Kanoria Chem.: Caustic soda corrodes profits - Views on News from Equitymaster

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Kanoria Chem.: Caustic soda corrodes profits

Aug 6, 2010

Kanoria Chemicals has announced its June quarter results. The company has reported an 8% fall in topline and a 76% fall in bottomline respectively. Here is our analysis of the results.

Performance summary
  • Topline falls by 8% YoY during the quarter
  • Company reports a margin contraction of 2.4% and as a consequence, operating profit declines by 17% YoY
  • Bottomline suffers a steep fall of 76% YoY on the back of poor operating performance, extraordinary losses and adverse depreciation charges. Excluding the extraordinary, bottomline decline stand at a modest 2%.

Financial picture
Rs m 1QFY10 1QFY11 Change
Net sales 1,201 1,109 -7.7%
Expenditure 918 874 -4.7%
Operating profit 283 235 -17.1%
Operating margins (%) 23.6% 21.2%  
Other Income -   -    
Interest (net) 61 49 -19.3%
Depreciation 99 99 0.1%
Profit before Tax 123 86 -30.0%
Extraordinary item 76 (39)  
Tax 46 10 -77.4%
Profit after Tax/(Loss) 154 37 -75.7%
Net profit margin (%) 12.8% 3.4%  
No. of Shares (m) 56.3 56.3  
Diluted Earnings per share (Rs)*   2.9  
Price to earnings ratio (x)*   11.5  
*12 months trailing earning

What has driven performance in 1QFY11?
  • Company operates through two divisions viz. chloro chemicals and alco chemicals. However, since bulk of the revenues comes from chloro chemicals, it plays a major role in the company’s performance. Sadly though, things have not looked up in this segment. Caustic soda, company’s main product from the chloro chemicals segment continues to fare poorly in terms of realisations. It should be noted that industries like textile, leather and paper are key consumers of caustic soda and with demand from them remaining sluggish, there has been pressure on both realisations as well as volumes. Fortunately for the company, imports from destinations like Europe and the US are not as high as before and this is lending some support to the prices. Alco chemicals, the company’s other division managed to put up a modest 2% growth in revenues during the quarter
    Segmental break-up…
    (Rs m) 1QFY10 1QFY11 Change
    Chloro Chemicals      
    Revenues 1,131 1,018 -9.9%
    PBIT 185 141 -23.6%
    PBIT margins 16.3% 13.9%  
    Alco Chemicals      
    Revenues 324 332 2.4%
    PBIT 13 18 32.1%
    PBIT margins 4.1% 5.3%  
    *Revenues include inter/intra segment sales of Rs 254 m and Rs 279 m for 1QFY11 and 1QFY10 respectively

  • As far as segmental margins are concerned, they have fallen quite a bit for the chloro chemicals segment and hence, were responsible for a 24% fall in segmental profits. With raw material prices not falling at the same rate as topline and with other expenses being quite sticky in nature, the chloro chemicals segment has seen its profits erode significantly. Profits for the alco chemicals segment however has come in higher by 32%. However, since its contribution to overall PBIT is low, PBIT of the company has taken a hit of 20% during the quarter.

  • Apart from lower margins, a stable depreciation charge has led to the 30% decline in PBT during the quarter. At 76%, the fall in bottomline is even steeper and has been driven not only by lower operating income and adverse depreciation charge but also by an extraordinary loss during the quarter. This loss seems to be the result of revaluation of its foreign currency bonds. Excluding the extraordinary though, the bottomline decline comes in at modest 2%, thanks mainly to the huge fall in tax outgo.

What to expect?
At the current price of Rs 32, the stock trades at 0.6x its expected FY12 book value per share. The company has underperformed our estimates on yet another occasion. It should be noted that the company operates in a commodity type cyclical business and hence, it would be wrong to expect a uni-directional, stable profit trajectory from it. However, when the industry does turn around, the company, thanks to its low cost operations and strong customer relationships, should be able to log in impressive growth rates. Furthermore, the strong dividend payout also helps put some floor to the company’s stock price. We maintain our positive view on the stock.

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