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Monday, April 16, 2018

Kotak Securities calls a 'Buy' on Kansai Nerolac Paints
CMP: 490        Target: 600

Outlook remains strong: We recently interacted with the management of Kansai Nerolac Paints (KNPL) to understand the developments in the company and in the sector. KNPL has been experiencing double digit volume YoY growth across segments since the last 12 quarters surpassing the performance of Asian Paints and Berger. The strong out-performance is on the back of: 1) Strong volume growth witnessed by the paint sector; 2) New and innovative product launches by the company; 3) Strong distribution network of the company (20000+ dealers and 102 depots);4) Heavy promotion through multiple media platforms and 5) Sales aggression exhibited by the company. Management (and we agree) expect the growth momentum to continue in medium term as well with increasing disposable income, healthy GDP growth, strong automotive demand and private/public sector capex in the country. Recommend BUY with an unchanged TP of Rs 600 at 44x FY20E earnings.

Automobile demand remains strong in India: Industrial segment contributes ~45% to KNPL’s revenues with automotive segment contributing 75% of the industrial segment revenues. KNPL's strong dominance in automotive paints segment is supplemented by its parent Kansai's association with global OEMs that have a strong presence in India.

Going forward the following factors would keep the demand momentum strong for automobiles:

  • Increasing disposal income,
  • Seventh pay commission pay-out
  • Expectation of normal monsoon
  • Strong exports and
  • Several new launches by all the companies (as announced in Auto Expo 2018)

Outlook and Valuation: We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of KNPL also indicated that the volume trends remain strong for the company and expect the trend to continue in medium term. For KNPL, we estimate 9% volume CAGR over FY17 – FY20E with stable margins and ROE of ~23.3% and ROCE of ~34.5% for FY20E.Maintain BUY with an unchanged TP of Rs 600 at 44x FY20E earnings.

Emkay calls a 'Buy' on Reliance Nippon Life Asset Management
CMP: 260            Target: 340

Mutual fund industry poised for strong growth: The equity investment culture through mutual funds has been deepening and is reflected well in the strengthening flows from both Top 15 and B15 locations. Indian mutual fund AUM stood at Rs23tn as of Q4FY18 and the trend suggests a likely growth rate of 22-24% CAGR between FY18-FY22E. This can more than double the MF AUMs beyond Rs50tn market over next four years. We expect AMCs with strong distribution reach to benefit from the same.

  • Multiple factors contributing to AUM growth: While the post-demonetization dampening of prices has reduced attraction of real estate as an investment, the relatively stable inflation appears to have taken the sheen off gold. We don’t see this trend altering meaningfully and as a consequence, expect the demand in financial assets to rise going forward.
  • Gross flows remain strong: Recent data shows continued stability of SIP and overall equity flows despite the correction seen in key indices. We interpret this as a sign of a maturing investment culture. With rising stability in flows and RNAM’s focus on B15 locations, we expect RNAM to continue benefiting incrementally and report a healthy +22% CAGR in AUM over FY18-FY20E. We expect the equity AUMs to show a meaningful improvement in overall AUM.
  • Initiate coverage with a ‘BUY’ and PT Rs340: We expect RNAM to deliver a +24% CAGR in net profit FY17-FY20E driven by a healthy growth in AUMs, stable investment management fees with rising equity contribution, and stable expense ratios. The target price values RNAM at 34x/27x FY19E/FY20E EPS and 4.1%/3.4% FY19E/FY20E AUM.
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