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Kansai Nerolac: Industrial demand remains lukewarm - Views on News from Equitymaster
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Kansai Nerolac: Industrial demand remains lukewarm
Aug 4, 2011

Kansai Nerolac has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported 24.1% YoY and 17.9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line increased 24.1% YoY during the quarter.
  • Operating margins fall to 14.2% in 1QFY12 from 15.4% in 1QFY11. The dip in margins is due to raw material price escalation. It may be noted that prices of crude oil and related derivatives have increased significantly over the last few months pressurizing margins. However, on a QoQ basis, margins registered a substantial improvement of about 300 bps.
  • Net profits increase 17.9% YoY in 1QFY12 on the back of strong performance at the operating level and increase in other income partially offset by higher depreciation expenses.

Standalone financial snapshot
(Rs m) 1QFY11h 1QFY12 Change
Sales 5,251 6,517 24.1%
Other operating income 3 4 21.9%
Expenditure 4,446 5,593 25.8%
Operating profit (EBDITA) 808 928 14.9%
Operating profit margin (%) 15.4% 14.2%  
Other income 52 57 9.2%
Interest 3 3 -19.4%
Depreciation 112 120 7.0%
Profit before tax 745 862 15.8%
Tax 225 250 10.9%
Profit after tax/(loss) 519 612 17.9%
Net profit margin (%) 9.9% 9.4%  
No. of shares (m)   53.9  
Basic & Diluted earnings per share (Rs)*   39.95  
P/E ratio (x) *   22.3  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Net sales increased 24.1% YoY in 1QFY12. The company registered healthy growth due to 16% YoY increase in volumes. However, higher interest rate environment impacted the demand from auto, infrastructure and housing segment. Further, concerns over raw material price inflation and hence profitability, continued to haunt the company. Nonetheless, with the raw material prices having reached their peak, further erosion in margins in unlikely.

  • Kansai Nerolacs' operating margin stood at 14.2% in 1QFY12, a decline of 120 bps over 1QFY11. It may be noted that prices of crude oil and related derivatives have increased considerably over the recent past, impacting the overall margin profile of the company. While passing on the price increase in the decorative segment is relatively easier, (lower bargaining power) the company has to partly absorb the increase in the industrial segment due to stiff competition and declining demand environment.

  • Bottom line registered a growth of 17.9% YoY in 1QFY12. Strong performance at the operating level and increase in other income boosted profitability growth.

What to expect?
At the current price of Rs 890, the stock is trading at a price to earnings multiple of 16.1 times our estimated FY14 earnings. Going forward, growth rate in the decorative segment is expected to remain robust. However, demand environment in the auto, infrastructure and housing sector will remain subdued on account of rising interest rates. Even margin sustenance would remain a key challenge considering that passing the cost escalation in industrial segment is becoming increasingly difficult on account of waning demand. In the near future, while decorative segment is expected to grow in the region of 10-15%, the industrial segment may face headwinds on account of monetary tightening. While we remain positive on the overall growth prospects of the company, current valuations leave little room for upside. Thus, we maintain our negative view on the stock.

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