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Goodlass: Subdued performance

Jan 17, 2002

Goodlass Nerolac, the number two player in the Indian paint industry, has reported a 31% rise in profits and a 5% growth in sales for the third quarter ended December 31, 2001. But the performance of the company is below our expectations.

(Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
Sales 1,481 1,556 5.0% 4,361 4,388 0.6%
Other Income 29 33 13.9% 83 107 29.8%
Expenditure 1,366 1,418 3.8% 3,965 3,961 -0.1%
Operating Profit (EBDIT) 116 138 19.1% 396 427 7.7%
Operating Profit Margin (%) 7.8% 8.8%   9.1% 9.7%  
Interest 18 9 -50.5% 47 33 -29.0%
Depreciation 53 64 21.9% 136 182 33.5%
Profit before Tax 74 97 32.4% 296 319 7.8%
Tax 22 30 36.4% 83 90 8.4%
Profit after Tax/(Loss) 52 67 30.7% 213 229 7.5%
Net profit margin (%) 3.5% 4.3%   4.9% 5.2%  
No. of Shares (m) 15.3 15.3   15.3 15.3  
Diluted Earnings per share* 13.5 17.6   18.6 20.0  
P/E Ratio   5.3     4.7  

Sales have increased by 5% to Rs 1,556 m in 3QFY02 and for the first nine months of the current fiscal, topline growth is lacklustre. One of the key factors that could have affected sales growth is the slowdown in the economy. Mr. Bharuka, the Managing Director of the company, expressed his concerns on the weakness in the industrial production front during our meeting earlier this fiscal. Paint demand in the current fiscal is estimated to have slowed down to around 7%-8% as against 11%-12% growth last year. Being one of the key supplier's of automotive paints to domestic majors like Telco and Maruti and multinationals like Mitsuibishi, we were expecting a higher sales growth given the rise in auto sales in recent months. Also, with the festive season demand, growth in sales seems to be on the lower side.

The third quarter trend–Highly volatile…
(Rs m) 3QFY99 3QFY00 3QFY01 3QFY02
Sales 1,160 1,416 1,481 1,556
Operating profit margin (%) 7.0% 11.0% 7.8% 8.8%
Net profit 32 99 52 67

Margins have increased by 100 basis points to 9% in 3QFY02 and the expansion in operating margins is in line with our expectations. Lower raw material costs, which as a percentage of sales stood at 62% in 3QFY02 as against 63% in 3QFY01, has benefited Goodlass. Titanium dioxide prices have fallen notably in the current fiscal due to weak crude prices. Depreciation charges have increased sharply in 3QFY02, which has been the case over the last six quarters, in light of the ongoing expansion in dealer tinting machines. The effective tax rate has remained stagnant as the company has received a rebate of Rs 17.5 m for the first nine months of the current fiscal.

Goodlass is currently trading at Rs 94 implying a P/E multiple of 4.7x annualised 9mFY02 earnings. The company is expected to report a net profit of Rs 309 m for FY02.

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