Reduction in GST rate from 28% to 18%, correction in crude prices leading to correction in raw material prices, spending by government, increasing disposable income leading to strong growth in the decorative segment and stability in the industrial segment would drive the revenues and earnings of paint companies going forward, including KNPL. Maintain ADD with a TP of Rs 500 (from Rs 470) at 43x FY21E earnings.
We model revenue CAGR of 13% led by ~9% volume CAGR in FY19-21E led by decorative paint segment. Price hikes coupled with a favourable mix would lead to an expansion in EBITDA margin from FY19 onwards. We maintain our HOLD recommendation on the stock with a revised target price of Rs 470/share.
Decorative paints save the show; Auto paints near term drag We adjust the numbers for IndAS 116 only and estimate CAGR of 13.5% in volumes, 11.7% in revenues and 15.6% in PAT over FY19-21. Kansai is trading at 37.4xFY21 EPS. We value the stock at 40xJune21 EPS of Rs12 and arrive at a target price of Rs479 (earlier 464 at 40xFY21). We believe current scenario provides an opportunity to accumulate stock for medium to long term gains, although returns will be back ended. Retain Accumulate.
Consequently, we increase our EPS forecast by 2/3% for FY20E and FY21E numbers and assign a higher PE multiple to the stock. Recommend ADD (from Reduce) with a TP of Rs 470 (from Rs 425) at 40x FY21E earnings (increased from 37x). Multiple of 40x is the average one year forward PE for KNPL for the last 3 years and at 20% discount to market leader Asian Paints.