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ICICI Direct Report
Kansai Nerolac Paints Ltd.'s Q1 FY21 revenue, earnings fell 59%, 71% YoY, respectively, mainly due to loss of revenue in April 2020.
However, the performance was better than our estimates mainly due to notable demand recovery in the decorative segment (55% of sales), which reported double digit volume growth in May-June 2020.
Strong demand from tier two/three/four cities helped drive decorative volume growth in Q1 FY21, where business activities reached near normalisation post ease in restrictions from lockdowns.
However, intermediary lockdowns in tier one and metro cities has impacted the recovery process. On the margin front, a sharp rise in employee cost completely offset the impact of higher gross margin (up 340 basis points YoY). As a result, Ebitda margin fell approximately 355 basis points YoY to 13.5% (though better than our estimate of 5.8%).
Finally, despite lower tax rate, higher other income, profit after tax was down 71% YoY to approximately Rs 42 crore, largely due to lower sales. Further, the balance sheet position remained strong (with zero debt, efficient working capital management) despite various challenges.
Going ahead, while the demand scenario likely to be challenging in the near term (considering intermediary lockdowns), we expect a strong demand recovery in the decorative paints to drive volume growth from H2 FY21 onwards.
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