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Kanoria Chemicals: Extraordinary spoils the show - Views on News from Equitymaster

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Kanoria Chemicals: Extraordinary spoils the show

Jun 1, 2011

Kanoria Chemicals has announced its March quarter results. The company has reported a 45% growth in topline and 11% YoY growth in net profits for the quarter ended March 2011. Here is our analysis of the results.

Performance summary
  • Topline grows by 45% YoY during the quarter
  • Operating profits grow at a lower rate of 33% as higher expenses take toll
  • At 11% YoY, the growth in net profits is much lower than operating performance on account of an extraordinary loss as opposed to an income during same quarter last year
  • Profit for the full year falls 39% YoY on the back of a 15% growth in topline
  • Announces a dividend of Rs 5 per share (yield of 10.6%)

(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 1,042 1,506 44.5% 4,305 4,939 14.7%
Expenditure 886 1,298 46.5% 3,460 4,080 17.9%
Operating profit (EBDITA) 156 208 33.1% 845 859 1.6%
EBDITA margin (%) 15.0% 13.8%   19.6% 17.4%  
Other income - -   32 0 -99.7%
Interest (net) 57 74 30.6% 232 233 0.1%
Depreciation 100 110 9.6% 400 410 2.7%
Profit before tax (1) 24   245 216 -11.7%
Extraordinary items 38 (8)   143 (2)  
Tax 24 2 -93.8% 108 45 -58.8%
Profit after tax/(loss) 13 15 10.7% 280 170 -39.3%
Net profit margin (%) 1.3% 1.0%   6.5% 3.4%  
No. of shares (m) 56.3 56.3   56.3 56.3  
Diluted earnings per share (Rs)*         3.0  
Price to earnings ratio (x)*         15.6  
(* on trailing twelve months earnings)

What has driven performance in FY11?
  • Topline for the full year has come in higher by 15% YoY. With the growth in the first nine months coming in single digits, majority of topline growth for full year was driven by the robust performance during the fourth quarter. As far as segmental performance is concerned, chloro chemicals segment, the larger of the two segments, managed to grow its revenues by a muted 7% during the fiscal. However, with the company selling off the business to the Aditya Birla Group, company’s fortunes would depend only on its Alco Chemicals business till the time new businesses are set up courtesy the cash it received from the sale of Chloro Chemicals division. Revenues for Alco Chemicals business grew by a strong 37% YoY during the fiscal.

    Segmental break up...
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw materials 481 609 26.5% 1,757 1,975 12.4%
    % sales 46.2% 40.4%   40.8% 40.0%  
    Staff cost 86 109 25.7% 333 376 13.0%
    % sales 8.3% 7.2%   7.7% 7.6%  
    Purchases - 70     9 89 859.1%
    % sales 0.0% 4.6%   0.2% 1.8%  
    Power and fuel 176 245 39.0% 781 860 10.1%
    % sales 16.9% 16.3%   18.1% 17.4%  
    Other expenditure 142 265 86.5% 581 780 34.4%
    % sales 13.7% 17.6%   13.5% 15.8%  

  • As far as segmental margins are concerned, while they remained almost stable for the Chloro Chemicals segment, the Alco Chemicals segment suffered a big dip in the same during the fiscal. From a high of around 9% in FY09, the segmental margins have come down to 3% in FY11, a worrying sign indeed.

  • Bottomline for the full year fell by 39% YoY. This was mainly on account of an extraordinary income that the company earned during FY10 but which was not there this year. Excluding the same, there was a 26% improvement in bottomline mainly on account of much lower taxes.

What to expect?
At the current price of Rs 46, the stock trades at a multiple of around 15x its trailing twelve month earnings. It should be noted that the deal for the sale of the company’s Chloro Chemicals business closed recently and it has also received funds for the same. As far as future plans are concerned, the area that the company is keen to enter is pharma and fine chemicals. It is also not averse to doing an acquisition in these fields though no plans have been firmed up as of now. In view of this lack of clarity on the use of cash, we are now assuming a 20% discount to the cash that will eventually end up on the company’s balance sheet. This lowers our target price for the company to Rs 62 from a medium term perspective. As mentioned earlier, the downgrade is mainly on account of lack of clarity by the company about how it is going to deploy the excess cash. Since the target price is still higher than the current price, we maintain our positive view on the stock.

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