi at the brokerage.

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Ram Prasad Sahu
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