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Kansai Nerolac: Margin sustenance a key issue - Views on News from Equitymaster
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Kansai Nerolac: Margin sustenance a key issue
Jan 28, 2011

Kansai Nerolac has announced 3QFY11 results. The company has reported 33.1% YoY and 14.6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • After a modest growth in the previous quarter due to delays in construction activity, the festive season prevalent in Oct-Dec period enables the company to post a healthy revenue growth of 33.1% YoY in 3QFY11.
  • Operating margins fall substantially from 14.5% in 3QFY10 to 12.3% in 3QFY11. The dip is due to raw material price escalation. It may be noted that prices of crude oil and titanium dioxide (key raw material input) have increased significantly over the last few months pressurizing margins.
  • Net profits increase 14.6% YoY in 3QFY11 on the back of higher other income and decline in tax interest expenses.
  • In January, the company divested entire stake in its associate company, Nipa Chemicals Ltd, for a consideration of Rs 257.2 m in a bid to focus on its core business activities.

Financial snapshot
(Rs m) 3QFY10 3QFY11 Change 9MFY10 9MFY11 Change
Sales 4,209 5,601 33.1% 12,826 16,182 26.2%
Other operating income 3 3 -21.9% 7 21 213.4%
Expenditure 3,602 4,916 36.5% 10,775 13,867 28.7%
Operating profit (EBDITA) 610 688 12.6% 2,058 2,336 13.5%
Operating profit margin (%) 14.5% 12.3%   16.0% 14.4%  
Other income 37 43 18.3% 157 142 -9.6%
Interest 3 2 -7.7% 8 8 -8.5%
Depreciation 111 128 15.3% 310 362 16.7%
Profit before tax 534 601 12.6% 1,897 2,109 11.2%
Tax 171 185 8.2% 581 638 9.7%
Profit after tax/(loss) 363 416 14.6% 1,316 1,471 11.8%
Net profit margin (%) 8.6% 7.4%   10.3% 9.1%  
No. of shares (m)         53.9  
Basic earnings per share (Rs) (Not Annualised)         27.3  
P/E ratio (x) *         26.6  
* On a trailing 12-months basis

What has driven performance in 3QFY11?
  • Net sales increased 33.1% YoY in 3QFY11. The company registered healthy growth due to strong demand in both industrial and decorative paints. Further, prevalence of festive season in the Oct-Dec quarter also boosted the top line. Going forward, the management expects the overall demand environment to remain healthy but the growth momentum may slow down given the high base effect. Nevertheless, concerns over raw material price inflation and hence profitability is likely to persist in the near term.

  • Kansai Nerolacís operating margin stood at 12.3% in 3QFY11, a decline of 220 bps over 3QFY10. This was mainly due to raw material price inflation. Prices of titanium dioxide (key raw material input) and crude oil have increased considerably over the recent past pressurizing margins. Going forward, unless the situation improves, margin sustainability would remain a key challenge for the company.

  • Bottom line registered a growth of 14.6% YoY in 3QFY11. Increase in other income, decline in interest expenses and tax rates boosted net profits.

What to expect?
At the current price of Rs 894, the stock is trading at a price to earnings multiple of 20 times our estimated FY13 earnings. We expect Kansai Nerolacís revenues to grow at a strong pace going forward fuelled by anticipated growth in volumes. However, margins are likely to remain a concern in the near term. While we remain positive on the growth prospects of the company, current valuations (For RPro Subscribers) are on the higher side.

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