Kansai Nerolac Paints Ltd’s Ebitda (earnings before interest, taxes, depreciation and amortization) margin expanded more than 300 basis points to 19.78% from a year earlier in the quarter ended September. Lower commodity prices and a relatively stable forex situation helped improve profitability. Net profit surged 41.4% from a year earlier to Rs139 crore, mainly aided by reduction in raw material prices, and net sales rose 5.7% to Rs999.88 crore.
While net profit was above the Bloomberg estimate of Rs121.20 crore, it was a miss on the sales front, which was anticipated at Rs1,072.4 crore.
But benefits from inventory acquired at lower costs are likely to wane. Prices of crude oil—a key ingredient—have begun to harden and the impact would start reflecting on Nerolac’s balance sheet, said managing director H.M. Bharuka. However, akin to larger rival Asian Paints Ltd, the company is also of the view that the decision to take a price hike will depend on how sharply input costs rise and the rate at which the goods and services tax (GST) is implemented.
Nerolac registered double-digit volume growth in the decorative and automotive segments. On the flip side, the performance of its industrial and coating segment was a dampener.
“Demand is low because liquidity is tight, hence it has been our conscious decision to curtail sales in this segment and we don’t see an improvement for the next six-nine months,” added Bharuka.
As far as outlook for the decorative and automotive segments is concerned, both are expected to continue to grow at the current rate, but the former is poised to see faster growth than the latter, given the strong demand.
“There is still no clarity on GST rates and that may lead to people postponing their decision to buy a car, so the automotive segment may see slower pace of growth,” explained Bharuka.
Meanwhile, Nerolac is trading at one-year forward price-to-earnings multiple of 45.96 times, which is expensive, although the valuation is lower than its peers. The stock ended Tuesday’s session on BSE at Rs374.85, down 2.6%. The pressure on the stock is likely to continue because of the expected negative impact of rising input costs and weakness in its industrial segment.