Kansai Nerolac paints a better picture in Q1
After growing in low single-digits for the past few quarters, Kansai Nerolac Paints Ltd’s industrial coating segment posted double-digit volume growth in the June quarter.
“This growth was led by traction seen in the automobile and consumer durable sectors. Within autos, demand was driven by passenger car vehicles and tractors; however, demand from commercial vehicles and three-wheelers is subdued. Also, infra-based paints demand is yet to witness significant revival,” said H.M. Bharuka, managing director.
According to analysts’ estimates, Kansai Nerolac enjoys nearly 35% market share in the industrial paints segment, which contributes 45% to its overall revenues. Maruti Suzuki India Ltd is its largest client.
Its decorative business too posted double-digit volume growth. Overall, the company has registered 10-11% volume growth in the June quarter, said analysts. They were expecting limited impact of GST (goods and services tax)-led destocking on the paint sector since firms have a small number of dealers and rely more on direct distribution.
Double-digit volume growth helped the paint maker to clock revenue growth of 11.15% year-on-year to Rs1,320.67 crore, beating Bloomberg analysts’ estimate of Rs1,127.40 crore. Net profit increased 11.31% year-on-year to Rs140.81 crore, exceeding expectations of Rs138.70 crore.
However, increased raw material prices restricted improvement in operating margins.
Ebitda margins stood at 17.7%, flat when compared to the year-ago level. Ebitda stands for earnings before interest, tax, depreciation and amortization. “Gross margin contracted 40 basis points as industrial margins were affected by increase in input costs. In the decorative segment, input cost increase was offset by the two rounds of price increases taken since March 17,” an IIFL Institutional Equities Research report said. A basis point is 0.01%.
Kansai Nerolac resorted to a price hike of 2.5-3% in March and 3% in May this year. However, it didn’t take a price hike in the industrial segment. “The company is not looking at increasing prices in the near term,” added Bharuka.
Now that the price of titanium dioxide—a key input raw material—has stabilized and so has the foreign currency movement, an improvement is foreseen in operating margins. While inflationary pressure would moderate due to drop in prices of crude oil, a material respite on crude oil linked derivatives would start reflecting only during the second half of the fiscal year, said analysts.
Meanwhile, the Kansai Nerolac stock is trading at a one-year forward price-to-earnings multiple of 37 times, lower than its larger peers. However, on a year-to-date basis, it has rallied 40%, outperforming key benchmark indices and competitors.
Given the positive outlook for auto sales in the coming quarters, expectations are that recovery seen in the industrial coating segment would sustain. Also, a good monsoon augurs well for its decorative paints segment.
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