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Kansai Nerolac: Better product mix drives growth - Views on News from Equitymaster
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Kansai Nerolac: Better product mix drives growth
Nov 7, 2011

Kansai Nerolac has announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported 15.5% YoY and 6.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line increases 15.5% YoY during the quarter.
  • Operating margins fall to 14.8% in 2QFY12 from 15.7% in 2QFY11. The dip in margins is due to raw material price escalation. While the company has taken calibrated price increases to counter inflation it has not been able to fully pass on the raw material price rise thereby pressurizing margins.
  • Net profits increase 6.5% YoY in 2QFY12 on the back of 9% YoY growth in operating profits partially offset by higher depreciation expenses and fall in other income.

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 2QFY12?
  • Net sales increased 15.5% YoY in 2QFY12. The demand conditions in both auto and decorative segment were subdued during the quarter. Thus, the growth has been driven by better product mix and price increases. Rising interest rates impacted demand conditions in the auto segment while extended monsoons slowed down the off take in the decorative segment.

  • Kansai Nerolac's operating margin stood at 14.8% in 2QFY12, a decline of 90 bps over 2QFY11. It may be noted that prices of titanium dioxide, a key raw material ingredient, have increased considerably over the recent past impacting the overall margin profile of the company. In addition, rupee depreciation in the current quarter further worsened the situation. Going forward, margins would continue to remain under pressure over the next two quarters.

  • Bottom line registered a growth of 6.5% YoY in 2QFY1 led by the 9% YoY growth in operating profits. However, fall in other income (-36.9% YoY) and rise in depreciation expenses (11.9% YoY) dented profitability growth during the quarter.

What to expect?
At the current price of Rs 840, the stock is trading at a price to earnings multiple of 15.2 times our estimated FY14 earnings. Going forward, growth rate in decorative, auto, infrastructure and housing sector will remain subdued on account of rising interest rates. Even, margin sustenance would remain a key challenge considering that company undertakes calibrated price increases (absorbs raw material price hikes to a certain extent) in order to protect its market share. In addition, the recent rupee depreciation may further put the margin profile at risk. In light of these challenges we maintain our negative view on the stock.

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