Kansai Nerolac Paints (KNPL) result was below our estimates due to higher-than-expected inflation in raw material cost. Demand in decorative coating business remained resilient during days when lockdown restrictions were minimal.

Positively, value growth stood higher than volume growth driven by higher contribution from emulsions. Also, management guides to maintain focus on premium portfolio as, due to inflation, value products (like putty) will put pressure on operating margins due to inferior economics. Inflation continues to put pressure on gross margin.

Commenting on the result review, IDBI Capital said, "KNPL guides for more price hikes to offset inflation going forward. However, taking price hike in industrial coatings will be relatively tougher. Revenue from new products (including construction chemical) is tracking well (10% of sales in 1QFY22). KNPL can sell new products at +50% of existing dealers. We have trimmed our EPS estimate by 6-12% during FY22-23E due to rise in inflationary pressure. Our revised TP stands at Rs 562 with SELL rating."

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