Budget rub-off to benefit Goodlass - Views on News from Equitymaster

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Budget rub-off to benefit Goodlass

Mar 8, 2001

Goodlass Nerolac reported a sharp 48% decline in net profits in the third quarter of the current year. This was primarily on account of declining car sales (which affected topline growth) and higher raw material prices. However, prospects for the fourth quarter seems bright in the light of a recovery in car sales and softening input prices.

Third quarter drags margins…
(Rs m) 9mFY00 9mFY01 change
Sales 3,880 4,361 12.4%
Other Income 69 83 20.4%
Expenditure 3,522 3,965 12.6%
Operating Profit (EBDIT) 358 396 10.7%
Operating Profit Margin (%) 9.2% 9.1%  
Interest 65 47 -28.5%
Depreciation 89 136 53.7%
Profit before Tax 273 296 8.6%
Tax 80 83 4.4%
Profit after Tax/(Loss) 194 213 10.3%
Net profit margin (%) 5.0% 4.9%  
No. of Shares (eoy) (m) 15.3 15.3  
Diluted number of shares 15.3 15.3  
Earnings per share* 16.9 18.6  

Mr. Yashwant Sinha through his budget seems to have injected the right dose for the automobile companies. The reduction of excise duty on cars to 16% has perked up automobile sales in March. The auto companies have passed on the benefit to the consumers by slashing prices by more than 10%-15% on all cars.

These companies, which were witnessing significant decline in sales in the first three quarters of the current year, will have something to cheer about in the last quarter. Besides, the country’s premier auto company, Maruti has posted more than 15% growth in sales in January 2001, thus gaining considerable market share in the small car segment.

These, we believe, would significantly add to the topline growth of the company, which has slowed down considerably in 3QFY01 (sales grew marginally by 5%). The company is expected to report around 12.5% growth in sales for FY01 to Rs 5,900 m. Though growth in margins might not be commensurate with the topline growth, we expect the company to report a 60 basis points decline in margins at the operating level for the full year (for the first nine months of the current year, operating margin has dropped by 10 basis points to 9.1%).

At the net profit levels, margins are not expected to decline sharply as the company has reduced its interest costs by 29% in 9mFY01 by pruning working capital. Net profit is also expected grow by 12% to Rs 340 m for the full year.

The stock is trading at Rs 113 at a P/E multiple of 6.1x the annualised nine months earnings. On the annualised sales of Rs 5,815 m, the market capitalisation to sales works out to 0.3 times (market capitalisation is Rs 1,728 m).

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