Kansai Nerolac shines on sales growth in Q1; stock gains about 7%

Employee costs and other operating expenses as a percentage of net operating income fell to 21.2% in Q1, from 22.3% a year back

After Asian Paints, Kansai Nerolac surprised the Street with better-than-expected performance in the June quarter. The automotive paint major posted top line growth of 6.6 per cent to Rs 1,456 crore while net profit was Rs 148 crore, up 6 per cent on a yearly basis.

The stock gained about 7 per cent on Monday after the announcement of Q1 results. The Sensex ended 0.5 per cent lower over its previous close. What helped the company in Q1 was operating leverage due to stronger volume and revenue growth.

Employee costs and other operating expenses as a percentage of net operating income fell to 21.2 per cent in Q1, from 22.3 per cent a year back. Expected cuts in advertising spends are likely to have kept other operating expenses lower. Adjusted for the IndAS 116, Ebitda margin showed a 71 basis-point year-on-year (YoY) improvement. The improvement in the margin came after eight consecutive quarters of fall.

Yet, gross profit margin remained flat at the year-ago level of 38 per cent, restricting the operating leverage benefits. Volatility in exchange rate and crude oil prices have kept raw material prices at higher levels, compared to the year-ago levels. Price cuts, too, are expected to have contributed to the pressure on gross profit margins.

Analysts at IIFL said Nerolac had joined Asian Paints in cutting prices for enamel portfolio (decorative paints), aiding a double-digit growth rate in the volumes of decorative segment. Even Asian Paints reported high double digit-volume growth (estimated at 17 per cent) in the decorative segment last week.

However, the industrial paint segment, which constitutes around 45 per cent of the company’s top line, remained under pressure, thanks to the sustained slowdown in the automotive segment.

 

Though Nerolac is entering into other niche markets such as adhesives and construction chemicals to diversify the risk in the industrial segment, it is unlikely to make much headway in the near term, given the stiff competition from Pidilite, said an analyst at a domestic brokerage.

Also, there is no visibility of recovery in the automotive segment, which might put pressure on the company’s margins and profit in the coming quarters. Thus, investors are recommended to wait for a clear upward volume trend before taking an exposure to the stock. The stock currently trades at 37 times FY21 estimated earnings, which is at a 15-20 per cent discount to Asian Paints and Berger Paints.