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Kansai Nerolac: Bolstered by strong demand - Views on News from Equitymaster

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Kansai Nerolac: Bolstered by strong demand
Nov 6, 2009

Performance summary
  • Topline grows by a decent 15% YoY in 2QFY10 largely driven by growth in the decorative paints segment.
  • Operating margins improve substantially by 7.3% to 18.9% due to a considerable fall in all costs (as percentage of sales).
  • Strong performance at the operating level coupled with lower interest costs and depreciation charges lead to the dazzling 96% YoY growth in the bottomline.


Financial performance: A snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 3,906 4,489 14.9% 7,451 8,621 15.7%
Expenditure 3,452 3,640 5.4% 6,548 7,175 9.6%
Operating profit (EBDITA) 454 849 87.0% 903 1,446 60.1%
EBDITA margin (%) 11.6% 18.9%   12.1% 16.8%  
Other income 40 35 -11.5% 109 120 10.2%
Interest 6 3 -52.7% 9 6 -40.4%
Depreciation 91 103 12.7% 177 197 10.9%
Profit before tax 397 779 96.1% 826 1,364 65.2%
Tax 126 249 97.2% 253 411 62.4%
Profit after tax/(loss) 271 530 95.6% 573 953 66.4%
Net profit margin (%) 6.9% 11.8%   7.7% 11.1%  
No. of shares (m)       27.0 27.0  
Diluted earnings per share (Rs)*         50.7  
Price to earnings ratio (x)*         22.9  
* on a trailing 12-month basis

What has driven performance in 2QFY10?
  • Kansai Nerolac is the second largest player in the paint sector and a market leader in the automotive coating segment. The company recorded a robust 15% YoY growth during 2QFY10 largely due to robust demand seen in the decorative segment, a revival in demand for the automotive industry, especially the passenger car segment as well as the consumer goods sector. The stimulus package released by the Government also had a favourable impact on demand. The automotive sector especially was hit hard by the slowdown last year and with a reversal in fortunes seen for the auto industry, Kansai Nerolac benefitted immensely. It must be noted that revenues from the industrial segment account for half of Kansai’s overall revenues, while decoratives account for the remaining half.

  • Operating margins considerably expanded by 7.3% during the quarter. This was largely due to a fall in all costs (as percentage of sales). Raw material costs, particularly, witnessed a huge drop from 66.2% of sales in 2QFY09 to 60.3% of sales in 2QFY10. In this regard softening of crude prices over the base period was primarily responsible for the impressive showing on the material front. Other expenditure also reduced from 17.4% of sales in 2QFY09 to 16.5% of sales in 2QFY10. This was largely due internal initiatives taken by the company in the backdrop of the global recession to reduce costs, control overheads and enhance productivity.

  • The strong 87% YoY growth in operating profits helped the company report a healthy 96% YoY growth in the bottomline. Lower interest costs and relatively lower increase in depreciation charges aided this growth. This was despite the reduction in other income and higher tax expenses. For the half year period, the company reported a 66% YoY growth in the bottomline on the back of a 16% YoY growth in the topline. The company so far has done better than our estimates.

What to expect?
At the current price of Rs 1,160, the stock is trading at a price to earnings multiple of 17.5 times our estimated FY12 earnings. We expect Kansai Nerolac’s revenues to grow at a strong pace going forward fuelled by growth in volumes as additional capacities start coming on stream. While the margins this year are likely to be robust, crude prices have been inching upwards and this could put pressure on operating margins in the future. While we remain positive on the growth prospects of the company, valuations at the current levels are on the higher side.

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