Kansai Nerolac sees industrial demand and price hikes drive margin recovery

Investment View and Recommendation

Prabhudas Lilladher's November 5, 2026 Q2FY27 result update on Kansai Nerolac Paints retains an Accumulate recommendation. The broker is cautiously optimistic, expecting healthy demand across decorative and industrial paints, price increases to support value growth and a recovery in EBITDA margins towards management's stated 13-14 per cent range by Q4FY27.

The thesis is also supported by Kansai Nerolac Paints' continuing focus on decorative-product innovation, distribution expansion and scaling its project business.

Q2FY27 Financial Performance

Kansai Nerolac Paints reported Q2FY27 revenue of Rs22,688 million, up 18.9 per cent YoY and 8.3 per cent above Prabhudas Lilladher's estimate of Rs20,955 million. The broker estimated overall volume growth at about 6.0 per cent, comprising low-single-digit decorative volume growth and high-single-digit industrial paints volume growth.

Reported gross margin fell to 29.9 per cent, below the broker's estimate, while EBITDA margin declined to 9.8 per cent. Adjusted PAT was marginally below the Rs1,541 million estimate.

Management Outlook and Margin Recovery

• Dealer-segment price hikes were implemented at the end of September and should flow through in Q3FY27.
• Further price increases are being negotiated with OEM customers.
• Industrial growth is expected to remain healthy in Q3FY27, supported by a strong order pipeline.
• Management expects sequential margin improvement as price settlements are implemented and aspires to return towards the historical 13-14 per cent EBITDA margin range by Q4FY27.
• Crude oil at US$80-85 per barrel is considered comfortable for margin recovery. Levels above that range may require additional price increases.

Business Segment and International Updates

Nerofix adhesives delivered double-digit revenue growth, although profitability declined by about Rs40-50 million following the merger because of higher WAM costs and inventory bought at elevated prices. Management expects adhesive profitability to improve in H2FY27 as WAM prices stabilise near US$1,200 per tonne and competitive pricing becomes more disciplined.

Nepal revenue grew about 20 per cent with improved profitability. Bangladesh continued to face revenue and profitability challenges, for which management is evaluating corrective measures, while Sri Lanka operations have been closed. Management also noted that decorative-business margin contraction was lower than the industry average.

Earnings Estimates and Valuation

Prabhudas Lilladher forecasts 8 per cent volume CAGR and about 120 basis points of margin expansion over FY27-FY29, resulting in sales CAGR of 6.1 per cent and EPS CAGR of 10.5 per cent.

The target price is reduced to Rs235 from Rs259 because the broker now values the stock at 22 times September 2028 EPS, compared with the earlier 24 times June 2028 EPS. At 17.4 times FY29E EPS, the broker considers the valuation inexpensive given the improving demand outlook.

Key Risks

• Persistently high inflation affecting discretionary demand.
• Elevated crude and derivative prices.
• Currency volatility affecting imports and procurement.
• Sustained competitive intensity across dealers, painters, contractors and architects.