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Kansai Nerolac: Raw material concerns loom large - Views on News from Equitymaster

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Kansai Nerolac: Raw material concerns loom large
Aug 2, 2010

Kansai Nerolac announced its 1QFY11 results recently. Both topline and bottomline registered healthy growth of 27% YoY and 23% YoY respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by a healthy 27% YoY in 1QFY11.
  • Operating margins improve marginally to 15.4% in 1QFY11 despite raw material price inflation due to price increases and operational controls.
  • Despite strong performance at the operating level, net profits register 23% YoY growth in 1QFY11 due to increase in depreciation and tax expenses.


(Rs m) 1QFY10 1QFY11 Change
Sales 4,129 5,251 27.2%
Other operating income 2 3 33.3%
Total Income 4,131.5 5,254 27.2%
Expenditure 3,533 4,446 25.9%
Operating profit (EBDITA) 599 808 34.9%
Operating profit margin (%) 14.5% 15.4%  
Other income 85 52 -38.6%
Interest 3 3 3.3%
Depreciation 96 112 16.8%
Profit before tax 584.5 745 27.4%
Tax 162 225 39.6%
Profit after tax/(loss) 423 519.2 22.7%
Net profit margin (%) 10.2% 9.9%  
No. of shares (m)   53.9  
Basic diluted earnings per share (Rs)†   9.6  
P/E ratio (x) *   25.6  

What has driven performance in 1QFY11?
  • Kansai Nerolac is the second largest player in the paint sector and a market leader in the automotive coating segment. Net sales of the company registered a strong growth of 27% YoY due to an improving macro environment coupled with robust demand from both decorative and industrial segments. Going forward, the management expects the overall demand environment to remain healthy. However, concerns over raw material price inflation and hence profitability is likely to persist in the near term.

  • Operating margins expanded by 0.9% during the quarter to 15.4%. Despite rise in raw material costs, margins expanded due to price increases and operational controls. Total expenditure as a percentage of sales stood at 85% during the quarter as compared to 86% in 1QFY10.

  • Despite strong growth in operating profits the net profits grew by about 23% YoY in 1QFY11. Reduction in other income, higher depreciation and interest expenses dented the bottomline growth. As a result, net margins contracted by 0.3% to 9.9% during the quarter.

What to expect?
At the current price of Rs 831, the stock is trading at a price to earnings multiple of 18 times our estimated FY13 earnings. We expect Kansai Nerolacís revenues to grow at a strong pace going forward fuelled by growth in volumes as additional capacities start coming on stream. The management has approved the brown-field capacity expansion of Bawal for Rs 680 m. However, margins are likely to remain a concern in the near term. While we remain positive on the growth prospects of the company, current valuations (For RPro Subscribers) are on the higher side.

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