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Kansai Nerolac: Margins under pressure

Nov 8, 2012

Kansai Nerolac has announced the second quarter results of financial year 2012-2013 (2QFY13). The company has reported 10.9% YoY growth in sales while its net profits have declined by 17.0% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased 10.9% YoY during the quarter.
  • Operating profits decline 14.9% YoY in 2QFY13. Operating margins, too, declined from 15.0% in 2QFY12 to 11.6% in 2QFY13.
  • Due to a muted performance at the operating level net profits decline 17.0% YoY.


Financial snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 6,127 6,794 10.9% 12,611 14,002 11.0%
Other operating income 34 29 -14.7% 70 56 -20.0%
Expenditure 5,234 6,034 15.3% 10,843 12,300 13.4%
Operating profit (EBDITA) 927 789 -14.9% 1,838 1,758 -4.4%
Operating profit margin (%) 15.0% 11.6%   14.5% 12.5%  
Other income 15 35 133.3% 86 102 18.6%
Interest - -   - -  
Depreciation 136 161 18.4% 256 317 23.8%
Exceptional items - -   - -  
Profit before tax 806 663 -17.7% 1,668 1,543 -7.5%
Tax 235 189 -19.6% 485 436 -10.1%
Profit after tax/(loss) 571 474 -17.0% 1,183 1,107 -6.4%
Net profit margin (%) 9.3% 6.9%   9.3% 7.9%  
No. of shares (m)         53.9  
Basic & Dilutedearnings per share (Rs)*         20.5  
P/E ratio (x) *         25.0  
* On a trailing 12-months basis

What has driven performance in 2QFY13?
  • Net sales increased 10.9% YoY in 2QFY13. 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.

  • Kansai Nerolacs' operating margin stood at 11.6% in 2QFY13, compared to 15.0% in 2QFY12. Inflationary pressures and inability to pass on the increase in raw material prices impacted margins.

  • Bottom line declined 17.0% YoY in 2QFY13 due to muted performance at the operating level. Rise in other income by 133.3% YoY and fall in tax expenditure by 19.6% YoY was not sufficient to curtail the fall in profits.

What to expect?
At the current price of Rs 968, the stock is trading at a price to earnings multiple of 25 times its trailing twelve month earnings. In FY13, management expects the top line to grow at 15% YoY. This is considerably low when compared to past growth figures. It may be noted that over the last 3 years the company grew its sales at a CAGR of 23%. 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. As far as the margins are concerned, it may be noted that crude prices have corrected in the recent past. Rupee, too, has gained some strength, off late. Thus, it appears that the margin concerns might ease out in the future. However, 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. Considering the current valuations, market leadership in the automotive segment and relatively clean balance sheet we maintain our HOLD view in the stock.

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