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Kansai Nerolac: Extraordinary gains save the day - Views on News from Equitymaster
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Kansai Nerolac: Extraordinary gains save the day
Jun 12, 2013

Kansai Nerolac has announced the results for financial year 2012-2013 (FY13). The company has reported 9.8% YoY growth in sales while its net profits have grown by 35% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased by just 9.8% YoY during FY13 due to slowdown in volume growth on the back of a slump in the auto industry. For the March quarter, the sales growth was almost flat (2% YoY)
  • Operating profits decline by 0.4% YoY in FY13. Operating margins, too, declined from 13% in FY12 to 11.8% in FY13.
  • The net profits for FY13 were boosted (up 35% YoY) by a write back of depreciation charged in the previous years. The company changed the method of depreciation from written down method to straight line method. Without the extraordinary gain, profits are down 18% YoY for FY13.

Financial snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 6,625 6,757 2.0% 25,859 28,395 9.8%
Other operating income 43 85 97.7% 147 171 16.3%
Expenditure 5,938 6,085 2.5% 22633 25205 11.4%
Operating profit (EBDITA) 730 757 3.7% 3,373 3,361 -0.4%
Operating profit margin (%) 10.9% 11.1%   13.0% 11.8%  
Other income 82 33 -59.8% 243 163 -32.9%
Interest - -   - -  
Depreciation 163 129 -20.9% 564 471 -16.5%
Exceptional item# - 1,149   - 1,149  
Profit before tax 649 1,810 178.9% 3,052 4,202 37.7%
Tax 200 583 191.5% 892 1,280 43.5%
Effective tax rate (%) 31% 32%   29% 30%  
Profit after tax/(loss) 449 1,227 173.3% 2,160 2,922 35.3%
Net profit margin (%) 6.7% 17.9%   8.3% 10.2%  
No. of shares (m)         53.9  
Diluted earnings per share (Rs)*         39.8  
P/E ratio (x) *         29.5  
* On a trailing 12-months basis
#Write back of excess depreciation in previous year

What has driven performance in FY13?
  • Net sales increased by 9.8% YoY in FY13. The sales growth was moderate due to sluggishness in demand especially from the industrial segment. Slowdown in the auto sector due to high interest rate environment also impacted the overall topline growth to an extent. 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 Nerolac's operating margin stood at 11.8% in FY13, compared to 13% in FY12. Input cost for the company increased by 11.4% YoY in FY13.

  • The company wrote back Rs 1.1 bn of excess depreciation booked earlier in 4QFY13. Kansai has company changed the method of depreciation from written down method to straight line method. Without the extraordinary gain, profits are down 18% YoY for FY13. The fall in other income by 33% YoY in FY13 accentuated the fall in profitability.

What to expect?
At the current price of Rs 1,173, the stock is trading at a price to earnings multiple of 29.5 times trailing twelve month earnings. The management expects growth to continue at a relatively muted pace in FY14. It may be noted that between 2010 and 2012 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 is expected to come on stream in FY14, one will have 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 of the stock warrant caution. Hence we would recommend investors to not buy any more of the stock at current levels.

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