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Kanoria Chemicals: Operating margins under pressure - Views on News from Equitymaster
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  • Jul 31, 2009 - Kanoria Chemicals: Operating margins under pressure

Kanoria Chemicals: Operating margins under pressure
Jul 31, 2009

Performance summary
  • The topline declines by 6.2% YoY mainly on account subdued performance of Alco chemicals business.
  • Operating profits decline by 12.7% YoY led by higher power costs, resulting into an EBITDA margin contraction of 1.8%.
  • Bottomline jumped nearly threefold mainly due to exceptional gain during the quarter as against a loss in corresponding quarter last year. However, excluding the same, bottomline declines by 34.9% YoY.


Financial Snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 1,280 1,201 -6.2%
Expenditure 956 918 -4.0%
Operating profit (EBDITA) 325 283 -12.7%
EBDITA margin (%) 25.4% 23.6%  
Other income 1 -  
Interest (net) 93 61 -34.4%
Depreciation 94 99 5.9%
Profit before tax 139 123 -11.5%
Extraordinary items (62) 76  
Tax 20 46 128.0%
Profit after tax/(loss) 57 154 170.2%
Net profit margin (%) 4.4% 12.8%  
No. of shares (m)   56.3  
Diluted earnings per share (Rs)*   4.3  
Price to earnings ratio (x)**   7.0  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY10?
  • The topline of the company declined by 6.2% YoY mainly on account of subdued performance of Alco chemicals segment during the quarter. The revenues from Alco chemical segment declined by 25% YoY due to subdued demand from the user industries. Chloro chemicals segment registered a minimal decline in the revenue as the decline in the prices of caustic soda was offset by the rise in the prices of cholrine during the quarter.

  • On the operating front, operating profits declined by 12.7% YoY , higher than the topline mainly on account of higher power costs during the quarter. The power costs (as a % of sales) increased from 16.1% in 1QFY09 to 20% in 1QFY10. This was primarily on account of higher coal prices. As regards the PBIT margins, Choro chemicals margins remained nearly same stable at around 16.3% during the quarter. However, PBIT margins of Alco chemical segment declined from 13.5% in 1QFY09 to 4.1% in 1QFY10, mainly due to higher molasses prices during the quarter. As per the management, the margins of Alco chemicals segment will improve significantly since the third quarter onwards as it is the time when the sugar crushing season begins.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 485 451 -7.0%
    % sales 37.9% 37.6%  
    Power cost 206 240 16.7%
    % sales 16.1% 20.0%  
    Staff costs 85 81 -4.6%
    % sales 6.6% 6.7%  
    Other expenditure 181 146  
    % sales 14.1% 12.1% -14.0%

  • The bottomline of the company grew by around 170.2% YoY during the quarter. This was primarily on account of exceptional gains due to forex exchange rates on the revaluation of outstanding FCCBs. While it is a notional gain, excluding the same, bottomline declined by 34.9% YoY during the quarter.

What to expect?
At current price of Rs 31, the stock of Kanoria Chemicals is trading 0.6x our expected FY12 book value per share. While the topline of the company has been slightly lower than our projections, the bottomline has surpassed our estimates. We expect the company to improve its performance especially the Alco division in the coming quarters. We continue to remain positive on the stock.

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