Moreover, with demand for automobiles remaining muted — volumes fell 7-19 per cent across categories in April 2019 — the management, too, projected a very subdued outlook, particularly for its industrial segment — for at least the next two quarters.
Weak guidance called for some trimming in earnings expectations.
Analysts at IIFL slashed earnings estimates for FY20 and FY21 by 8 per cent each. The dismal demand situation in its key segment may also restrict the company’s pricing power, which could weigh on profitability, amid volatile crude oil prices and dollar-rupee exchange rate.
Many analysts see Ebitda
(earnings before interest, tax, depreciation and amortisation) margin of Kansai Nerolac to remain at FY19 levels of 14 per cent in the ongoing financial year as well.
To be sure, even the Q4 Ebitda
margin contracted sharply by 209 basis points year-on-year to 13.2 per cent, on account of high input costs and lower operating leverage.
This translated to net profit declining 12.3 per cent year-on-year to Rs 92.8 crore — about 17 per cent lower than the Street’s estimates.
For now, the management is confident on its decorative segment.
But the extent of competition, mainly from market leader Asian Paints, could hurt the company’s confidence, a factor that played out even in the March quarter.
Increased trade promotion by competitors capped Kansai Nerolac’s decorative segment’s growth, although it supported the overall volume growth of 3-4 per cent in the quarter under review.
With plenty of challenges across the board, investors may consider being on the sidelines until demand revives in the automobile sector.