The stock of Kansai Nerolac is down marginally by about 1 per cent in trade today. Despite strong growth in segments such as decorative, industrial and powder coatings, the steady increase in raw material costs for the company has impacted its margins and bottom line.
The company’s revenue growth of 17 per cent YoY (net of excise duty) can be attributed to the strong recovery in the decorative and industrial paint segment. The company has reported double digit growth in all its segments. The company is the largest player in the decorative segment, which contributes nearly 55 per cent of its revenue, while the industrial segment contributes 45 per cent (chunk from automotive coatings).
At the operating level, the company’s margins were impacted due to the rise in crude oil prices. Titanium dioxide, a derivative of crude oil, for instance, witnessed a sharp price increase. The raw materials cost (as a percentage of sales) has increased by 6 percentage points YoY to 64 per cent in the March quarter (on revenues net of excise). Nonetheless, the company’s operating margins were down by a lower 2 percentage points, thanks to the company’s sustained efforts to affect a price increase, which to an extent, has aided margins.
Nonetheless, the dip in operating margins has impacted earnings -- profits declined by about 9 per cent YoY during the March quarter.
Outlook
Going ahead, the volatility in crude prices is a cause for concern as a chunk of its raw material is in the form of crude derivatives. Though this increase in raw materials costs can hurt margins, price hikes in the decorative segment can cushion the fall to some extent.
The company recently entered into agreement to acquire Marpol, a pioneer in the powder coating business. Given Kansai Nerolac’s strong market presence in this segment, the acquisition of Marpol will boost its market position and improve its customer base.