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Kansai Nerolac: One time gain boosts profits - Views on News from Equitymaster

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Kansai Nerolac: One time gain boosts profits
Apr 30, 2011

Kansai Nerolac has announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported 22.8% YoY and 73.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line increased 22.8% YoY during the quarter.
  • Operating margins fall substantially from 13.9% in 4QFY10 to 11.2% in 4QFY11. The dip in margins is due to raw material price escalation. It may be noted that prices of crude oil and related derivatives have increased significantly over the last few months pressurizing margins.
  • Net profits increase 73.5% YoY in 4QFY11 on the back of exceptional gain related to stake sale in associate company. Adjusting for the exceptional one time gain, net profits decline 1.3% YoY.
  • The company has declared a dividend of Rs 10 per share (dividend yield of 1%).

Financial snapshot
(Rs m) 4QFY10  4QFY11  Change FY10  FY11  Change
Sales   4,238 5,205 22.8%    17,064    21,387 25.3%
Other operating income  4   (10) -363.9%  10  12 11.7%
Expenditure   3,652 4,616 26.4% 14427 18482 28.1%
Operating profit (EBDITA) 589  580 -1.4%    2,647 2,917 10.2%
Operating profit margin (%) 13.9% 11.2%   15.5% 13.6%  
Other income  37  81 121.5% 194  223 15.3%
Interest 4 1 -76.3%  12 8 -30.0%
Depreciation 133  132 -0.6% 443  494 11.5%
Profit before tax 489 529 8.1% 2,386 2,638 10.5%
Exceptional items    254     254  
Tax 150 194 29.5% 731 832 13.7%
Profit after tax/(loss) 339 589 73.5% 1,655 2,060 24.5%
Net profit margin (%) 8.0% 11.3%   9.7% 9.6%  
No. of shares (m)         53.9  
Basic & Diluted  earnings per share (Rs)         38.2  
P/E ratio (x) *         22.3  
* On a trailing 12-months basis

What has driven performance in 4QFY11?
  • Net sales increased 22.8% YoY in 4QFY11. The company registered healthy growth due to strong demand in both industrial and decorative paints. Going forward, the management expects the overall demand to moderate, especially in the industrial segment due to hawkish interest rate environment. Further, concerns over raw material price inflation and hence profitability is likely to persist in the near term.

  • Kansai Nerolacs’ operating margin stood at 11.2% in 4QFY11, a decline of 270 bps over 4QFY10. This was mainly due to raw material price inflation. Prices of crude oil and related derivatives have increased considerably in 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 73.5% YoY in 4QFY11. However, the growth was mainly due to a one time gain from divesting entire stake in an associate company, Nipa Chemicals Ltd. After adjusting for the exceptional gain, net profits declined 1.3% YoY.

What to expect?
At the current price of Rs 851, the stock is trading at a price to earnings multiple of 18.9 times our estimated FY13 earnings. Going forward, growth rate in the decorative segment is expected to remain robust. However, demand environment in the industrial segment is likely to face headwinds on account of hawkish interest rate policy. Even, margins are likely to remain a concern unless crude prices settle down 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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