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Goodlass: Worries in sight? - Views on News from Equitymaster
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Goodlass: Worries in sight?
Apr 21, 2006

Performance Summary
Goodlass Nerolac announced its full year results yesterday. The highlights of the full year performance were stability in operating margins despite input costs spiralling upwards, significant increase in other income and increased investment in capacity expansion that led to a spike in depreciation charges. Overall, while the topline performance is in line with our estimates, at the net profit, growth was higher owing to higher other income.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 2,050 2,372 15.7% 8,795 10,096 14.8%
Expenditure 1,736 2,038 17.4% 7,430 8,524 14.7%
Operating profit (EBDITA) 314 333 6.2% 1,365 1,572 15.1%
EBDITA margin (%) 15.3% 14.1%   15.5% 15.6%  
Other income 37 73 95.4% 222 604 171.9%
Interest 2 3 56.3% 8 8 1.3%
Depreciation 59 93 56.7% 207 318 53.5%
Profit before tax 290 311 7.1% 1,373 1,850 34.8%
Extraordinary income/(expense) - - - - 148 -
Tax 101 101 -0.3% 453 610 34.7%
Profit after tax/(loss) 189 210 11.1% 920 1,388 50.9%
Net profit margin (%) 9.2% 8.8%   10.5% 13.7%  
No. of shares (m) 15.3 25.5   15.3 25.5  
Diluted earnings per share (Rs)         54.4  
Price to earnings ratio (x)         16.5  

What is the company's business?
Goodlass Nerolac is the second largest paint company in India with an estimated market share of 23% in the organised segment (Source: Company). It is the leading OEM paint supplier to the likes of Maruti, Mitsubishi and Telco (40% share). To reduce the dependency on automotive paints, Goodlass has being making a concerted effort to increase contribution from the decorative paint market. It is estimated that the industrial-decorative contribution of the company at the current juncture is at 50:50. Kansai Paints, the Japanese paint major, holds 64.5% stake in the company. India ranks among the top three international markets for Kansai Paints, apart from Japan and the US (Goodlass contributes to 11% of Kansai's net sales).

What has driven performance in FY06?
In line sales growth: As we have mentioned in our previous analyses, Goodlass is the second largest player in the paint sector. But unlike Asian Paints, which is very strong in the decorative paint segment, Goodlass is the market leader in the automotive coating segment. While the company has made concerted efforts to boost market share on the decoratives front, growth in FY06 was led by higher automotive sales. As per SIAM (the representative association for auto manufacturers in India), the automobile sector in India registered a 13% YoY growth in volumes in FY06 (of this, the passenger car segment in India grew by 8% with the two-wheeler recording another year of good volume growth (14% in FY06)). The actual net sales was 2% higher as compared to our estimates for FY06.

Margins - More worries? Operating margins, though marginally higher for FY06, witnessed significant pressure in 4QFY06. This was largely on account of a sharp spurt in raw material cost to sales (48% of sales in 4QFY05 to over 61% in 4QFY06). While other key overheads were more or less the same (in relation to net sales), the company benefited from a favorable change in stock. But for this, the decline in margins would have been much higher. In our view, with crude prices crossing US$ 70 per barrel and petrochemical prices trading firm, margins will remain under pressure going forward. Besides, with competition growing rapidly in the automotive segment, auto manufacturers will look to squeeze in key suppliers to protect margins. In this context, we expect realisations to remain under pressure.

Spurt in raw material costs…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Raw materials 994 1,455 46.4% 5,280 6,449 22.1%
% sales 48.5% 61.4%   60.0% 63.9%  
Staff cost 130 144 10.3% 493 559 13.4%
% sales 6.4% 6.1%   5.6% 5.5%  
Other expenses 414 503 21.5% 1,621 1,856 14.5%
% sales 20.2% 21.2%   18.4% 18.4%  
Change in stock 198 (63) - 36 (339) -
% sales 9.7% -2.7%   0.4% -3.4%  

Other income boost: Though our topline and operating level estimates were in line with FY06 actual performance, we had factored in a decline in other income (last year, the company gained from the portfolio management income). Other Income in FY06 includes profit on sale of investments in an associate company to the extent of over Rs 146 m.

What to expect?
The stock currently trades at Rs 899, implying a price to earnings multiple of 16.5 times FY06 earnings. The company declared a special interim dividend of Rs 8.5 per share earlier. Including the annual dividend of Rs 11.5 per share, total dividend for the year stands at Rs 19.5 per share (dividend yield of 2.2%). Going forward, despite growth opportunities, we expect auto and housing activity to soften, given the fact that interest rates are likely to harden (the Monetary Policy has also hiked provisioning with respect to advances towards commercial and residential properties of certain kind). In the long-term, paint sales will track GDP growth rate, even as margins are likely to remain under a tight leash. Post the analyst meet today, we will update subscribers in detail.

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