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Kansai Nerolac: Volume pressure lingers - Views on News from Equitymaster
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Kansai Nerolac: Volume pressure lingers
Mar 8, 2013

Kansai Nerolac has announced the third quarter results of financial year 2012-2013 (3QFY13). The company has reported 15.3% YoY growth in sales while its net profits have declined by 7.2% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased 15.3% YoY during the quarter due to slowdown in volume growth due to a slump in the auto industry.
  • Operating profits decline by 5.2% YoY in 3QFY13. Operating margins, too, declined from 12.1% in 3QFY12 to 11.0% in 3QFY13.
  • Due to a muted performance at the operating level net profits decline 7.2% YoY in 3QFY13.

Financial snapshot
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Sales 6,623 7,636 15.3% 19,234 21,638 12.5%
Other operating income 34 30 -11.8% †104 86 -17.3%
Expenditure 5,853 6,820 16.5% 16,696 19,120 14.5%
Operating profit (EBDITA) 804 846 5.2% †2,642 2,604 -1.4%
Operating profit margin (%) 12.1% 11.0%   13.7% 12.0%  
Other income 75 28 -62.7% †161 130 -19.3%
Interest 1 -   1 -  
Depreciation 144 172 19.4% 400 489 22.3%
Profit before tax 734 702 -4.4% 2,402 2,245 -6.5%
Tax 207 213 2.9% 692 649 -6.2%
Effective tax rate (%) 28% 30%   29% 29%  
Profit after tax/(loss) 527 489 -7.2% 1,710 1,596 -6.7%
Net profit margin (%) 7.9% 6.4%   8.8% 7.3%  
No. of shares (m)         53.9  
Basic & Diluted† earnings per share (Rs)*         29.9  
P/E ratio (x) *         38.8  
*On a trailing 12 months basis

What has driven performance in 3QFY13?
  • Net sales increased 15.3% YoY in 3QFY13. The sales growth was moderate due to sluggishness in demand especially from the industrial segment. Slowdown in the auto sector due to high interest rate environment also impacted the overall topline growth to an extent. While the company has managed to pass on the input cost inflation to retail customers it has not been able to do so for the industrial segment.

  • Kansai Nerolacís operating margin stood at 11.0% in 3QFY13, compared to 12.1% in 3QFY12. Input cost for the company increased by 17.6% YoY in 3QFY13.

  • Bottom line declined by 7.2% YoY in 3QFY13 due to muted performance at the operating level. Fall in other income by 62.7% YoY and rise in effective tax rate further accentuated the fall in profitability.

What to expect?
At the current price of Rs 1,160, the stock is trading at a price to earnings multiple of 39 times trailing twelve month earnings. In FY13, management expects the top line to grow at 15% YoY. This is considerably low when compared to past growth figures. It may be noted that over the last 3 years the company grew its sales at a CAGR of 23%. Sluggishness in auto demand due to high interest rates and slowdown in the real estate market is expected to keep the top line growth under check. Also while more capacity is expected to come on stream in FY14, one will have keep a watch on utilization rates and operating margins.

As far as the margins are concerned, it may be noted that crude prices have corrected in the recent past. Rupee, too, has gained some strength, off late. Thus, it appears that the margin concerns might ease out in the future. However, considering that the company has limited bargaining power in the industrial segment it remains to be seen whether it can extract any benefits out of the fall in raw material prices by holding on to the realizations. The current valuations of the stock warrant caution. Hence we would recommend investors to not buy any more of the stock at current levels.

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Feb 22, 2018 02:45 PM


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