>KANSAI NEROLAC (ICICI DIRECT)

Volume growth persists, margin under pressure
Kansai Nerolac Paints Ltd reported its Q4FY10 results and surpassed expectations with tremendous growth in revenue and margins. The company’s revenue increased 35% during the quarter to Rs 423.8 crore from Rs 313.6 crore in the corresponding quarter last year. The EBITDA for the quarter improved 76% YoY but experienced a decline of 3.5% QoQ and stood at Rs 58.6 crore in Q4FY10. This decline was on the back of an increase in crude base raw material prices. Higher EBITDA resulted in a 50% increase in net profit to Rs 30.3 crore from Rs 20.1crore in Q4FY09.

■ Highlights of the quarter
The company commenced operations at its new facility in Hosur, Tamil Nadu that caters mainly to automobile clients TVS Motors and Ashok Leyland. The plant began operations in January and has a capacity of ~20,000 metric tonnes. The company has already made an investment of
Rs 180 crore in the plant and expects to increase to Rs 230 crore on further investment for increasing capacity. The company would be expanding the capacity of its Jaunpur plant in Uttar Pradesh to increase the company’s total capacity by almost 25%, going forward.

Valuation
At the current market price of Rs 1499 the stock is trading at 24.4x its FY11E EPS of Rs 68.0 and 22.0x its FY12E EPS of Rs 76.8. The strong demand emanating from automotive paints resulted in sustainable volume growth. However, rising crude prices would, in turn, result in an increase in crude-based raw material that would pressurise margins going forward. Hence, we value the stock at 18x its FY12E EPS of Rs 76.8 to arrive at a price target of Rs 1382.

To read the full report: KANSAI NEROLAC