Goodlass Nerolac, the second largest paint company in India, has reported a 4.6% growth in net profit for the second quarter ended September 30, 2001. Growth in sales, though sluggish, is much better than 1QFY02 where the company reported a 6% fall in sales.
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The reason for a comparatively higher growth in sales could be due to several reasons. Passenger car sales, for the last two months, has increased significantly thanks to a slew of new launches and improved performance from Maruti and Telco. Maruti, for instance, has reported a 6% rise in sales for the first half of the current year. Since Goodlass is the key supplier of paint to both Maruti and Telco the recent upturn in auto demand has benefited the company. Paint demand also tend to pick up towards the latter half of 2QFY02 in line with the festive season. However, realisation seems to be under pressure in light of an sluggish economy.
Sales for 1HFY02 has slipped marginally by 1.7% to Rs 2,832 m. The slow down in the economy and sluggishness in both commercial vehicles and passenger car sales had affected paint demand over 1HFY02. This has led to the lower sales for the period.
Operating margin, however, has increased from 11% in 2QFY01 to 12% in 2QFY02 primarily led by a 6.3% fall in raw material costs that accounts for 60% of sales and 68% of expenditure. With crude prices having stabilised around US$ 25 per barrel, titanium dioxide prices also seem to have softened. This along with the removal of surcharge on customs duty has resulted in improvement in margins.
The scrip is currently trading at Rs 82 on a P/E multiple of 3.9x annualised 1HFY02 earnings. Auto demand, led by commercial vehicles and passenger cars, is expected to improve towards the end of the year. Despite concerns of global unrest, the Indian economy is expected to grow by 6% in the current financial year as per the Reserve Bank of India's mid-term monetary policy. Since Maruti and Telco command almost 60% market share in the passenger car segment, an improved performance from these companies in the coming quarters will directly benefit Goodlass. Goodlass is also expected to report a significant rise in sales and profits in 3QFY02 on the back of higher paint demand during the festive season.
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