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Nerolac: Goody on a roll…

Dec 21, 2000

Goodlass Nerolac, the market leader in the industrial paint segment, posted a 110% jump in net profits in the second quarter ended 30th September 2000. Despite concerns of a slow down in automobile sales (especially at Maruti, its major client) and rising raw material prices, this is a creditable performance. This has necessitated a re-look at our estimates for the full year. For the first half of the current year, sales grew by a healthy 17%. We expect the company to post around 15% growth in sales for the full year (FY01). Sales could slow down in the second and third quarters, as automobile sales are not expected to show any significant improvement till March 2001. It may pick up in FY02, once the government announces the new auto policy. The government is reportedly planning to reduce excise duty on small cars, which would mean that small cars would become cheaper by Rs 20,000-Rs 25,000. Further, Toyota, the company’s new client, has become the market leader in the multi utility vehicle segment with consistent growth in volumes in the current year.

FY00 financials…
(Rs m) 3QFY00 4QFY00 QoQ
Sales 1,416 1,382 -2.4%
Other Income 39 18 -53.5%
Expenditure 1,260 1,201 -4.7%
Operating Profit (EBDIT) 155 181 16.2%
Operating Profit Margin (%) 11.0% 13.1%  
Interest 15 16 8.9%
Depreciation 35 33 -5.5%
Profit before Tax 145 150 3.5%
Tax 46 44 -5.8%
Profit after Tax/(Loss) 99 106 7.8%
Net profit margin (%) 7.0% 7.7%  

The company’s initiatives on the decorative paint segment are also encouraging. It has launched new products and has increased the number of Colour Scape’s, the computerized dealer-tinting machines. This should add to the top line in the current year. Going forward, we believe that the impetus for sales growth would be the decorative segment where per capita consumption levels continue to remain low.

Margins have also shown significant improvement in the first half of the current year. Operating margins went up from 8.2% in 1HFY00 to 9.8% in 1HFY01. This, on the back of rising raw material prices and the pressure from the automobile companies to decrease paint prices is a notable improvement.

Though raw material costs as a percentage of total cost is expected to touch 54.5% in FY01 (53% in FY00), the discontinuation of the resins and the pigments division would increase its operational efficiency. Therefore, overall, we expect the margins to remain at the previous year’s level of 8.9% for the full year. We have also upgraded our net profit estimate to Rs 350 m for FY01.

The stock is trading at Rs 138 at a P/E multiple of 6.5x the annualised 1HFY01 earnings. On the estimated sales of Rs 6,902 m, market capitalisation to sales works out to 0.3 times (market capitalisation is Rs 2,115 m).


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