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Goodlass: Lacks colour

Jun 7, 2002

Goodlass Nerolac, the No.2 in the paint segment, has posted a lacklustre performance for the year ended March 31, 2002. While sales growth was way below industry growth of 8%, profits have risen by 21% on the back of favorable raw material scenario and lower interest expenses.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net sales 1,305 1,442 10.6% 5,666 5,831 2.9%
Other Income 33 44 32.5% 115 151 30.6%
Expenditure 1,221 1,362 11.6% 5,186 5,324 2.7%
Operating Profit (EBDIT) 83 80 -4.2% 480 507 5.6%
Operating Profit Margin (%)6.4%5.5%8.5%8.7%
Interest 17 4 -75.6% 64 37 -41.6%
Depreciation 65 65 0.6% 201 247 22.9%
Profit before Tax 34 54 57.5% 331 374 12.9%
Tax 22 10 -54.5% 105 100 -4.8%
Profit after Tax/(Loss) 12 44 256.2% 226 274 21.2%
Net profit margin (%)1.0%3.1%4.0%4.7%
No. of Shares (m) 15.3 15.3 15.3 15.3
Diluted Earnings per share (Rs) 3.2 11.5 14.8 17.9
P/E Ratio (x) 7.4

Highlight of the company's FY02 results is the gradual improvement in paint demand. In 4QFY02, Goodlass managed to post a volume growth of 11% to Rs 1,442 m, which incidentally is the highest in all the four quarters in FY02. The company's quarterly performance clearly indicates the underlying improvement in demand starting 3QFY02. Subdued demand for automobiles and lower demand for decorative paints resulted in a 6% fall in sales in 1QFY02. But there has been a steady rise in sales ever since in paint demand. Judging by the performance of paint companies during the festive season, it seems, increase in farm output has benefited paint sector in general.

Quarterly trend...
(% growth)1QFY022QFY023QFY024QFY02FY02
Operating margins8.0%12.0%8.8%5.5%8.7%

But at the same time, higher sales in 3QFY02 and 4QFY02 has come at the cost of lower operating margins (especially 4QFY02). On the decorative front, market leader Asian Paints has managed to extend its market share in FY02 through aggressive pricing strategy. Consequently average industry realisation is estimated to have declined by 2% with manufacturers passing on the benefit from lower raw material costs to the consumers. Though passenger car sales have been robust in FY02, since auto majors have better bargaining power, Goodlass might have been forced to reduce prices (Goodlass is one of the key automotive paint suppliers to Telco and Maruti).

Other income has increased notably on account of lease rentals from expansion of dealer tinting machines, which is in line with industry trend. Titanium dioxide and other key raw materials were on the lower side in FY02. This has enabled the company to improve its operating margins for the full year. Though interest costs was lower, depreciation has gone up and is in line with its retail expansion plans. Like Asian Paints, Goodlass might also resort to arrangement of finance with banks for installation of such machines with dealers, thereby lowering depreciation charges in the future.

While the company performance at the net level in FY02 was in line with our estimates, topline growth was disappointing. With auto majors lining up a number of new models in FY03, Goodlass could benefit immensely if the sector performs well. However, on the decorative segment front, there is much to be done and given the prevailing competitive environment, improvement in price realisation in FY03 seems unlikely. Besides, demand sustainability has also come under cloud with no signs of recovery in the industrial sector. Given this backdrop, though we expect Goodlass's margins and profits to improve in FY03, topline growth is a cause of concern.

The stock currently trades at Rs 132 implying a P/E multiple of 7.4x FY02 earnings. On expected earnings of Rs 296 m, P/E multiple works out to 6.9x.

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