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Kansai Nerolac: High cost of raw materials dent performance

Bavadharini KS BL Research Bureau | Updated on July 20, 2018 Published on July 20, 2018

The stock of Kansai Nerolac was down marginally by about one per cent. Despite a strong double-digit sales growth, the steady increase in raw material costs impacted the company’s margins in the June quarter.

It reported a revenue growth of about 17 per cent y-o-y (net of excise duty) mainly due to the strong recovery in the decorative and industrial paint segment. The company’s performance has largely met expectations. Kansai Nerolac is the largest player in the decorative segment which contributes nearly 55 per cent to its revenue; 45 per cent of revenues pertains to the industrial segment.

The increase in crude oil prices though, has impacted Kansai Nerolac’s margins since most of its raw materials such as titanium dioxide are a form of crude derivatives. The raw material cost (as a percentage of sales) has increased sharply to 59 per cent in the latest June quarter, compared to the same period last year (49 per cent). Nonetheless, operating margins improved marginally by 0.4 percentage points to 16 per cent. This could be due to the company’s ability to pass on raw material price increases to the customers.

Outlook

Going ahead, the volatility in crude prices could add pressure on margins. But price hikes in the decorative segment can cushion the fall to some extent. The company, as a part of its expansion plan, has entered into an agreement with the Bangladesh-based RAK Paints, to acquire a 55 per cent equity stake in RAK Paints for about ₹45 crore.

Published on July 20, 2018

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