Kurita Water Industries Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥198.30B
• Operating Income: ¥24.90B
• Net Income: ¥17.39B
• EPS: ¥155.90

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid Q2 under IFRS with double‑digit profit growth on modest topline, driven by margin expansion and disciplined cost control. Revenue grew 1.4% YoY to 1,982.96, while operating income rose 15.9% YoY to 249.00, lifting operating margin to 12.6%. Net income increased 15.0% YoY to 171.74, translating to a net margin of 8.7%. Based on growth rates, the operating margin expanded by roughly 158 bps YoY (from ~11.0% to ~12.6%), and net margin expanded by about 102 bps (from ~7.6% to ~8.7%). Gross margin stands at a healthy 37.0%, with SG&A ratio at 25.1%, indicating good operating discipline. Earnings quality is strong: operating cash flow of 283.26 exceeds net income by 1.65x and OCF margin is 14.3%. Free cash flow of 113.20 was positive after capex of 144.82, but below total shareholder returns (dividends 52.07 + buybacks 151.61), implying external funding or cash drawdown for repurchases. Balance sheet remains conservative with equity ratio of 60.7% and D/E of 0.64x. ROE is moderate at 5.1% on DuPont (8.7% margin × 0.358 asset turnover × 1.64x leverage), reflecting low asset turnover typical of project and service-heavy water treatment businesses. ROIC at 5.2% sits below the 7–8% benchmark, signaling room for asset efficiency improvements. Tax rate is 29.2%, broadly in line with statutory norms, with minimal contribution from equity-method income (0.47). Goodwill and intangibles total 851.15, or ~15.4% of assets, a watchpoint for impairment risk amid M&A-driven growth. Liquidity ratios are not fully disclosed, but current assets of 2,249.58 and positive OCF suggest manageable near-term liquidity. Dividend payout ratio of 62.2% is slightly above the 60% benchmark, yet appears covered by FCF if buybacks normalize. Forward-looking, sustaining the higher margin run-rate and improving ROIC toward 7–8% will be key, alongside disciplined capital returns versus FCF.

Profitability Analysis

Step 1 (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 8.7% × 0.358 × 1.64 = 5.1%. Step 2: The most notable YoY change is in the margin component: operating income +15.9% vs revenue +1.4% implies operating margin expansion (+158 bps), and net margin improved (+102 bps). Step 3: Drivers likely include favorable mix and execution in higher-margin service/chemicals, pricing discipline, and SG&A efficiency (SG&A ratio 25.1% vs implied higher level last year) atop a steady gross margin of 37.0%. Step 4: Sustainability appears reasonable near term given OCF support and no reliance on non-operating gains (non-operating income minimal, equity-method income 0.47), but continued price/cost discipline and backlog quality are prerequisites. Step 5: Watch for any cost creep—if SG&A growth outpaces revenue, the recent operating leverage could reverse; given revenue growth of 1.4% and strong profit growth, there is no immediate sign of SG&A outrunning sales this quarter.

Growth Assessment

Topline growth was modest at +1.4% YoY, but profit growth was robust with operating income +15.9% and net income +15.0%, indicating quality growth from margin improvement rather than volume. Operating margin at 12.6% and net margin at 8.7% exceed prior-period implied levels, suggesting better mix/pricing and cost control. Given the negligible contribution from equity-method income (0.47; 0.2% of revenue), profit quality is predominantly from core operations. With OCF margin at 14.3% and FCF positive at 113.20, the earnings are corroborated by cash. Outlook sustainability hinges on maintaining gross margin near 37% and SG&A at ~25% of sales, while accelerating asset turnover from 0.358 to lift ROE/ROIC. ROIC at 5.2% remains below the 7–8% target range for high-quality industrials; incremental improvements in project cycle times, order selectivity, and asset-light growth (services/chemicals) will be important for durable growth. Near-term growth visibility would benefit from disclosed orders/backlog and regional segment trends (not provided).

Financial Health

Leverage is conservative with equity ratio 60.7% and D/E 0.64x, providing balance sheet resilience. Current ratio is not calculable (current liabilities undisclosed), so no explicit warning can be made; however, current assets of 2,249.58 and strong OCF suggest adequate liquidity. Maturity mismatch risk cannot be fully assessed due to missing breakdown of short-term vs long-term debt and cash, though accounts receivable (1,279.20) and inventories (212.23) appear sizeable relative to accounts payable (589.83), implying working capital is asset-heavy as typical for the business. Goodwill 679.03 and intangibles 172.12 total 851.15 (~15.4% of assets), indicating some acquisition-related risk if cash flows underperform. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF/Net income is 1.65x, signaling high earnings quality with cash realization above net profit. OCF margin is 14.3% (283.26/1,982.96), supporting the margin expansion narrative. Capex was 144.82 (51% of OCF), allowing positive FCF of 113.20. FCF covered dividends of 52.07 comfortably, but not total shareholder returns including buybacks (dividends 52.07 + repurchases 151.61 = 203.68 > FCF). Working capital appears a material use of capital structurally (AR 1,279.20 vs AP 589.83), but there are no evident signs of manipulation in the quarter given strong OCF versus NI. Overall, cash conversion is healthy and supports ongoing operations and dividends, with buybacks dependent on cash balance or incremental financing.

Dividend Sustainability

Calculated payout ratio is 62.2%, slightly above the <60% benchmark but broadly manageable given stable cash generation. FCF of 113.20 covers dividend cash out (52.07) by ~2.2x, indicating the ordinary dividend is sustainable on current cash flows. Total shareholder returns (including 151.61 of buybacks) exceeded FCF, suggesting buyback pace outstripped organic cash generation this period; sustainability of buybacks depends on cash reserves and leverage tolerance. With D/E at 0.64x and equity ratio 60.7%, the balance sheet can accommodate periodic repurchases, but consistency should be aligned with medium-term FCF. Policy outlook: with EPS at 155.90 JPY and BVPS 3,095 JPY, a stable-to-progressive dividend appears feasible if margins hold and ROIC improves; upside to payout likely capped until ROIC advances toward 7–8%.

Risk Assessment

Business Risks:

• Execution risk on project-based revenues leading to margin volatility
• Input cost and pricing pressure impacting gross margin (current 37.0%)
• Customer capex cycles in industrial and utility end-markets affecting order intake
• Goodwill/intangible impairment risk (851.15 total; ~15.4% of assets) if acquisitions underperform

Financial Risks:

• Buybacks (151.61) exceeding FCF (113.20) increase reliance on cash balances or debt
• Working capital intensity (AR 1,279.20 vs AP 589.83) can strain cash in downturns
• ROIC at 5.2% below 7–8% benchmark, risking value dilution if capital allocation does not improve
• Limited visibility on debt maturity profile and cash holdings due to unreported items

Key Concerns:

• Sustainability of margin expansion that drove +15.9% operating profit growth on +1.4% sales
• Payout ratio slightly above benchmark (62.2%) alongside elevated buybacks
• Data gaps (current liabilities, debt details, cash breakdown) constrain liquidity assessment

Investment Implications

Key Takeaways:

• Quality beat on profits with operating margin expanding to ~12.6% and net margin to ~8.7%
• Cash conversion strong (OCF/NI 1.65x), validating earnings quality
• Balance sheet solid (equity ratio 60.7%, D/E 0.64x), providing flexibility
• ROE 5.1% and ROIC 5.2% indicate scope to enhance capital efficiency
• Shareholder returns exceeded FCF due to buybacks; trajectory depends on future cash generation

Metrics to Watch:

• Order intake and backlog (leading indicators for revenue growth)
• Operating margin sustainability versus cost inflation
• ROIC progression toward ≥7%
• Working capital turns (especially AR days) and asset turnover (currently 0.358)
• Cash balance and net leverage amid ongoing buybacks
• Segment/geographic mix effects on gross margin

Relative Positioning: Within water treatment peers, Kurita delivers solid margins and cash conversion with a conservative balance sheet, but trails best-in-class on ROIC/ROE due to low asset turnover; continued mix shift to higher-return services/chemicals and disciplined project execution are key to closing the gap.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
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