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Kansai Nerolac: Decorative segment boosts growth - Views on News from Equitymaster

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Kansai Nerolac: Decorative segment boosts growth
Feb 9, 2012

Kansai Nerolac has announced the third quarter results of financial year 2011-2012 (3QFY12). The company has reported 18.8% YoY and 26.7% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line increases 18.8% YoY during the quarter.
  • Operating margins fall marginally to 12.1% in 3QFY12 from 12.3% in 3QFY11.
  • Net profits increase 26.7% YoY in 3QFY12 on the back of strong performance at the operating level and rise in other income partially offset by higher depreciation expenses.


Financial snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 5,601 6,655 18.8% 16,182 19,328 19.4%
Other operating income 3 2 -32.0% 21 10 -53.8%
Expenditure 4,916 5,851 19.0% 13867 16689 20.4%
Operating profit (EBDITA) 688 806 17.2% 2,336 2,649 13.4%
Operating profit margin (%) 12.3% 12.1%   14.4% 13.7%  
Other income 43 75 72.5% 142 161 13.5%
Interest 2 2 -16.7% 8 7 -13.3%
Depreciation 128 145 13.1% 362 401 10.8%
Profit before tax 601 734 22.2% 2,109 2,403 13.9%
Tax 185 207 12.3% 638 692 8.6%
Profit after tax/(loss) 416 527 26.7% 1,471 1,710 16.2%
Net profit margin (%) 7.4% 7.9%   9.1% 8.8%  
No. of shares (m)         53.9  
Basic & Diluted earnings per share (Rs)*         31.7  
P/E ratio (x) *         21.0  
* On a trailing 12 months basis

What has driven performance in 3QFY12?
  • Net sales increased 18.8% YoY in 3QFY12. While the demand conditions in the decorative segment improved growth, in the industrial segment growth was subdued due to slowdown in the real estate and auto industry.

  • Kansai Nerolac's operating margin stood at 12.1% in 3QFY12, a decline of 20 bps over 3QFY11. It may be noted that while the prices of titanium dioxide, a key raw material ingredient, have eased they continued to remain a concern. In addition, rupee depreciation further worsened the situation.

  • Bottom line registered a growth of 26.7% YoY in 3QFY12. Decent performance at the operating level filtered into the bottom line. Rise in other income (72.5% YoY) and fall in interest expenses (-16.7% YoY) also boosted profit growth during the quarter.

What to expect?
At the current price of Rs 890, the stock is trading at a price to earnings multiple of 16.1 times our estimated FY14 earnings. Management expects revenue growth to be in the region of 15% in FY13 and is also planning to increase its distribution reach by opening up smaller stores in new areas. The company has also lined up an investment of Rs 4 bn in 0rder to increase its capacity from 2 lakh tonnes per annum to 3 lakh tonnes per annum.

Going forward, we believe that the growth will be driven by the decorative segment as demand conditions in the industrial segment remain weak on account of slowdown in infrastructure projects and rising interest rates. Even margin sustenance will be a key challenge for the company. In light of these factors we maintain our negative view on the stock.

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