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Business News/ Market / Mark-to-market/  Kansai Nerolac: overhang of higher input costs remains in Q2
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Kansai Nerolac: overhang of higher input costs remains in Q2

Kansai Nerolac may have no choice but to raise prices further, if the northward movement in raw material prices continues

Cost of materials consumed increased by around 19% year-on-year in Q2. Graphic: Naveen Kumar Saini/MintPremium
Cost of materials consumed increased by around 19% year-on-year in Q2. Graphic: Naveen Kumar Saini/Mint

Kansai Nerolac Paints Ltd’s earnings were a mixed bag, with high double-digit volume growth being a positive on the one hand and pressure on margins dragging performance on the other.

Volume growth was led by the decorative segment in the September quarter (Q2), thanks to early festive season sales. Besides, for the second consecutive quarter, its industrial segment also posted double-digit volume growth. Overall, the company is estimated to have posted nearly 18% year-on-year volume growth, say analysts.

“All segments have performed well this time; it has been an extraordinary quarter. Though we expect the trend of double-digit volume growth to continue, it is unlikely to be this high," vice chairman and managing director H.M. Bharuka said in an interview.

Double-digit volume growth helped the paint maker clock revenue growth of 16.2% year-on-year to Rs1,161.82 crore, in line with Bloomberg analysts’ estimate of Rs1,162.4 crore. Net profit increased 3.8% year-on-year to Rs144.63 crore, missing expectations of Rs146.8 crore.

Ebitda margin declined from 19.8% a year ago to 19% in Q2. Ebitda stands for earnings before interest, tax, depreciation and amortization. Elevated raw material prices also led to a contraction in the gross margin. As the chart shows, cost of materials consumed increased by around 19% year-on-year in Q2.

“Prices of raw materials including crude oil and titanium dioxide (TiO2) have been higher y-o-y (year-on-year). There are supply constraints given the environment issues in China, from where some of the key raw materials are procured. Some factories there are being shut down. So, in the near term, we expect raw material prices to remain on the higher side," said Bharuka.

After touching a multi-year high in June this year, TiO2 prices recently eased, but when compared to last year, they still remain high. If the northward movement in raw material prices continues, then the company will have no choice but to raise prices further, he added.

It should be noted that Kansai Nerolac has already taken two price hikes of 2.5-3% in March and 3% in May this year.

Given the pressure on margins, the stock corrected 1.4% after earnings were announced. On a year-to-date basis, it has rallied 51%, outperforming peers and key benchmark indices, although valuations at 39 times earnings are lower than peers’.

Analysts see limited upside in the Kansai Nerolac stock, mainly given continuing worries over higher raw material costs.

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Published: 17 Oct 2017, 07:19 AM IST
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