Kansai Nerolac Paints (KNPL) reported a weak set of numbers for Q3FY19 on profitability fronts. Revenue for the company was up 18.0% yoy to Rs1,350.7cr, in-line with our estimate. However, on account of higher raw material costs, the gross margin contracted 551bps yoy to 34.5%. Thus, EBITDA for the quarter declined 7.9% yoy to Rs177cr, ~5% lower than the estimate. Lower other expenses as percent of sales marginally offset gross margin contraction. Thus, EBITDA margin declined 369bps yoy to 13.1% (vs. estimate of 14.0%). PAT fell 9.9% yoy to Rs112.7cr, ~4% lower than the estimate.
Demand was positive for Decorative segment during the quarter aided by delayed festive season. However, Industrial segment was subdued; lower growth in the Automotive industry, especially negative growth in passenger cars led to a lower demand for Automotive and Industrial products in general.
Cost pressures during the quarter continued to be high. This coupled with inability to pass on the full impact of cost increase to Industrial customers as well as inventory loss impacted the operating profit.
Raw material expenses during the quarter were up 28.8% yoy due to high crude prices, (constituting ~50% of its raw material expenses) and rupee volatility. This led to gross margin contraction of 551bps yoy to 34.5% in Q3FY19.
Earlier, Asian Paints (ANPT) had also reported its Q3FY19 numbers; the contraction in gross margin for ANPT was much lower at 127bps yoy as compared to KNPL.
Though the crude prices witnessed decline from November, 2018 and a marginal strengthening of the rupee was there, prices of derivatives still need to come down. KNPL has increased prices in Decorative twice during the quarter and has obtained some price increase in Industrial to artistry offset the sharp inflation seen in material costs. Company expects the benefit of these should reflect in Q4FY19 performance.
Depreciation cost was up by 21.4% yoy to Rs23.5cr.
Effective tax rate for the quarter stood at 35% in Q3FY19, at similar level as in Q3FY18.
The company expects the growth momentum to remain encouraging in the Decorative segment, however, demand in Industrial segment is expected to remain subdued.
Kansai Nerolac Paints Ltd is currently trading at Rs. 429.25, down by 7.4 points or 1.69% from its previous closing of Rs. 436.65 on the BSE.
The scrip opened at Rs. 437.10 and has touched a high and low of Rs. 438.70 and Rs. 415.10 respectively. So far 3,83,564 (NSE+BSE) shares were traded on the counter. The stock is currently trading above its 200 DMA.
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