We upgrade KNPL to Buy with FV of Rs 485 (Rs 530) (35X FY2022e PE). Even as ST demand collapses due to Covid-19, the fundamentals of the company and the category are notably intact: volume-led growth potential and stable/improving margin profile arising from rational competition. We cut FY2020-22e forecasts to factor in Covid-19 impact, lower crude prices and weaker macro. The stock has corrected 35% in the past month notwithstanding significant RM tailwinds and it is trading at 24X FY2022e PE, implying 40% valuation discount to APNT versus 15-20% historically.
Baking in Covid-19 impact and lower crude prices: KNPL will see a material decline in sales in Q1 due to the ongoing nation-wide lockdown until April 15, 2020 and any 2-3 week extension of lockdown/ social distancing. A pick-up in sales, thereafter, could be slow as consumers may defer discretionary activities. We forecast a 65% y-o-y decline in revenues in Q1 (zero sales in April, sales at 30%/80% of the usual run-rate in May/June) and a gradual recovery from Q2. The sharp fall in crude would boost GM—say 500-600 bps GM tailwinds if crude stabilises at $45-50/bl and currency at Rs 75/USD. Of this, we expect 50/90% of RM savings in decorative/industrial coatings to be passed on.
Upgrade to Buy: We cut FY2021e revenues by 18%. We cut FY2022e revenues by 11% as we model (i) price cuts of 4% (RM savings would be partly passed on) versus price increase earlier and (ii) weaker macro. We increase FY2021-22e Ebitda margin by 30-180 bps; crude benefit would reflect from Q2/Q3. At CMP, KNPL is trading at 24X FY2022e PE versus 41X/45X of APNT/BRGR.
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