**[investwise]** ISec Puts A Sell On Kansai Nerolac, says party is over! PO Rs 660

 

Kansai Nerolac-Party Is Over Sell With A Target of Rs 660, Downside 18 per cent   Strong performance in Q4FY10. KNPL's net sales grew 35.2% YoY on the back of strong volume growth of ~33% in Q4FY10. Volume growth in the decorative segment stood at ~22%, while being significantly higher in the industrial segment.   Though raw material cost-to-sales declined 100bps YoY to 63.9%, it increased 30bps QoQ due to high proportion of solvent-based Industrial Paints and higher crude-linked input prices.   Decline in other operating costs helped OPM expand 316bps YoY to 13.9% in Q4FY10. Recurring PAT grew a whopping 64.7% YoY to Rs331mn.   Current volume growth and OPM not sustainable. In FY10, Kansai not only enjoyed the upswing in the auto cycle but also benefited from low input costs, resulting in strong volume growth of ~22% and the highest OPM in the past 10 years. However, we believe the high volume growth and margins are unsustainable.   We estimate FY11E & FY12E volume growth at 15% & 14% respectively and OPM at 14.5% each.   Valuations expensive; maintain SELL. KNPL's EPS increased 67% YoY in FY10 on the back of a low base, low input costs and sharp economic recovery.   However, due to decline in margins and lower volume growth, we estimate FY10- 12E EPS CAGR at 10%. At FY11E P/E of 23.5x, we find KNPL stock expensive as it trades at 38% premium to its five-year median P/E of 17x and at ~4% premium to P/E of APL (versus 25% discount historically).   We value KNPL stock at FY12E P/E of 18x and, hence, arrive at target price of Rs 660 (implying downside of 18%).   Maintain SELL. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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