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Kansai Nerolac: Demand environment moderates - Views on News from Equitymaster
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Kansai Nerolac: Demand environment moderates
Aug 2, 2012

Kansai Nerolac has announced the first quarter results of financial year 2012-2013. The company has reported 11.2% YoY growth in sales while its net profits have increased by 3.4% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased 11.2% YoY during the quarter.
  • Operating margins fall marginally to 13.4% in 1QFY13 from 14% in 1QFY12.
  • Net profits increase 3.4% YoY in 1QFY13.
  • The company entered into a JV with Nepal Shalimar, a paint company from Nepal. Kansai Nerolac will pay approximately Rs 75.5 m, for a 68% stake in the company. Nepal Shalimar has a market share of about 8% in its country and management expects the same to increase to 15% by FY13. Currently, Nepal Shalimar has a capacity of 11,000 tonnes.

Financial snapshot
(Rs m) 1QFY12 1QFY13 Change
Sales 6,484 7,208 11.2%
Other operating income 36 27 -25.0%
Expenditure 5,609 6,266 11.7%
Operating profit (EBDITA) 911 969 6.4%
Operating profit margin (%) 14.0% 13.4%  
Other income 71 67 -5.6%
Interest - -  
Depreciation 120 156 30.0%
Exceptional items - -  
Profit before tax 862 880 2.1%
Tax 250 247 -1.2%
Profit after tax/(loss) 612 633 3.4%
Net profit margin (%) 9.4% 8.7%  
No. of shares (m)   53.9  
Basic & Diluted earnings per share (Rs)   11.7  
P/E ratio (x) *   21.8  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Net sales increased 11.2% YoY in 1QFY13. The demand for paint moderated in the current quarter. And with monsoons being uncertain, the rural demand could take a further setback thereby impacting volumes and profitability in the future.

  • Kansai Nerolac's operating margin stood at 13.4% in 1QFY13, a decline of 60 bps over 1QFY12. While the inflationary pressures have eased out a bit, rupee depreciation continues to dampen profits. Though the company was able to partly offset the cost inflation, it was not sufficient to shield margins which declined by 60 bps on a YoY basis.

  • Bottom line increased 3.4% YoY in 1QFY13. Fall in other income and rise in depreciation expenses impacted profits. The other income fell by 5.6% YoY while depreciation expenses increased by 30% YoY.

What to expect?
At the current price of Rs 880, the stock is trading at a price to earnings multiple of 21.8 times its trailing twelve month earnings. Management expects growth rate in the paint industry to slow down in FY13. While cost inflation concerns have started cooling off depreciating rupee is a major cause of worry.

The acquisition of Nepal Shalimar is expected to add about 250 m to the topline and Rs 20 m to the bottomline of the company. Until now, the company was exporting its products to Nepal but because of the heavy duty structure prevalent there, it decided to go for an acquisition. Going forward, the overall demand environment does not appear to be bright due to uncertain monsoons (rural demand is dependent on monsoon), volatility in commodity prices (while crude prices have declined, crude derivatives have remained more or less stable) and general slowdown concerns. Also, the current valuations are on the expensive side. As a result, we maintain our sell view on the stock.

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