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Goodlass Nerolac: Promising prospects

Sep 18, 2003

Goodlass Nerolac, which has a major presence in the industrial paints segment, has gained significant ground on the bourses in the last six months. The company has recently announced further investments for capacity expansion and advertising, mainly to capitalize on the expected higher demand growth in the decorative segment in the long term. Let us take a look at the business of the company and its prospects going forward. Goodlass Nerolac is the second largest paint company in the country with an estimated overall market share of 20% in the organised segment. The company is the market leader in case of automotive segment with a market share of about 65%. Apart from having a strong hold in automotive paints, it has a presence in the decoratives segment also. It is estimated that the industrial-decorative contribution of the company at the current juncture is at 50:50.

While Goodlass Nerolac is the leader in the automotive segment it still lags way behind the overall industry leader, Asian Paints, as far as growth and operational performance is concerned. While Asian paints increased its market share in the past few years, Goodlass Nerolac on the other hand has witnessed a fall in market share (in the decorative segment) during the same period. However in FY03, the company has given a strong performance. Its topline during FY03 witnessed an increase of about 11%, while its bottomline spurted by about 46%. The company also managed to improve its operating margins during FY03.

While the company's performance in FY03 has enthused, its valuations continue to languish in comparison to its peers. If one were to compare Asian paints and Goodlass Nerolac, Goodlass has lower valuations. The discount is justified to an extent. Both gross and net profit margin is lower for Goodlass as compared to that for Asian Paints. One of the reasons for this is that margins in case of the automotive segment are lower as compared to that from the decorative segment. Goodlass, which has a major presence in automotive segment, thus has lower margins. Further bargaining power in case of automotive customers is lower thereby hampering realisations. 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 prospects of the company are concerned, the auto sector holds immense potential for the company. Auto sector is likely to witness healthy growth in volumes especially from new vehicles. Both the passenger and commercial vehicles segment are likely to witness healthy volumes. The company has major clients (TATA, Maruti, Toyota, Honda, Hindustan Motors, Volvo, Ashok Leyland to name a few) in both the segments and this will boost demand for the company growing forward. Also with Japanese majors introducing new models in the country, demand from this segment is expected to be healthy.

The company recognizing the potential of the decorative segment is also planning to increase its presence in the same. This is due to the fact that the housing sector is likely to witness robust investments (on account of demand supply mismatch, low interest rates and tax incentives on housing loans) going forward and this will spur demand from this segment. Increased share in the decorative segment would also lead to higher margins as this segment gives higher realisations as compared to the automotive paints segment.

Parental support is likely to further augment the company's growth going forward. Kansai Paints, the Japanese paint major, holds 64.5% stake in the company. It has a strong presence in automotive paints segment and has also a good international client base. It is increasingly focusing towards developing markets, which have very low consumption as its revenues are growing at a slower rate. Considering that Goodlass accounts for about 11% of the parent's revenues, it may be one of the key areas of focus for the parent and this would help the company growing forward. Also, 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).

At Rs. 339, the stock is trading at a P/E multiple of 11.5x its FY04E earnings. The company has plans to double its capacity in the next few years on account of expected demand in both the decorative and automotive paints segment. Increased capacities supplemented by an increase in demand from both these segments are likely to be the key growth driver for the company in the future.

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