Kansai Nerolac targets stronger H2 growth as automotive coatings capex expands

Investment View and Valuation

Prabhudas Lilladher retained its Accumulate rating on Kansai Nerolac Paints (KNPL) in its August 4, 2026 Q1FY27 result update and raised its target price to Rs259 from Rs248. The broker increased its FY27E and FY28E EPS estimates by 4.5 per cent and 2.0 per cent, respectively.

The estimate revisions are supported by expectations of a stronger H2FY27 festive season, management's FY27 EBITDA-margin guidance of 13-14 per cent despite geopolitical volatility, and sustained traction in automotive and industrial paints. Prabhudas Lilladher values KNPL at 25 times June 2028 EPS. The stock traded at 20.2 times FY28E EPS, which the broker believes limits downside.

Q1FY27 Financial Performance

KNPL reported Q1FY27 revenue growth of 10.2 per cent year-on-year to Rs2,299.5 crore, slightly below Prabhudas Lilladher's Rs2,369.2 crore estimate. The broker estimates volume growth of about 5.3 per cent, with decorative-paint volumes growing at a low single-digit rate and industrial-paint volumes in high single digits.

Gross margin declined 108 basis points year-on-year to 35.0 per cent but exceeded the broker's estimate. EBITDA rose 7.7 per cent to Rs335.9 crore, marginally below the estimate, while EBITDA margin contracted 34 basis points year-on-year to 14.6 per cent but exceeded expectations. Adjusted PAT increased 5.9 per cent to Rs244.6 crore, ahead of the broker's estimate.

Demand Trends and Business Performance

Management said Q1 demand was led by the industrial business. Automotive, powder and performance coatings recorded strong growth, whereas auto refinishes were broadly flat. Management expects H2FY27 demand momentum to exceed H1FY27, aided by the festive season.

• Decorative volumes remained in the low single digits in Q1FY27, while competitive intensity stayed high, particularly in decorative paints.
• Project business grew at a double-digit rate and is now present in more than 80 cities.
• Construction chemicals delivered double-digit growth, while wood finishes recorded high-single-digit growth.

Pricing and Margin Outlook

Management expects Q2FY27 margins to be maintained year-on-year despite high-cost inventory, helped by the full impact of decorative and industrial price increases. Consolidated pricing growth was about 5 per cent in Q1FY27, including around 5 per cent industrial price hikes.

Management expects a further 3 per cent decorative price increase and a 3-5 per cent industrial increase in Q2FY27. Industrial price increases typically lag raw-material-cost changes by one to two quarters. FY27 EBITDA-margin guidance was retained at 13-14 per cent, while the medium-term aspiration remains towards the upper end of 14 per cent or higher.

Automotive Coatings Capex

KNPL's board approved Rs600 crore of capex over about 2-2.5 years for automotive powder coatings. The project comprises 66,000 kilolitres per annum of coatings capacity and about 10,000 metric tonnes per annum of resin capacity.

The resin capacity is intended primarily for backward integration in automotive coatings and is incremental to normal annual capex of Rs150-200 crore. Management expects the new capex to earn return on capital employed of 15-18 per cent, in line with current levels, with potential for higher returns from later incremental capacity.

Earnings Outlook and Key Drivers

The broker expects KNPL's decorative innovations, expanding distribution, project business and rising share of the total paints market to remain supportive. Its FY26-28 forecasts are as follows: