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Kansai Nerolac: Raw material concern looms large - Views on News from Equitymaster
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Kansai Nerolac: Raw material concern looms large
Oct 30, 2010

Kansai Nerolac has announced 2QFY11 results. The company has reported 18.8% YoY and 1.2% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows at a healthy pace of 18.8% YoY in 2QFY11.
  • Operating margins fall substantially from 18.9% in 2QFY10 to 15.8% in 2QFY11. The dip was due to raw material price escalation.
  • Despite muted operating performance, net profits increase 1.2% YoY in 2QFY11 on the back of higher other income and decline in tax rates.

Consolidated financial snapshot
(Rs m) †2QFY10† †2QFY11† Change †1HFY10† †1HFY11† Change
Sales ††††††† 4,488 †††††††††† 5,330 18.8% †††††† 8,617 †††††††† 10,581 22.8%
Other operating income† ††††††††††††††† 1 †††††††††††††††† 15 1290.9% †††††††††††††† 4 †††††††††††††††† 19 428.6%
Expenditure ††††††† 3,640 †††††††††† 4,504 23.8% 7173 8951 24.8%
Operating profit (EBDITA) †††††††††† 849 ††††††††††††† 841 -1.0% †††††† 1,448 †††††††††† 1,649 13.9%
Operating profit margin (%) 18.9% 15.8%   16.8% 15.6%  
Other income ††††††††††††† 35 †††††††††††††††† 46 31.4% ††††††††† 120 †††††††††††††††† 99 -18.1%
Interest ††††††††††††††† 3 †††††††††††††††††† 2 -23.1% †††††††††††††† 6 †††††††††††††††††† 5 -8.9%
Depreciation †††††††††† 103 ††††††††††††† 121 18.2% ††††††††† 199 ††††††††††††† 234 17.5%
Profit before tax 779 764 -2.0% 1,364 1,508 10.6%
Tax 249 228 -8.7% 411 453 10.3%
Profit after tax/(loss) 530 536 1.2% 953 1,055 10.7%
Net profit margin (%) 11.8% 10.1%   11.1% 10.0%  
No. of shares (m)         †††††††††††† 53.9  
Basic earnings per share (Rs)
(Not Annualised)
        †††††††††††† 19.6  
P/E ratio (x) *         †††††††††† 27.5  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Net sales increased 18.8% YoY in 2QFY11. The company registered healthy growth despite prolonged monsoon due to low base effect and improving macro environment. 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.

  • Kansai Nerolacsí operating margin stood at 15.8% in 2QFY11, a decline of 310 bps over 2QFY10. This was mainly due to raw material price inflation. Prices of titanium dioxide (key raw material input) have increased by over 30% over the last three months. Thus in light of increasing raw material prices management expects margins to remain under pressure.

  • Despite muted operating performance, bottomline registered a growth of 1.2% YoY in 2QFY11. Increase in other income, decline in interest expenses and tax rates boosted net profits.

What to expect?
At the current price of Rs 898, the stock is trading at a price to earnings multiple of 20 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. 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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