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Kansai Nerolac: Auto slowdown takes toll - Views on News from Equitymaster
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Kansai Nerolac: Auto slowdown takes toll
Aug 13, 2013

Kansai Nerolac announced the results for first quarter of financial year 2013-2014 (1QFY14). The company has reported 9.6% YoY growth in sales while its net profits have declined by 3.8% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased 9.6% YoY during the quarter due to slowdown in volume growth due to a slump in the auto industry.
  • Operating margins decline by 0.6% from 13.4% in 1QFY13 to 12.8% in 1QFY14.
  • Due to a muted performance at the operating level net profits decline 3.8% YoY in 1QFY14.

Financial snapshot
(Rs m) 1QFY13  1QFY14  Change
Net sales 7,208 7,898 9.6%
Other operating income  27 21 -22.2%
Expenditure 6,266 6,905 10.2%
Operating profit (EBDITA) 969 1,014 4.6%
Operating profit margin (%) 13.4% 12.8%  
Other income 67 37 -44.8%
Interest - -  
Depreciation 156 153 -1.9%
Profit before tax 880 898 2.0%
Tax 247 289 17.0%
Effective tax rate (%) 28% 32%  
Profit after tax/(loss) 633 609 -3.8%
Net profit margin (%) 8.7% 7.7%  
No. of shares (m)   53.9  
Basic & Diluted  earnings per share (Rs)*   39.4  
P/E ratio (x) *   26.8  

What has driven performance in 1QFY14?
  • Net sales for Kansai increased 9.6% YoY in 1QFY14. The sales growth was moderate due to sluggishness in demand especially from the industrial segment. Slowdown in the auto sector due to high interest rate environment also impacted the overall topline growth to an extent. While the company has managed to pass on the input cost inflation to retail customers it has not been able to do so for the industrial segment.

    The society of Indian Automobile Manufacturers (SIAM) has further downgraded the growth in the automobile industry for FY14 to 3-5% from the 6.7% growth registered in FY13. The downgrades reflect the acute slowdown being faced by the automobile manufacturers across all segments like commercial vehicles, two-wheelers as well as passenger cars. Hence the near term outlook for Kansai Nerolac, a dominant paint supplier to the auto industry, remains muted.

  • Kansai Nerolac's operating margin stood at 12.8% in 1QFY13, compared to 13.4% in 1QFY14. Input cost for the company increased by 10% YoY in 1QFY14.

  • Bottomline declined by 3.8% YoY in 1QFY14 due to muted performance at the operating level. Fall in other income by 45% YoY and rise in effective tax rate further accentuated the fall in profitability.
What to expect?
At the current price of Rs 1,056, the stock is trading at a price to earnings multiple of 27 times trailing twelve month earnings. Sluggishness in auto demand due to high interest rates and slowdown in the real estate market is expected to keep the top line growth under check. Also while more capacity is expected to come on stream in FY14, one will have to keep a watch on utilization rates and operating margins.

As far as the margins are concerned, it may be noted that crude prices have corrected in the recent past. However, the depreciation of the rupee may keep margin upsides limited. Also, considering that the company has limited bargaining power in the industrial segment it remains to be seen whether it can extract any benefits out of the fall in raw material prices by holding on to the realizations. The current valuations of the stock warrant caution. Hence we would recommend investors to not buy the stock at current levels.

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