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Kansai Nerolac: Hit by falling profits - Views on News from Equitymaster

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Kansai Nerolac: Hit by falling profits
Nov 10, 2008

Performance summary
  • Topline grows by 12% YoY impacted by the slowdown in the industrial paints segment.
  • Operating margins decline by 3.2% owing to a rise in raw material costs and other expenditure (as percentage of sales).
  • Fall in operating profits coupled with a lower other income contribute to the 18% YoY decline in the bottomline.


Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 3,488 3,906 12.0% 6,667 7,451 11.8%
Expenditure 2,973 3,452 16.1% 5,697 6,548 14.9%
Operating profit (EBDITA) 516 454 -12.0% 971 903 -6.9%
EBDITA margin (%) 14.8% 11.6%   14.6% 12.1%  
Other income 61 40 -35.0% 152 109 -28.3%
Interest 4 6 37.5% 7 9 38.2%
Depreciation 96 91 -5.3% 184 177 -3.8%
Profit before tax 477 397 -16.7% 932 826 -11.4%
Tax 146 126 -13.2% 276 253 -8.2%
Profit after tax/(loss) 331 271 -18.3% 656 573 -12.7%
Net profit margin (%) 9.5% 6.9%   9.8% 7.7%  
No. of shares (m)       27.0 27.0  
Diluted earnings per share (Rs)*         41.4  
Price to earnings ratio (x)*         9.7  
* on a trailing 12-month basis

What has driven performance in 2QFY09?
  • Kansai Nerolac is the second largest player in the paint sector. But unlike Asian Paints, which is very strong in the decorative paint segment, Kansai Nerolac is the market leader in the automotive coating segment. The company recorded a 12% YoY growth during the quarter, which is tepid as compared to the robust 30% YoY growth reported by its peer Asian Paints. This could largely be attributed to slowdown in the industrial paint segment which has been accentuated by the pressure on the auto industry. It must be noted that revenues from the industrial segment account for half of Kansaiís overall revenues, while decoratives account for the remaining half. While the decoratives segment performed well, the management has opined that the slowdown in the real estate market is a cause for concern.

  • Operating margins witnessed considerable pressure in 2QFY09 and declined by 3.2%. This was largely on account of rise in raw material costs and other expenditure (as percentage of sales). Given that crude prices were firm during the quarter, input costs witnessed a rise and the full impact could not be passed on to the customers, consequently affecting operating margins. The sharp depreciation of the rupee against the dollar also impacted overall margins given that the key raw material titanium dioxide is imported. As a result operating profits fell by 12% YoY.

  • Bottomline during the quarter fell by 18% YoY. Besides the decline in operating profits, a lower other income further aggravated the dip in net profits. Even a lower tax outgo could do nothing to arrest the fall.

What to expect?
At the current price of Rs 403, the stock is trading at a price to earnings multiple of 6.3 times our estimated FY11 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. Though there will be pressure in the medium term due to slowdown in the auto sector, volatile crude prices and rupee depreciation, margins are expected to improve over the next three years. We maintain our positive view on the stock.

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