BackCan it get more colourful for Nerolac?
The brighter spot in the results is, of course, the fact that the decorative segment, which accounts for slightly more than half the revenue, has seen double-digit volume growth
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A few days before Kansai Nerolac Paints Ltd announced its March quarter results on 27 April, its stock closed at an annual high of ₹ 304.25. Since then, the stock has fallen a bit but that could be because of higher valuations.
For perspective: for the March quarter, revenue increased 10% from a year earlier to ₹ 891 crore. However, pre-tax and exceptional-item earnings grew at a much faster pace of about 39% to ₹ 122 crore. That was mainly owing to stronger operating profit growth, which was helped by a decline in raw material costs. Fall in crude oil-linked inputs assisted a 260 basis points expansion in operating profit margin to 15%. A basis point is 0.01%.
The brighter spot in the results is, of course, the fact that the decorative segment, which accounts for slightly more than half the revenue, has seen double-digit volume growth. In an interview to CNBC-TV18, H.M. Bharuka, managing director of Kansai Nerolac, said decorative segment volume growth was above 17% for the March quarter, while for industrial paints volume growth could be around 8-9%.
For fiscal year 2016, overall volume increased 12%, with decorative volume increasing 16% and industrial volume growing at a slower pace of 9%.
Implementation of the Seventh Pay Commission’s award should benefit the paints industry. For Kansai Nerolac, the decorative paints segment is expected to continue to perform well this year too. However, expectations from the industrial segment are subdued. Better demand from the automobile sector would augur well.
“On the industrial front, current improvement in demand conditions would need further support from a pickup in industrial activity and infrastructure push from the government," the company said.
Analysts from Prabhudas Lilladher Pvt. Ltd pointed out, “Industrial segment should post subdued performance for 1HFY17; however, a good monsoon and pickup in overall economic activity can lead to a better H2FY17." The brokerage firm added that further margin expansion looks difficult, given subdued sales growth in the industrial segment and a recent upsurge in crude oil prices.
Whether the overall scenario becomes more colourful for the company will depend on whether the monsoon is good, which will eventually spur demand, especially from rural areas.
But considering one Kansai Nerolac share currently trades at 36 times the estimated earnings for this fiscal year, the bright picture seems to be priced in.
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