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Kansai Nerolac: Profits remain flat - Views on News from Equitymaster
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Kansai Nerolac: Profits remain flat
Mar 25, 2014

Kansai Nerolac has announced the third quarter results of financial year 2013-2014 (3QFY14). The company has reported 8% YoY growth in sales while its net profits have remained flat. Here is our analysis of the results.

Performance summary
  • Top line increased 8% YoY during the quarter due to slowdown in volume growth due to a slump in the auto industry.
  • Operating profits grow by 3.1% YoY in 3QFY14. Operating margins remain stable at around 14%.
  • Due to a muted performance at the operating level net profits remain flat on year on year basis.

Financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Sales 7,636 8,216 7.6% 21,638 23,924 10.6%
Other operating income 30 25 -16.7% 86 153 77.9%
Expenditure 6,820 7,369 8.0% 19120 21274 11.3%
Operating profit (EBDITA) 846 872 3.1% 2,604 2,803 7.6%
Operating profit margin (%) 11.0% 10.6%   12.0% 11.6%  
Other income 28 28 0.0% 130 79 -39.2%
Interest - 1   - 4  
Depreciation 172 166 -3.5% 489 480 -1.8%
Profit before tax 702 733 4.4% 2,245 2,398 6.8%
Tax 213 242 13.6% 649 781 20.3%
Effective tax rate (%) 30% 33%   29% 33%  
Profit after tax/(loss) 489 491 0.4% 1,596 1,617 1.3%
Net profit margin (%) 6.4% 6.0%   7.3% 6.7%  
No. of shares (m)         53.9  
Basic & Diluted†earnings per share (Rs)*         30.0  
P/E ratio (x) *         33.8  
* On a trailing 12-months basis

What has driven performance in 3QFY14?
  • Slowdown in the auto sector growth and industrial growth coupled with higher interest rates kept Kansaiís growth muted during the first nine months of FY14. Net sales increased 11% YoY in 9mFY14 and by 8% in 3QFY14. 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 3QFY14, as was the case in 3QFY13. Input cost for the company increased by 17.6% YoY in 3QFY14.

  • Bottom line grew barely by 1.3% YoY in 9mFY14 while it remained flat for the third quarter. Fall in other income by 39% YoY in 9mFY14 and rise in effective tax rate further accentuated the fall in profitability.
What to expect?
At the current price of Rs 1,063, the stock is trading at a price to earnings multiple of 34 times trailing twelve month earnings. The management expects the top line to grow to remain muted in line with the GDP growth. 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 has come on stream in FY14, one will have to 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 warrant some more margin of safety. Hence we would recommend investors to not buy the stock at current levels.

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