KANSAINER - Kansai Nerolac Paints Share Price

The management of Kansai Nerolac Paints has provided an optimistic outlook for the upcoming quarters, projecting that November and December will see an uplift in demand, particularly due to favorable factors such as strong construction activity supported by the RBI. The automotive sector is also expected to witness buoyant demand driven by seasonal trends and government policies, especially in the tractor segment. Furthermore, the company anticipates that infrastructure growth, encompassing railways, roads, airports, and power, will drive demand for high-performance coatings.

Key forward-looking points include:

• Projected revenue growth in Q3 and Q4, with expectations for the automotive segment to achieve high single-digit growth rates in value for the second half of FY 2026.
• The company emphasized maintaining margins in the range of 13% to 14% in the short term and aspiring towards 15% in the long term.
• Growth in the decorative segment is expected to rebound, particularly after a challenging Q2, as demand traditionally picks up after Diwali.
• Kansai Nerolac has introduced innovative products in both decorative and industrial segments, contributing to approximately 10%-12% of revenue, which is set to increase with ongoing product launches.

For Q2 FY 2025-26, the company reported a slight negative value growth in decorative business, and while PBDIT decreased by 1.5%, net revenues rose by 0.4%. The management noted resilience in their project segment, which posted double-digit growth, reflecting strong engagement with additional dealer networks expanded to over 2,500 in H1.

In summary, management's outlook reflects confidence in demand recovery across segments, a focus on product innovation, and strategic investments which aim to fortify the brand's competitive position in the market.

Question 1: As the paint and coating space gets more competitive, what is Kansai Nerolac doing to build a strong edge not just through brand or dealer reach but through something deeper?

Answer: We maintain a balanced portfolio across segments, focusing on our strong markets and enhancing our product mix. We plan calculated investments to protect our Decorative market while diversifying into industrial areas, capitalizing on our R&D capabilities and extensive supply chain. The inherent technology and service requirements in our industry make it challenging for competitors to replicate our strengths quickly.

Question 2: As input costs keep shifting, how are you planning to protect margins?

Answer: We continuously refine our product mix while implementing cost reduction initiatives. Our focus remains on innovation and formulation improvement, ensuring we manage costs effectively. This strategy aims to balance short-term volatility with long-term margin stability.

Question 3: Could you provide insights on demand in the Decorative segment, particularly on volume and the performance of retail versus project demand?

Answer: We saw a slight demand uptick at the end of September post-monsoon. October faced challenges due to an early Diwali, limiting our sales window compared to the previous year. However, we anticipate demand to improve in November and December, driven by seasonal factors.

Question 4: What is your target for new product contribution by FY '26?

Answer: Our target for new product contribution is around 10%-12%. Innovations primarily focus on our emulsion and construction chemicals categories. We consistently work on product introductions to maintain that target while managing any cannibalization that may occur.

Question 5: What margin guidance do you have for the next quarters?

Answer: While we don't provide precise margin guidance, we aim to maintain margins around 13%-14% in the short term and aspire for 15% over the long term. Continued focus on value generation through procurement and R&D will play a critical role in achieving these targets.

Question 6: How has the Decorative performance been across geographies, and is the margin weakness linked to product mix?

Answer: Geographically, the North region faced challenges due to monsoons, while the East performed well. Premium emulsions helped boost our margin despite overall results being impacted by the prolonged monsoon and changes in product mix that affected profitability.

Question 7: What are your thoughts on competition and dealer dynamics, specifically regarding new competitors?

Answer: The trend of dealers returning to us after experimenting with new entrants is encouraging. We've increased our market share over time, and our focus is on consolidating and improving dealer relationships, which is yielding positive results.

Question 8: Could you clarify the status on your international subsidiaries?

Answer: Our subsidiary Nerofix turned EBITDA positive and is growing well by shifting focus towards retail. Nepal remains strong; however, we face challenges in Bangladesh and Sri Lanka. Strategies are in place for continuous improvement in these regions.

Question 9: On gross margins, how do you anticipate they will change in the coming quarters?

Answer: While crude cost improvements positively affect gross margins, rupee depreciation presents challenges. Stable gross margin expectations rely on product mix continuity. We aim for incrementally better margins, although fluctuations due to mix changes could occur.

Question 10: Will you explore any international expansions or new acquisitions?

Answer: Currently, we focus on domestic growth opportunities and enhancing our existing operations. While we keep an eye on potential acquisitions, especially regarding our cash positioning, international expansions are evaluated based on pertinent market conditions and opportunities.