Kansai Nerolac Paints - Q1FY14 Result Update - SPA Securities

Kansai Nerolac Paints (KNP) registered sales in line with our expectation but higher other expenditure resulted in lower than expected PAT in Q1FY14. Company reported sales growth of 9% YoY in Q1FY14 to INR 7,919mn on the back of sluggish auto paint demand and reducing demand in decorative paints segment. EBIDTA margin declined by 59bps YoY to 12.80% on the back of higher growth in other expenditure related to the new plant at Hosur. PAT came in at INR 609mn in Q4FY13, a YoY de-growth of 4%, also aggravated by lower other income. We maintain our SELL recommendation on the stock owing to CMP being higher by ~10% from our target price.

Sluggish economy to impact volume growth

KNP's Q1FY14 sales at INR 7,919mn grew by 9% YoY backed by ~7% volume growth. Although company registered double digit volume growth in decorative business, the overall performance was hurt by slackening demand in auto and other industrial paints segment which together constitute ~45% of the company's sales. Decorative segment registered good growth on the back of lower base effect. Auto sector overall de-grew by ~3.5% YoY in which passenger cars registered a YoY decline by 10 percent in Q1FY14. Expected improvement in economic environment supported by normal monsoons would result in better second half of the current fiscal for the company in terms of demand.

High other expenditure weighed on EBIDTA margin

Company registered YoY EBIDTA margin contraction by 59bps to 12.80% in Q1FY14, despite 53bps YoY expansion in gross margins, due to high other expenditure. Gross margin expanded on the back of sharp decline in key RM cost and simultaneous increase in product prices by the company. However, other expenditure registered a YoY growth of 18% on the back of commissioning of new plant at Hosur and increasing power and fuel cost. Depreciation of INR against USD by 10% since the beginning of the current fiscal has reduced benefits that can be derived by the company on the back of fall in international prices of the key RM like TiO2 and crude derivatives.

Other Highlights

- Company took a price hike of ~1% in decorative and ~2-3% in industrial paits segment in Q1FY14. It further plans to affect price hike of ~1% in Aug 2013 in decorative paints segment

- Company has retrospectively changed its depreciation policy on its fixed assets from the written down value to the straight line method in Q4FY13. Had it not been the case, the PAT would have been lower by 8% YoY in Q1FY14.

Outlook & Valuation

Sluggish economic growth would continue to impact demand environment resulting in lower sales growth for the company in the short term. However, we expect volume growth to pick up in second half of the current fiscal on the back of expected improvement in the economy backed by election related spending and favorable monsoon. Stabilization in exchange rate and benign RM cost would aid margin to sustain at the current levels. At CMP, stock is trading at 31x TTM EPS (historical avg. of 18-20x) and ~10% above our 18 months target price of INR 1,058 (20x FY15E EPS). We, therefore, continue to recommend SELL on the stock.

Source : Equity Bulls

Keywords