Stock Review: Kansai Nerolac

This is the only industry, which has been posting a double digit growth in last two decades. If you come on Kansai Nerolac, they are number one in powder coating and automotive segments and overall number two. The history of the financial performance of the company, but if you see FY10, they had before interest, taxes, depreciation and amortization (EBITDA) margin of about 14.4% and the EBITDA margin has improved to 16.5% in H1. Now, since they are sitting on a cash of about Rs 400 crore, the company is contemplating an expansion of about Rs 650 crore which will get completed in next two years times, so obviously the intention of the company is to retain the number two positions. Since the expansion is all likely to get completed with the internal accruals, company will continue to enjoy the debt free status.

If you compare the P/E multiple, this paint industry is largely having very high P/E multiple. If you take the case of Asian Paints, it has a P/E of more than 30. If you take the case of Berger Paints, it has a P/E of 25-26, while this company is ruling at a P/E of 21-22. As you have said that the share has risen much more in this last one year. But still maybe with the expansion and with the increase in the EBITDA margin and increase in the capacity down the line 18 months or so, I see further improvement in the share price largely due to the earning growth and P/E expansion and can be very safe blue chip kind of stock which can give 30-35% return in 2011.