The first quarter performance of paint majors has been quite impressive. Led by sustained demand for housing and higher automotive sales, revenues and profitability has grown at a faster clip. Goodlass Nerolac, the second largest manufacturer of paints in the country, also posted a sharp rise in revenues. In this article, we look at the 1QFY04 performance of the company in brief and concentrate more on future growth prospects.
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While net sales increased by 17% in 1QFY04, net profit grew at a faster clip of 53%. As can be seen from the graph below that highlights the company's quarterly performance starting 1QFY01, net sales have been showing a consistent rise on a YoY basis since 2QFY02. If one were to reverse back, the auto sector actually started showing signs of an uptrend from September 2001 led by the commercial vehicle (CV) segment. A slew of new launches from passenger car and two-wheeler manufacturers further buoyed demand. Since Goodlass is one of the key suppliers of paint to key automotive players like Telco and Maruti, the rise in demand has augured well for the company. The 1QFY04 performance has to be viewed in this context.
To reduce the dependency on the automotive paints segment, the company has been focusing on the decorative segment over the last five years. The launch of exterior paint and enamels in late FY02 has benefited the company in terms of increasing contribution from this segment. Despite the consistent rise in net sales on a YoY basis, operating margins have been hovering in the 10%-13% range. This is on account of higher contribution from automotive paint segment where there is an absence of pricing power. Also, capacity utilisation of the company in FY03 stood at just 61% (44% in FY02) as against almost 80% for Asian Paints. Such low capacity utilisation levels also limits margin expansion potential.
As far as the future growth prospects of Goodlass is concerned, we expect demand for automobiles in India to grow in line with GDP in the long-term. Most of the auto majors are either increasing capacity or launching new models in the near future, which will mean higher revenue growth for Goodlass. Since Kansai Paints of Japan holds a majority stake in the company, it is also important to look at Kansai's strategy.
Given the strong foothold of the parent in the automotive paint segment and its international relationships (most of the Japanese majors), Goodlass has an upper hand in gaining new customers. With revenues growing at a slower rate for Kansai Paints in Japan (revenues CAGR of –1% in the last five years), the Japanese major is looking at emerging markets for growth. Since Goodlass accounts for 11% of consolidated revenues of Kansai, India is expected to be one of the key focus areas for Kansai.
The stock currently trades at Rs 271 implying a P/E multiple of 11.6x its annualised 1QFY04 earnings (6.3x FY04E earnings). Though valuations are lower on a relative basis, the company has been facing pressure on the market share front in the last two years on the decoratives and automotive paint fronts from Asian Paints. Lower margins, return ratios and low liquidity have also been hampering valuations of the stock.
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