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Goodlass: Heading north? - Views on News from Equitymaster
 
 
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  • Jan 2, 2002

    Goodlass: Heading north?

    As a major supplier of paints to key auto majors like Telco, Maruti and Hindustan Motors in India, prospects for Goodlass Nerolac seem to be turning brighter. After prolonged sluggishness there are signs of recovery in auto demand. This along with a buoyant housing industry is likely to benefit the second largest player in the Indian paint industry.

    In the first half of the current fiscal, Goodlass recorded a 1.7% fall in sales and a 1.1% drop in profits. While sales in 1QFY02 fell by 6%, there was a 2% rise in sales in 2QFY02 thanks to a recovery in commercial vehicle and passenger car demand. While margins were depressed in 1QFY02, a 6.3% fall in raw material costs in 2QFY02 enabled the company to increase margins. Raw material prices have further come down in 3QFY02 and paint companies have passed on the benefit to the consumer by lowering prices across the board. Titanium dioxide prices, which were hovering around US$ 1,900 per tonne levels, have come down to US$ 1,800 in the current year thanks to the weak crude prices. This would benefit the company in terms of lower raw material costs that accounted for 52.5% of sales in FY01.

    Goodlass in expected to record a 95% rise in profits in 3QFY02 due to a combination of reasons. For one, the company’s profits fell by 48% in 3QFY01 due to a depressed demand scenario last year. Besides, the festive season in the current year is spread across two quarters (Diwali being in November) and paint demand tends to rise during this period. We expect the company to record around 8% growth in sales in 3QFY02.

    On the new product introduction front, recognizing the growth prospects in the exterior paint segment (growing at 20% per annum), Goodlass introduced ‘Suraksha’ in FY01. The product seems to be faring well and the company plans to increase its market share. Other promotional strategies on the enamel and emulsions front are likely to result in higher market share in FY02. Goodlass aims to achieve a market share of 25% by FY04, Read interview

    Prospects for 2HFY02 are also promising. As per the most recent estimates by the Central Statistical Organisation, GDP growth for the second quarter of the current fiscal stood at 5.3%. Though, this is lower compared with 6.2% in the corresponding period last year, there are signs of improvement. Led by a comparatively better performance by the agriculture and service sectors, GDP growth is much better compared to 1QFY02. This a welcome sign for the paint industry.

    After a lacklustre performance in 1HFY02, both CVs and passenger car sales have shown marked signs of improvement. Since the company is one of the key suppliers to Telco and Maruti, Goodlass would benefit from any upturn in demand. This along with a buoyant housing sector points towards promising potential for the company in the long run.

    After being beaten down heavily on the bourses, Goodlass currently trades at Rs 88 implying a P/E multiple of 5.7x FY02E earnings.

     

     

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