Kansai Nerolac - Strong Revenue Growth; Margin Recovery Expected | Initiating Coverage

Kansai Nerolac (KNPL) reported 9.8% YoY revenue growth, the highest in the last 12 quarters, driven by high-single-digit growth in decorative and double-digit growth in industrial businesses. Further, in industrial segment, automative, performance coating and powder coating reported robust growth. Going ahead, the management expects demand to remain healthy despite an erratic monsoon and geopolitical uncertainties. However, growth lagged the market leader, Asian Paints (17.6%). Despite a 5.0% consolidated price hike, GM and EBITDAM contracted to 35.0% and 13.8%, respectively, due to an adverse product mix and delayed pricing pass-through in the Industrial business. The management expects margins to improve from Q2FY27E, driven by the full impact of 3% decorative and 3–5% industrial price hikes, while maintaining its FY27E EBITDAM guidance of 13–14% and 14%+ over the medium term. The company continues to deliver healthy topline growth, supported by improving demand across both segments. While margins remain under pressure, management expects recovery in the coming quarters through the full pass-through of price hikes, though commodity price volatility and macro uncertainties remain key monitorable. We initiate coverage on Kansai Nerolac with an 'Accumulate' rating. Valuing the stock at 23x FY28E EPS, we arrive at a target price of Rs 232.

Q1FY27 Performance:

Revenue in line, while EBITDA and APAT ahead of consensus estimates: Net sales grew by 9.8% YoY to Rs 23.7bn. GM contracted by 110bps YoY to 35.0%. A 110bps increase in RM cost was partially offset by 40/60bps decline in emp cost/other exp respectively. Consequently, EBITDA margin contracted by 20bps YoY to 13.8%.  EBITDA grew by 8.3% YoY to 3.3bn. APAT grew by 3.4% YoY to Rs 2.3bn.

Segmental Performance:

The decorative business delivered high-single-digit revenue growth with low-single-digit volume growth, reflecting the company's strategic focus on premiumization, supported by double-digit growth in construction chemicals, waterproofing, premium wood finishes and project/institutional businesses, alongside continued expansion in distribution and retail services. The Industrial business reported robust double-digit growth, driven by a better product mix and broad-based demand across automotive and performance coatings. The automotive segment continued to outperform the market, supported by technology-led innovations and EV-related opportunities while the performance coatings business witnessed strong growth led by premiumization, new product launches, and higher penetration across infrastructure, construction, railways, appliances and electricals. The management expects demand momentum to remain healthy across both segments, supported by improving market conditions and sustained industrial activity.

Outlook:

We expect Kansai Nerolac to deliver steady growth, supported by improving demand in the decorative paints segment, continued strength in industrial coatings and a gradual recovery in urban demand. Margin performance is expected to remain resilient, aided by premiumization, cost optimization initiatives and easing raw material costs, while the company's focus on distribution expansion and product innovation should support long-term growth.

Valuation:

We forecast a Revenue/EBITDA/PAT CAGR of 8.0%/10.4%/10.9% over FY26–FY28E. Despite elevated competitive intensity, we expect Kansai Nerolac to deliver healthy revenue growth, driven by sustained demand across the decorative and industrial segments, a longer painting season supported by the El Niño impact and continued premiumization. While macro uncertainties may keep margins near the lower end of the company's guidance, we expect gradual improvement through pricing actions. Accordingly, we initiate coverage on Kansai Nerolac with an 'Accumulate' rating. Valuing the stock at 23x FY28E EPS, we arrive at a target price of Rs 232.

Company website: https://www.nerolac.com/

*CMP is as per report published date

Click to download the full Kansai Nerolac Ltd Q1FY27 Company Update

Analyst:

• Sachin Bobade - HOR, Institutional Equities (NISM-201700098683)
• Akshay Patel - Senior Research Associate, Institutional Equities (NISM-202100071038)

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Frequently Asked Questions (FAQs) – Kansai Nerolac Q1FY27 Company Update

What drove Kansai Nerolac’s Q1FY27 revenue growth?

Revenue increased 9.8% YoY to approximately ₹2,370 crore, led by high-single-digit growth in decorative coatings and double-digit growth in industrial businesses.

How did Kansai Nerolac’s margins perform?

Gross margin declined to 35.0%, while EBITDA margin moderated to 13.8%. The pressure was attributed to an adverse product mix and delayed pricing pass-through, particularly in industrial businesses.

What is the target price for Kansai Nerolac?

The institutional research report assigns an Accumulate rating with a target price of ₹232, based on 23x FY28E EPS. The target is an analyst estimate, not a guarantee of future returns.

What could support Kansai Nerolac’s margin recovery?

The full impact of announced price increases across decorative and industrial businesses, alongside cost optimization and premiumization, is expected to support margins from Q2FY27E.

What are Kansai Nerolac’s key growth drivers?

Key drivers include decorative paints, industrial coatings, automotive demand, premiumization, new product launches, distribution expansion and opportunities linked to EVs and infrastructure.

How is the industrial coatings business performing?

The industrial segment delivered double-digit growth, supported by automotive, performance and powder coatings. Technology-led products, premiumization and broader applications remain important growth drivers.

What are the key risks for Kansai Nerolac?

Key risks include commodity price volatility, competitive intensity, macroeconomic uncertainty, uneven demand and delays in passing through pricing actions.

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