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Kansai Nerolac: Recurring profits grow - Views on News from Equitymaster
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Kansai Nerolac: Recurring profits grow
May 11, 2012

Kansai Nerolac has announced the fourth quarter and full year results of financial year 2011-2012. The company has reported 28% YoY growth in sales. However, net profits have declined by 23.8% YoY. Here is our analysis of the results.

Performance summary
  • Top line increases 28% YoY during the quarter.
  • Operating margins fall marginally to 10.9% in 4QFY12 from 11.1% in 4QFY11.
  • Net profits decline 23.8% YoY in 4QFY12. However, adjusting for the exceptional gain in 4QFY11, net profits grow 34% YoY. Adjusted net profits increase on the back of strong performance at the operating level.
  • The company has recommended a dividend of Rs 11 per share for the fiscal under consideration
  • The long term debt/equity ratio of the company stood at 0.06x at the end of FY12
  • The company plans to expand its distribution network by 5% in the future

Financial snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 5,175 6,625 28.0% 21,266 25,859 21.6%
Other operating income 36 43 19.4% 147 147 0.0%
Expenditure 4,632 5,938 28.2% 18506 22633 22.3%
Operating profit (EBDITA) 579 730 26.1% 2,907 3,373 16.0%
Operating profit margin (%) 11.1% 10.9%   13.6% 13.0%  
Other income 81 82 1.2% 225 243 8.0%
Interest - -   1 1 0.0%
Depreciation 132 163 23.5% 494 564 14.2%
Exceptional items 254 - -100.0% 254 - -100.0%
Profit before tax 782 649 -17.0% 2,891 3,051 5.5%
Tax 193 200 3.6% 831 892 7.3%
Profit after tax/(loss) 589 449 -23.8% 2,060 2,159 4.8%
Net profit margin (%) 11.3% 6.7%   9.6% 8.3%  
No. of shares (m)         53.9  
Basic & Dilutedearnings per share (Rs)*         40.1  
P/E ratio (x) *         23.3  
*On trailing 12 month basis

What has driven performance in 4QFY12?
  • Net sales increased 28% YoY in 4QFY12. While the demand conditions in decorative and industrial segment have not improved dramatically, an average price hike of 13% during the last fiscal supported top-line growth. Considering the current market conditions registering 15% (28%-13%) volume growth in FY12 was a commendable task.

  • Kansai Nerolacs' operating margin stood at 10.9% in 4QFY12, a decline of 20 bps over 4QFY11. Rupee depreciation and volatility in commodity prices continued to dampen profits. However, an average price hike of 13% during the year helped the company to recover cost increases to a certain extent.

  • Bottom line declined 23.8% YoY in 4QFY12. However, adjusting for the exceptional gain of Rs 254 m in 4QFY11 bottomline increased 34% YoY. Strong performance at the operating level filtered into the adjusted bottom line.

What to expect?
At the current price of Rs 932, the stock is trading at a price to earnings multiple of 23.3 times its trailing twelve month earnings. Management expects growth rate in the paint industry to slow down in FY13. Muted demand environment in the industrial and residential segments is likely to impact growth in the near future. Despite the current prevailing challenges, the company has decided to increase its manufacturing capacity to 260,000 tonnes from 220,000 tonnes. This will require an investment of Rs 3 bn. The said capex is likely to be funded through internal accruals. Nonetheless, considering the current weak operating environment and expensive valuations we maintain our negative view on the stock.

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