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Kanoria Chemicals: A difficult year - Views on News from Equitymaster
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Kanoria Chemicals: A difficult year
May 21, 2010

Kanoria Chemicals has announced its FY10 results. The company has reported a 14% drop in topline and a 65% fall in profits excluding extraordinary income. Here is our analysis of the results.

Performance summary
  • Topline for the quarter falls by 13% YoY, led presumably by lower realizations
  • Operating profits suffer a greater fall of 54% YoY as costs increase at a faster rate than topline
  • Bottomline declines by a huge 83% YoY during the quarter as interest and depreciation charges add to the woes. Excluding extraordinary income, bottomline turns into the red
  • Profits for the full year grow 92% YoY on the back of 14% drop in topline. Excluding extraordinary income, bottomline falls 65% YoY
  • Announces a dividend of Rs 1.5 per share, translating into a dividend yield of 4.7% at the current price



(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales             1,197             1,042 -13.0%           5,002           4,305 -13.9%
Expenditure                 861                 886 2.9%           3,854           3,460 -10.2%
Operating profit (EBDITA)                 336                 156 -53.5%           1,148              845 -26.4%
EBDITA margin (%) 28.1% 15.0%   23.0% 19.6%  
Other income                    -                      -                       2                 32  
Interest (net)                   68                   57 -16.3%              294              232 -21.1%
Depreciation                   95                 100 5.9%              383              400 4.3%
Profit before tax                 174                    (1) -100.4%              472              245 -48.2%
Extraordinary income/(expense)                 (57)                   38               (243)              143  
Tax                   41                   24 -40.5%                 83              108 30.7%
Profit after tax/(loss)                   76                   13 -82.8%              146              280 91.6%
Net profit margin (%) 6.3% 1.3%   2.9% 6.5%  
No. of shares (m)                56.3                56.3               56.3             56.3  
Diluted earnings per share (Rs)*                        5.0  
Price to earnings ratio (x)*         6.4  
(* on trailing twelve months earnings)

What has driven performance in FY10?
  • Company’s topline for the fiscal has come in lower by 14% YoY. It is perhaps for the first time in quite a few years that the company has suffered a fall at the topline level. While exact details are not available, we believe it could be mainly due to lower realizations. Both the segments of the company, viz. chloro chemicals and alco chemicals, witnessed double digit fall in revenues, thus driving the overall revenues of the company lower. It should be noted that by virtue of the commodity nature of its business, the company lacks pricing power and hence, must have been forced to lower its realizations in sync with the fall in product prices. Going forward however, the situation should witness some sort of improvement.

    Segmental break up...
    Segment FY09 FY10 % change
    Chloro Chemicals      
    Revenues      4,577      3,892 -15.0%
    PBIT         710         471 -33.6%
    PBIT margin 15.5% 12.1%  
    Alco Chemicals      
    Revenues      1,474      1,180 -19.9%
    PBIT         130           65 -50.1%
    PBIT margin 8.8% 5.5%  

  • Normally, one would expect the margins of the company to remain stable irrespective of the business cycle as it works on a pass through model. But that does not seem to be the case as operating margins for the full year have come down by more than 3%, resulting into a 26% fall in operating profits. The key culprits here have been the power and staff costs, which have increased at a much faster rate than the topline and have thus, pressurized margins. Margins should start looking up over the next few quarters as the company churns out more volumes and is also able to enjoy stronger realizations.
    Cost break-up...
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Raw materials 423 481 13.8% 2,037 1,766 -13.3%
    % sales 35.3% 46.2%   40.7% 41.0%  
    Staff cost 73 86 18.5%    316    333 5.2%
    % sales 6.1% 8.3%   6.3% 7.7%  
    Power and fuel 181 176 -2.8%    749    781 4.3%
    % sales 15.1% 16.9%   15.0% 18.1%  
    Other expenditure 184 142 -22.7%    751    581 -22.7%
    % sales 15.4% 13.7%   15.0% 13.5%  

  • Furthermore, with both interest as well as depreciation charges changing at a greater rate than the operating profits, profits have come under more pressure, resulting into a 48% fall in PBT for the full year. The presence of an extraordinary item in the form of forex gains however, has led to a huge 92% surge in bottomline. If one excludes the same, the bottomline has actually suffered a fall of 65% YoY. We believe that since the forex gain is mostly notional and is one time in nature, a correct assessment of profitability could only be obtained by excluding extraordinary items.

What to expect?
At the current price of Rs 32, the stock trades at a multiple of price to book value of 0.6x its expected FY12 book value per share. Although the company has put up a poor performance, we remain confident of the company’s ability to put the bad phase behind it and grow at a good pace in the future. Plus, investors also have the benefit of earning a good 5% dividend yield on the stock. We remain positive on the stock from a FY12 perspective.

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