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M a r g i n s t o r e m a i n u n d e r p r e s s u r e …
Kansai Nerolac’s Q2FY12 results were inline with our estimates. Net sales
witnessed a growth of 15.5% on the back of strong growth in decorative
segment. Raw material cost to sales has increased from 68.8% to 69.5%
resulted in EBITDA margins dip to 14.9% from 15.2% in Q2FY11, but it
was above our estimates of 14.4%. The company was holding large
amount of raw material inventory, which has helped it to maintain
margins in the current quarter. Dip in EBITDA margins has resulted in
moderate earning growth of 6.7% to | 57.1 crore.
Operational performance
The company has witnessed a strong growth in decorative segment led
by the high festive season demand. However industrial paints demand
has witnessed slower growth due to muted passenger vehicle growth.
We believe demand for decorative paints would continue to be strong in
Q3FY12. However expected flat growth from Maruti (which is one of the
bigger clients on Kansai) due to Labor unrest in October would also
impact automotive paints growth in Q3FY12. Simultaneously sharp
increase in Titanium dioxide prices and Rupee Depreciation would also
impact margins in Q3FY12.
Valuation
At the CMP, the stock is trading at 19.4x and 17.1x its FY12 and FY13
estimated EPS of | 44.8 and | 50.8, respectively. With the company being
the leader in the industrial paints segment and extending its reach in the
decorative segment, we believe that sales growth would continue to
remain strong in next quarter. However, with rising commodity prices,
crude oil and titanium dioxide and impact of rupee depreciation would
pressurize margins going forward. However we believe commodity prices
would cool off by first quarter of FY13, which should bring back margins
at 16% in FY13. Considering margins pressure in near term, we are
valuing Kansai at 20% discount to the market leader Asian paints at 20x
its FY13E EPS, and assigned it a BUY rating with a target price of | 1016.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
M a r g i n s t o r e m a i n u n d e r p r e s s u r e …
Kansai Nerolac’s Q2FY12 results were inline with our estimates. Net sales
witnessed a growth of 15.5% on the back of strong growth in decorative
segment. Raw material cost to sales has increased from 68.8% to 69.5%
resulted in EBITDA margins dip to 14.9% from 15.2% in Q2FY11, but it
was above our estimates of 14.4%. The company was holding large
amount of raw material inventory, which has helped it to maintain
margins in the current quarter. Dip in EBITDA margins has resulted in
moderate earning growth of 6.7% to | 57.1 crore.
Operational performance
The company has witnessed a strong growth in decorative segment led
by the high festive season demand. However industrial paints demand
has witnessed slower growth due to muted passenger vehicle growth.
We believe demand for decorative paints would continue to be strong in
Q3FY12. However expected flat growth from Maruti (which is one of the
bigger clients on Kansai) due to Labor unrest in October would also
impact automotive paints growth in Q3FY12. Simultaneously sharp
increase in Titanium dioxide prices and Rupee Depreciation would also
impact margins in Q3FY12.
Valuation
At the CMP, the stock is trading at 19.4x and 17.1x its FY12 and FY13
estimated EPS of | 44.8 and | 50.8, respectively. With the company being
the leader in the industrial paints segment and extending its reach in the
decorative segment, we believe that sales growth would continue to
remain strong in next quarter. However, with rising commodity prices,
crude oil and titanium dioxide and impact of rupee depreciation would
pressurize margins going forward. However we believe commodity prices
would cool off by first quarter of FY13, which should bring back margins
at 16% in FY13. Considering margins pressure in near term, we are
valuing Kansai at 20% discount to the market leader Asian paints at 20x
its FY13E EPS, and assigned it a BUY rating with a target price of | 1016.
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