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Goodlass: Back in colour

Jun 6, 2003

The sharp upturn in the automobile sector coupled with the robustness in housing sector has benefited paint companies significantly in FY03. Goodlass Nerolac, the second largest player in the Indian paint sector, has taken advantage of the same. The results of the same are reflected in the FY03 performance of the company. While revenues have increased by 11%, net profit has risen by 46%.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net sales 1,402 1,591 13.5% 5,879 6,534 11.1%
Other Income 34 42 25.2% 103 89 -13.7%
Expenditure 1,312 1,439 9.7% 5,324 5,803 9.0%
Operating Profit (EBDIT) 90 153 69.7% 555 730 31.6%
Operating Profit Margin (%) 6.4% 9.6%   9.4% 11.2%  
Interest 4 4 -7.0% 37 17 -55.8%
Depreciation 65 84 28.7% 247 241 -2.1%
Profit before Tax 54 107 97.4% 374 561 50.1%
Tax 10 21 105.0% 100 163 62.5%
Profit after Tax/(Loss) 44 87 95.7% 274 398 45.6%
Net profit margin (%) 3.2% 5.4%   4.7% 6.1%  
No. of Shares (m) 15.3 15.3   15.3 15.3  
Diluted Earnings per share (Rs) 11.6 22.6   17.9 26.0  
P/E ratio (x)         7.7  

As we mentioned earlier, the company's topline growth is a factor of recovery in the automobile sector. This is because of the fact that Goodlass generates an estimated 45% of its revenues from the automotive paint sales to OEMs (original equipment manufacturers). OEMs are typically automobile manufacturers like Maruti, Telco, Mitsubishi to whom Goodlass acts as a supplier of paint. Historically, it has been observed that revenue growth is more or less in line with the performance of the auto sector. That said, over the years, the company has been focusing on the decorative segment. The introduction of 'Suraksha', an exterior paint in FY02 and entry in to the wood finishes segment is directed at reducing the dependence on automotive paints segment.

This is of significance considering the fact that margins are lower in the automotive paint segment due to the lack of bargaining power. There has been a significant pressure on prices in the last two years for the company (CAGR drop of 3%). We expect the trend to have continued in FY03 as well. However, the company's performance at the topline and at the operating level is higher than our estimates. As against our estimate of Rs 6.3 bn, Goodlass has posted a net sales of Rs 6.5 bn in FY03. Given the increasing focus of the company on the decorative front, operating margins have also shown a marked improvement. This despite significant pressure on raw material costs is commendable. Prices of key raw materials like Titanium dioxide increased by 13% in the last one year in light of hardening crude prices in international markets.

Despite the higher incidence of tax, the company has posted a net profit growth of 46% for FY03, which is higher than our estimate by Rs 50 m. But operating margins at 11% in FY03 is in line with historical levels (as is evident from the graph above) and the improvement is magnified due to poor performance in FY02.

The stock currently trades at Rs 201 implying a P/E multiple of 7.7x FY03 earnings (7x FY04E earnings). Compared to the market leader Asian Paints that trades at 16.6x FY03 earnings, valuations are on the lower side. However, one needs to remember that Asian Paints has a superior operating margin and commands twice as much market share compared to Goodlass. Low floating stock also has been hampering valuations. Nevertheless, as the company increases its presence in the decorative segment, margins are likely to show further improvement. Given the strong backing from Kansai and its international relationship with auto majors, Goodlass will benefit. Besides, companies like Suzuki, Honda and Mitsubishi are looking at introducing new models in India. This will add to the revenue growth of the company.

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