shalimar sa aats paints ltd. cap. 52 week h/l cmp target...

Shalimar Paints Ltd.Market Cap. 52 Week H/L CMP Target Price

1 2 144/49 91 124S a a a ts td

Rs. 1727.5 mn Rs. 144/49 Rs. 91 Rs. 124

January 06, 2014

STOCK DATA

Recommendation BUY

Demand Growth Drivers are in place – Indian Paint industry is pegged at Rs. 285bn (FY13) & has grown at a CAGR of ~15% in the lastthree years and expected to grow at a CAGR of ~14% to reach Rs. 495bn by FY17E (IPA & AC Nielsen). Decorative paints (~70% of overallmarket) has grown at a CAGR of ~16% in the last three years and expected to grow at a CAGR of ~16% to reach Rs. 365bn by FY17E (IPA& AC Nielsen). Despite the near term concern on demand scenario, consumers shift from unbranded to branded products will aidvolume growth as ~25‐30% of total market is unorganized. Shortened repainting cycle (from 5 yrs. to 3‐3.5 yrs.) will also aid decorative

Reuters Code Bloomberg Code

SHLP.BO SHP IN

BSE Code 509874

Face Value Rs. 2

Shares Outstanding* 18.9 mn

volume growth as 25 30% of total market is unorganized. Shortened repainting cycle (from 5 yrs. to 3 3.5 yrs.) will also aid decorativevolumes to grow as repainting constitutes ~75‐80% of decorative market. Industrial paints (~30% of overall market) is likely to performbetter with expected economic revival going ahead as its fortunes is linked to economic environment. Apart from these, India’s low percapita consumption of paints (2.6 Kg/annum vs. global average of 15 Kg/annum), economic growth, higher disposableincome, increasing urbanization & changing lifestyles, easy availability of credit and a concurrent growth in construction, auto andconsumer durables segments will continue to act as the driving force behind the rise in consumption of paints going ahead.One of the top 5 company in Indian Branded Paints market – Shalimar Paints Ltd (SPL) is India’s 5th largest branded paint company andShares Outstanding 8 9

Avg. Daily Volume (6m)

111,432 shares

Price Performance (%)

1M 3M 6M

(2) 60 (12)

one of the world’s oldest organized paint company having 111 years of existence with more than 54 branches & depots and 7000dealers. It has three manufacturing facilities at Howrah, Nashik & Sikandrabad and two R&D Centers ‐ one each at Howrah & Nashik.New Greenfield Plant to help increase its presence in South – SPL is likely to commission its Chennai plant in Q1FY15 which willincrease its installed capacity by ~30% to 85800 MTPA. With the commissioning of this plant, SPL will have a manufacturing presenceacross India which is likely to kick‐in operational efficiencies and enhance its market share in South & West because currently bothSouth &West is being catered by its Nashik plant & this new plant will free up capacity for SPL to cater exclusively to the West marketSenior‐Level Management changes augurs well for SPL – On May 25th 2013 SPL has appointed Mr Sameer Nagpal as MD & CEO who

SHARE HOLDING (%)

Promoters 62.4

FII 0.0

200 Days EMA Rs. 88

* On fully diluted equity Shares

Senior‐Level Management changes augurs well for SPL On May 25th 2013, SPL has appointed Mr. Sameer Nagpal as MD & CEO whohas a good past track‐record of spearheading India Growth Strategy for Ingersoll Rand International (India) Ltd. According to the SPL’snew CEO, the Indian paint industry is poised to grow 2‐3x GDP and highlighted that the company is looking to grow at 3‐4x the marketgrowth rate on the back of its huge latent equity and a strong portfolio of brands whose potential is waiting to be unlocked.Outlook and Valuation ‐ SPL is likely to grow at a CAGR of 10.3% on a conservative basis during FY14E‐FY16E on the back of risingpaints demand, targeting tier II and III cities, expansion of distribution network, introduction of new products, penetration of newergeographies, focus on value added products, inventory management and capacity addition. It is currently trading at 8.1x its FY16E EPS

Y/E Mar. Revenues (Rs. mn) RPAT (Rs. mn) AEPS (Rs.) AEPS (% Chg) P/E (x) ROCE (%) ROE (%) P/BV (x)

FY13 5 301 8 131 4 6 9 (9 2) 13 1 22 8 18 9 2 3

FI/Bank 3.1

Body Corporate 11.9

Public & Others 22.6

of Rs.11.2. We believe that SPL will be able to maintain its H1FY14 EBITDA margin of 8.5% going ahead on account of stablerupee, improving product mix, two price hikes & reduction in dealers discounts in H1FY14. Its revenue has grown at a CAGR of 12.9% inthe last four years to Rs.5,301.8 mn in FY13. Considering the past performance & future growth potential, we recommend ‘BUY’ for thestock with a price target of Rs.124 (11x its FY16E EPS). We feel that it is a value buy as it is trading at a significant discount to its peers.

1

FY13 5,301.8 131.4 6.9 (9.2) 13.1 22.8 18.9 2.3

FY14E 5,344.3 151.6 8.0 15.4 11.4 24.1 18.7 2.0

FY15E 5,892.0 177.4 9.4 17.0 9.7 23.5 18.9 1.7

FY16E 6,496.0 212.5 11.2 19.8 8.1 24.0 19.3 1.4

This report based on Techno Funda Research and our View / Target Price has been derived accordingly. Please refer to the disclaimer on the last page.

Shalimar Paints Ltd.

COMPANY OVERVIEWEstablished in 1902, Shalimar Paints Ltd (SPL) bears the distinction of being one of the oldest paint companies of the world and is currently the fifth largestpaint company of India. It is jointly promoted by Mr. Girish Jhunjhnwala and Mr. Ratan Jindal. It has a diversified revenue mix with presence in both decorativeand industrial paints and a wide product range across both segments and across all price points. For industrial segments, it service marquee clients in thefollowing industries: a) oil & gas b) petrochemicals c) fertilizers d) power e) steel f) engineering g) shipping h) auto ancillaries, etc. It has strong R&Dcapabilities with a proven history of developing indigenous products for both the decorative and industrial segments.

Product Range: Its range of decorative paints includes: a) Exterior Walls (Emulsions & Cement Paints) b) Interior Walls (Emulsion & Distemper Paints) c)Metal, Wood & Floor Surfaces (Enamels, Wood Finishes & Dry Colours) and d) Paint Undercoats (Primers, Putty, Stainers & Colorants) whereas its IndustrialPaints range includes: a) Protective Coating b) Product Finish c) Metal Decorative Coating and d) Marine Paints

Manufacturing Plants and R&D Centers: It has three manufacturing plants across the country with a capacity of 66 000 tonnes per annum A fourth plant inManufacturing Plants and R&D Centers: It has three manufacturing plants across the country with a capacity of 66,000 tonnes per annum. A fourth plant inChennai, Tamil Nadu is expected to start operations in Q1FY15. Howrah and Nashik plants also have resin manufacturing facilities which helps SPL operateeffectively in Industrial paints. It has two R&D Centers: one at Howrah, West Bengal and one at Nashik, Maharashtra set up in 2009 (spread over 10,000 sq.ft.). Both of them are recognized by Department of Scientific & Industrial Research (DSIR). R&D Center at Howrah was the first in‐house R&D unit to berecognized by DSIR in 1979.

Distribution Reach: It has a nationwide distribution network with three regional distribution centers (RDCs), more than 54 branches & depots and 7000g ( ) pdealers. It also have dedicated sales & marketing teams for decorative and industrial paints. It also has tinting systems under the brand name ‘Color Space’where it offers more than 10,000 shades across all the product lines to its customers.

Decorative Industrial North South East West

Decorative vs. Industrial Mix No. of Depots Region‐Wise Revenue Split

Region‐WiseSplit

No. of Depots (%)

33%35%

35%

10%

Split Depots (%)

North 39%

West 21%

East 20%

2January 06, 2014

Source: Company, Sushil Finance

67%

20%

South 20%

Total 100%


Decorative Paints ‐ Products RangePRODUCT ECONOMY MID‐RANGE PREMIUM

Enamels Mela Superlac Lustre Superlac Hi Gloss, Superlac Sat In

Interior Emulsions No. 1 Silk Superlac Acrylic Emulsion Husain Collection

Exterior Emulsions Shaktiman Xtra Self Clean, Xtra MaximaExterior Emulsions Shaktiman Xtra Self Clean, Xtra Maxima

Distemper ‐ No. 1 Premium Acrylic Distemper ‐

Primers Cement & Metal Primers Universal White Primer ‐

Aluminium GP Aluminium TE Aluminium Lustrol

Stainer ‐ Superlac Stainer ‐

Putty Shakti, Magic (Exterior) ‐ ‐y g ( )

Industrial Paints – Products Range

SEGMENTS PRODUCT RANGE

Protective CoatingTuffkote Range of products include – Chlorinated Rubber, Epoxy, Polyurethane, In Organic Zinc Silicate, Glass Flake epoxy, High Temperature Silicon Aluminum, Acrylic Polysiloxane, Coal Tar Epoxy, Bituminous, Surface Tolerant & Rapid Cure coatings

Product FinishQAD & Nitrocellulose lacquers, Alkyd Amino/ Epoxy/ Acrylics/ Vinyl base products for solid and metallic colours, flamboyant & stipple finishes, Non yellowing white and wide spectrum of whether durable colors, Strip coating and specialized coating for metallic tapes, Coatings for Aircrafts, etc.

PackagingCankote products include Gold/Pigmented/Tube Coatings, Coatings for Food, Pesticides & Chemical Product Containers, Integrated Necks & Pilferproof Closure, Varnishes, Barrel Lining Lacquer, Side Stripe Varnish, Crown Cork, etc.

New Construction Shop Primers Under Water Anticorrosive & Antifouling paints Boot Top & Top Side paints Superstructure Decks

Key Management Personnel

Name Designation

MarineNew Construction Shop Primers, Under Water Anticorrosive & Antifouling paints, Boot Top & Top Side paints, Superstructure, Decksand Accommodation area coatings, Potable water tank coatings, Tanks & Cargo Holds coatings, etc.


3January 06, 2014

Mr. Girish Jhunjhnuwala Chairman

Mr. Sameer Nagpal Managing Director & CEO

Source: Company


Demand Growth Drivers are in placeIndian Paint industry is pegged at Rs. 285bn (FY13) and has grown at a CAGR of ~15% in the last three years and expected to grow at a CAGR of ~14% to reachRs. 495bn by FY17E (as per IPA & AC Nielsen). Per capita consumption of paint in India is fairly low at 2.57 Kg/annum when compared to the global average of15 Kg and 20 Kg in the developed markets. The growth has been fuelled by higher income levels of people across urban and rural segments, historically lowconsumption of paints which offers potential headroom for growth, rising awareness of branded paints with better quality & longer durability and the desireby people to remodel and embellish existing homes Per capita paint consumption in India has risen to 2 57 Kg in FY12 from 2 2 Kg in FY08 At the sameby people to remodel and embellish existing homes. Per capita paint consumption in India has risen to 2.57 Kg in FY12 from 2.2 Kg in FY08. At the sametime, organized players have expanded their distribution network, reaching out to more cities and towns particularly in semi‐urban & rural parts, investingsignificantly behind new product offerings across price points and creating more customers connect via significant investments in advertising & publicity(A&P).

Decorative paints (~70% of the overall market) include wall finishes for interior and exterior use, enamels, wood finishes and ancillary products such asprimers, putties, etc. It has grown at a CAGR of ~16% in the last three years and expected to grow at a CAGR of ~16% to reach Rs. 365bn by FY17E (as per IPAp , p , g y p g y ( p& AC Nielsen). Higher growth is being witnessed in new demand pockets, particularly in Tier 2 and 3 cities. Within decorative paints, the water‐basedproducts and high margin emulsions segment is growing at a much faster pace thanks to a rising premiumization trend. There is a fair bit of seasonality indemand for decorative paints as festive and wedding season tend to have higher demand for repainting. Despite the near term concern on demandscenario, consumers shift from unbranded to branded products will aid volume growth as ~25‐30% of total market is unorganized. Shortened repainting cycle(from 5 years to 3‐3.5 years) will also aid decorative volumes to grow as repainting constitutes ~75‐80% of the total decorative market.

I d t i l i t ( 30% f th ll k t) i l d t ti i t t ti ti GI i t ( l i d t i l) d ti il ti dIndustrial paints (~30% of the overall market) include automotive paints, protective coatings, GI paints (general industrial), powder coating, coil coating andothers. It has grown at a CAGR of 10% in the last three years and expected to grow at a CAGR of ~12% to reach Rs. 130bn by FY17E (as per IPA & AC Nielsen).The paints in this segment are largely solvent‐based. It is currently witnessing subdued growth rates led by poor automotive and infrastructure‐relateddemand. We believe that the industrial paints demand is likely to perform better with expected economic revival going ahead as its fortunes is linked to theeconomic environment and capex cycle. In addition, organized manufacturers’ efforts to enter into tie‐ups with large industrial painting contractors and takeup turnkey contracts called Apply Supply Contracts for both maintenance jobs and new projects will drive volume growth.

We believe that India’s low per capita consumption of paints, economic growth, higher disposable income, increasing urbanization & changinglifestyles, consumer uptrading, easy availability of credit and a concurrent growth in construction, automobiles and consumer durables segments will continueto act as the driving force behind the rise in consumption of paints going ahead.

Apart from the above factors, organized manufacturers efforts to enhance its distribution network & product offerings, move closer to the customer bysetting up flagship stores and improve service levels will help the industry in its drive to make consumers shift from unbranded products to branded products.

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In the near‐term, we believe that good monsoon will increase the demand for decorative paints esp. in the rural market. We also believe that good monsoonaugurs well for automobiles and consumer durables segment which is likely to increase the demand for industrial paints going ahead.

January 06, 2014


One of the top 5 players in Indian branded paints marketShalimar Paints Ltd (SPL) is India’s 5th largest branded paint company having 111 years of existence with three manufacturing facilities. It has a market share of2.6% and 1.8% in India’s organized paints segment and overall paints industry respectively. It is one of the leading player in High Performance coatings (HPC) inIndia and also have a significant presence in packaging coatings and general industrial coatings. It is also a major player in product Finish paints used in the utilityservice segment such as ceiling fans, light fixtures, luminaries, pumps, motors, material handle equipment, textile machinery, tractors & tillers, barrel, LPGCylinders and auto ancillaries industry. It is the only leading coating manufacturer & supplier in the Indian organized paint industry to the metal packagingCylinders and auto ancillaries industry. It is the only leading coating manufacturer & supplier in the Indian organized paint industry to the metal packagingindustry in India. It has a strong presence in tier II and III cities. It derives more than 2/3rd of its revenue from the economy and mid‐tier segments.

Existing Manufacturing Facilities:

PARAMETER HOWRAH NASHIK SIKANDRABADEstablishment Year 1902 1993 2003Location West Bengal Maharashtra Uttar PradeshTotal Area (Sq. m) 145000 50000 41243Covered Area (Sq. m) 25500 10970 7102Installed Capacity 66000 Tonnes per annumSales Region Catered Mostly East West & South Mostly North

Architectural Coatings ‐ interior &exterior High Performance Coatings Can

Enamels finishes, primers, waterbase finishes, industrial & marine

Enamels finishes, primers, waterbase finishes, industrial & marine

Source: Company Presentation, Sushil Finance

Product Portfolio

exterior, High Performance Coatings, CanCoatings, Stoving Systems, MarineCoatings along with new generationproducts like Water Based & High SolidIndustrial Paints, Wood Finishes, Solventborne Paints and Aviation Coatings

paints, distemper, etc. paints, distemper, cycle black, etc.

p y ,

A fourth plant in Chennai, Tamil Nadu with a capacity of ~18000 MTPA is expected to start operations in Q1FY15 which will increase its capacity by ~30%.

Forged Technical Association/Partnerships to remain competitive in both Industrial and Decorative segments

Tied up with Degussa Coatings and Colorants, a world leader in POS colorants, for supply of colorants for its Color Space tinting systems. Color Space usesstate‐of‐the‐art dispensing systems manufactured by Fluid Management Inc. (unit of IDEX Corporation).Has existing long association with multinational giants like Pinchin Johnson Co. & International Paints PLC of the U.K. and IP (Courtaulds).

5January 06, 2014

g g g ( )In July 2010, entered into a tie‐up with Rudolf Hensel, a leading manufacturer of fire intumescent coatings. Under the arrangement, SPL have exclusiverights to promote Rudolf Hensel products in India which would be used as intermediate coatings with the primer and top coat of the company. This productis expected to have significant growth potential as regulations requiring fire intumescent coatings in places like airports, malls, metro stations etc. are fastcoming into place.


New Greenfield Plant to help increase its presence in South

SPL is likely to commission its Chennai plant in Q1FY15 which will increase its installed capacity by ~30% to ~85800 MTPA.

With the commissioning of this new plant, SPL will have a manufacturing presence across India which is likely to kick‐in operational efficiencies liketransportation cost savings, etc. and enhance its market share in South & West because currently both South and West is being catered by its Nashik planthi h i ti t ~80 90 % it tili tiwhich is operating at ~80‐90 % capacity utilization.

The new plant will free up much‐needed capacity for SPL to cater exclusively to the West market.

Currently, SPL generates ~70% of its revenues from North & East India while the Industry generates ~60% of its revenues from South & West India.

We believe that the additional capacity at Nashik and Chennai plants will drive the volume growth for SPL as the company will be able to penetrate the SouthWe believe that the additional capacity at Nashik and Chennai plants will drive the volume growth for SPL as the company will be able to penetrate the South& West India more aggressively.

Existing Manufacturing Facilities offer significant operating Leverage

Significant scope for capacity expansion without any additional land cost as the existing plants are built only on ~1/3rd of the available land.

High levels of flexibility in switching between manufacture of industrial or decorative paints at each of the facilities. 80% of the capacity can be altered infavour of either segment and thereby maximize its capacity utilization. Remaining 20% is dedicated to decorative paints only.

Currently, it is operating at a capacity utilization of ~80‐90% across its existing three plants.

6January 06, 2014


Senior‐Level Management Changes augurs well for SPLOn May 25th 2013, SPL has appointed Mr. Sameer Nagpal as Managing Director & CEO . Prior to joining SPL, he worked as a Vice President ‐ Strategy &Business Creation (India) with Ingersoll Rand International (India) Ltd and has led businesses through rapid growth and transformation cycles. He is creditedwith stitching a number of international tie‐ups for product sourcing, contract manufacturing and research/collaborative development in his earlierassignments.

SPL’s board of Directors cited that Mr. Sameer Nagpal is well equipped to guide the company through the transformation of emerging as a strong contenderin the Indian paints industry on account of its experience of multinational and Indian organizations‘, both in residential and commercial businesses.

According to the SPL’s new CEO, the Indian paint industry is poised to grow 2‐3x GDP and highlighted that the company is looking to grow at 3‐4x themarket rate on the back of its huge latent equity and a strong portfolio of brands whose potential is waiting to be unlocked.

Under the new leadership, the company has already started focusing on volume growth, product mix and margins.

In H1FY14, the company has taken two price hikes to pass on the adverse impact of rupee depreciation on raw materials costs to the consumers. Thebenefit of this price hike will be visible from Q3FY14.

In H1FY14, the company also reduce the dealers discount which was high compared to the industry.

From Q2FY14, the company is also trying to shift product mix from low margin protection paints towards high margin decorative paints.

7January 06, 2014


Decent Financial Performance over the last three years

FY11 FY12 FY13 FY14E FY15E FY16E

Production (KL) 43503 45314 46305 46114 48420 50841

Net Sales Growth (%) 10.6 19.6 9.0 0.8 10.3 10.3( )

OPM (%) 7.2 8.3 7.2 8.5 8.6 8.6

PBT Margin (%) 4.1 4.3 3.4 4.0 4.3 4.7

PAT Margin (%) 2.9 3.0 2.5 2.8 3.0 3.3

ROCE (%) 24 5 28 7 22 8 24 1 23 5 24 0ROCE (%) 24.5 28.7 22.8 24.1 23.5 24.0

ROE (%) 23.5 24.6 18.9 18.7 18.9 19.3

Operating CF (Rs. Mn) (3.8) 12.5 (70.6) 134.0 130.0 144.6

Debt‐Equity(x) 1.1 1.1 1.2 1.2 1.0 0.8

N Fi d A ( ) 12 0 14 7 13 3 11 5 12 5 14 0

In FY13, SPL’s sales and margin was impacted a bit due to a major fire incident on 4th January 2013 at its Nashik plant.


Net Fixed Assets (x) 12.0 14.7 13.3 11.5 12.5 14.0

We have taken the conservative approach in forecasting the financials considering the fact that India is facing one of the major slowdown in industrialWe have taken the conservative approach in forecasting the financials considering the fact that India is facing one of the major slowdown in industrialactivity which could hamper SPL’s industrial paints sales growth. India is also witnessing visible slowdown in consumer discretionary spending which couldagain limit its growth in decorative paints sales.

We believe that this is a short‐term pain for the paints industry and the medium‐to‐long term outlook for the industry is very positive.

We expect the paints industry to report better numbers going ahead on account of rural opportunity combined with easing prices of key raw material i.e.

8January 06, 2014

rutile.

Co’s.

Rev. from Ops.(5 Y

EBITDA (5‐Yrs CAGR)

Adj. PAT(5‐Yrs

Gross Margin (FY13)#

EBIDTA Margin (FY13)

Adj. PAT

Margin

Debt/Equity (FY13)

Gross Block(5‐Yrs

Working Capital (excl. Cash) % f

RoNW(5‐Yrs A )

RoCE(5‐Yrs A )

Installed Capacity (FY13)

No. of Mfg. units (d

Product Mix ‐Deco/I d

Overall Market Share

Mkt Share in Organ‐ized

Deco Market Share

No. of

D l

PEER COMPARISON

(5‐Yrs CAGR)

CAGR)(CAGR)

(FY13)# (FY13)g

(FY13)(FY13)

(CAGR)

as % of Sales (FY13)

Avg) Avg) (FY13) (do‐mestic)

Indus‐trial

(%) Segment (%)

(%)Dealers

Asian Paints 20.2 21.4 21.6 51.3 14.9 9.4 0.1 22.3 3.4 42.4 50.9944000

KL10 80/20 39 55 55 35000

340000/Berger Paints 19.2 22.1 18.6 44.8 10.9 6.4 0.6 25.9 14.7 23.9 24.5

340000 Tons

7 75/25 11 16 18 ~16000

Kansai Nerolac 15.8 12.6 13.5 41.3 10.9 6.7 0.1 17.5 12.8 20.3 24.3300000 Tons

5 55/45 10 15 15 ~15000

Akzo Nobel 18.7 19.6 16.0 42.2 8.5 6.2 0.0 17.9 ‐17.8 10.5 12.5150000

KL5 NA 8 11 10 ~8500

Shalimar Paints 13.0 11.2 5.4 33.9 6.5 2.3 1.2 8.3 20.7 22.5 24.566000 Tons

3 67/33 2 3 2 ~7000

Source: Company, Sushil Finance # Gross Margin = Net Sales less Raw Materials Cost (incl. Traded Goods)

From the above table, we can conclude that the performance of SPL in the last 5 years has been decent vis‐à‐vis its peers.

SPL has grown at a decent CAGR in the last five years on top‐line vis‐à‐vis peers. But lower margins and higher D/E lead to lesser bottom‐line growth.However, despite of lower scale of business, margins are expected to improve going ahead as the company has already started focusing on marginexpansion by rationalizing dealer discounts and product mix .

Its return ratios are also on par to its peers except Asian paints.

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SPL has lesser market share mainly due to single plant (Nashik) catering both West & South markets (60% of industry’s sales). But upcoming Chennai plantwill help in addressing this concern.

We believe that the current management focus on cost and operational efficiencies may help in improving working capital (excl. cash) efficiencies.

January 06, 2014


Peer Comparison (as per FY13 Financials)

CompanyEV/Sales

EV/EBITDA

MCAP/Sales

Price/Earnings

Price/Book

Asian Paints 4.0 26.8 4.0 43.0 13.9

SPL’s Discount (%) to its peers (as per FY13 Financials)

CompanyEV/Sales

EV/EBITDA

MCAP/Sales

Price/Earnings

Price/Book

Asian Paints 87.5 76.1 92.3 69.5 83.4

Berger Paints 2.4 21.9 2.3 35.8 8.2

Kansai Nerolac 2.0 18.3 2.0 29.8 4.8

Akzo Nobel 1.8 21.5 1.9 30.1 3.7

Shalimar Paints (SPL) 0.5 6.4 0.3 13.1 2.3

Berger Paints 79.1 70.7 86.4 63.4 71.8

Kansai Nerolac 75.1 65.0 84.4 56.0 51.8

Akzo Nobel 72.6 70.3 83.3 56.5 38.5

Average 78.6 70.5 86.6 61.4 61.4

SPL is currently trading at par to its total value of Tangible Fixed Assets plus Net current assets (as on FY13) and at a significant average discount of 61.4%on trailing PE basis to its peers.

If we take into consideration the value of intangible assets of the company which is in the form of multi‐year financial as well as many years of investment


( )

If we take into consideration the value of intangible assets of the company which is in the form of multi year financial as well as many years of investmentin setting up of distribution network, branding, client‐relationships, etc., then we feel that the current market price offers value to the investors.

We feel that the company’s current discount of 86.6% to its peers on trailing Mcap/Sales basis is too high which should come down to atleast 78.5% i.e.SPL should trade at 0.5x its FY13 Sales. Currently, the market is valuing SPL at 0.5x its FY13 decorative sales (2/3rd of its FY13 overall sales) and not valuingits industrial sales.

We feel that any investors who can hold the stock for 12‐18 months, it is worth buying this 5th largest paints player in India at the current market price.There is also possibility that the market may rerate the company going ahead if the Chennai plant starts contributing to the volume growth in a significantway and the new management starts delivering consistent financial performance.

10January 06, 2014


RISKSAny further slowdown in economic growth may hamper its growth as the volume growth of paints industry in India is being consistent with the GDP growthover the years (~1.5‐2.0x of real GDP Growth).

Any further delay in investments (public as well as private) will impact the demand for Industrial coatings which in turn will impact SPL’s growth.

Petroleum based raw material and crude oil is the backbone of the paints business Excessive volatility in the raw material prices and exchange rate mayhave an impact on its operating margins (9% of its raw material requirements was imported directly by SPL in FY13).

Cash generation by SPL may be impacted due to further increase in net working capital (excl. cash) as percentage of sales. Over the last three years (FY10‐FY13), SPL’s operating cash flows was impacted due to increase in net working capital (excl. cash) as percentage of sales from 15.1% in FY10 to 20.% in FY13.Increase in working capital was largely due to higher inventory as percentage of sales which increased from 17.2% in FY10 to 25% in FY13.

11January 06, 2014


OUTLOOK AND VALUATIONSPL is likely to grow at a CAGR of 10.3% on a conservative basis during FY14E‐FY16E on the back of rising paints demand, targetingtier II and III cities, expansion of distribution network, introduction of new products, penetration of newer geographies, focus onvalue added products, inventory management and capacity addition. It is currently trading at 8.1x its FY16E EPS of Rs.11.2. Webelieve that SPL will be able to maintain its H1FY14 EBITDA margin of 8.5% going ahead on account of stable rupee, improvingg g g p p gproduct mix, two price hikes and reduction in dealers discounts in H1FY14. Its revenue has grown at a CAGR of 12.9% in the last fouryears to Rs.5,301.8 mn in FY13. Considering the past performance & future growth potential, sufficient installed capacity and nomajor capex going ahead, we recommend ‘BUY’ for the stock with a price target of Rs.124 (11x its FY16E EPS). We feel that it is avalue buy as it is trading at a significant discount to all its peers. There is upside risk to our estimates if the new management becomesuccessful in achieving higher utilization for the South plant and thereby able to achieve aggressive sales growth from the West andS h I diSouth India.

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PE Band – 5 Years and 3 Years Average of 1‐Year Forward PE is: 11.1 & 12.7 respectively.

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PROFIT & LOSS STATEMENT (Rs.mn) BALANCE SHEET STATEMENT (Rs.mn)

Y/E Mar. FY13 FY14E FY15E FY16E

Net Sales 5,302 5,344 5,892 6,496

As on 31st Mar. FY13 FY14E FY15E FY16E

Share Capital 38 38 38 38

R & S l 712 831 975 1154Raw material Consumption 3,540 3,676 4,051 4,464

Staff Cost 287 390 424 468

Other Expenses 1,094 824 909 1,003

Reserves & Surplus 712 831 975 1154

Net Worth 750 868 1013 1192

Secured Loans 781 912 912 912

Unsecured Loans 100 100 100 100

Total Loan funds 881 1012 1012 1012Total Expenditure 4,921 4,890 5,385 5,935

PBIDT 380 454 507 561

Interest 166 214 214 214

Total Loan funds 881 1012 1012 1012

Deferred Tax 26 29 32 37

Capital Employed 1657 1909 2057 2240

Net Block 319 326 412 460

Cap WIP 79 138 58 3Depreciation 38 43 52 58

Other Income 2 19 12 13

PBT incl OI 178 216 253 303

Cap. WIP 79 138 58 3

Investments 8 8 8 8

Sundry Debtors 1545 1557 1717 1893

Cash & Bank Bal 152 274 313 373

Loans & Advances 132 133 147 162Tax 46 65 76 90

APAT 131 152 177 213

Extraordinary Items 21 ‐ ‐ ‐

Loans & Advances 132 133 147 162

Inventory 1320 1330 1467 1617

Other Curr Assets 113 114 126 139

Curr Liab & Prov 2010 1971 2190 2414

Net Current Assets 1251 1437 1579 1769

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RPAT 110 152 177 213 Total Assets 1657 1909 2057 2240

Source: Company, Sushil Finance Research Estimates

January 06, 2014


CASH FLOW STATEMENT (Rs.mn) FINANCIAL RATIO STATEMENT


Profit After tax 110 152 177 213


Growth (%)Net Sales 9.0 0.8 10.3 10.3

Depreciation & Amortization 38 43 52 58

Chg. in Working Capital (217) (63) (103) (130)

Chg. in Deferred Tax Liability (2) 3 4 4

Cash Flow from Operating (71) 134 130 145

EBITDA (5.8) 19.3 11.7 10.7 Adjusted Net Profit (9.2) 15.4 17.0 19.8

Profitability (%)

EBIDTA Margin (%) 7.2 8.5 8.6 8.6 Net Profit Margin (%) 2.5 2.8 3.0 3.3

(Incr)/ Decr in Gross PP&E (35) (50) (138) (106)

(Incr)/Decr In Work in Progress

(70) (59) 80 55

ROCE (%) 22.8 24.1 23.5 24.0 ROE (%) 18.9 18.7 18.9 19.3

Per Share Data (Rs.)

EPS (Rs.) 6.9 8.0 9.4 11.2 CEPS (Rs.) 7.7 10.4 12.3 14.5

(Incr)/Decr In Investments (0) ‐ ‐ ‐

Cash Flow from Investing (105) (109) (58) (51)

(Decr)/Incr in Debt 192 131 (0) (0)

BVPS (Rs) 39.6 45.9 53.5 63.0

Valuation

PER (x) 13.1 11.4 9.7 8.1 PEG (x) (9.9) 5.9 5.3 4.6 P/BV (x) 2.3 2.0 1.7 1.4

(Decr)/Incr in Networth 3 ‐ ‐ ‐

Dividend ‐ (33) (33) (33)

Cash Flow from Financing 195 98 (33) (33)

EV/EBITDA (x) 6.4 5.4 4.8 4.2 EV/Net Sales (x) 0.5 0.5 0.4 0.4

Turnover

Debtor Days 106 106 106 106 Creditor Days 132 129 130 130

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Cash at the End of the Year 152 274 313 373

Source: Company, Sushil Finance Research Estimates

Gearing Ratio

D/E 1.2 1.2 1.0 0.8

January 06, 2014


SALESDevang Shah | +91 22 4093 6060/62

ANALYSTBhaveshkumar Jain| +91 22 4093 5098 e a g S a | /

[email protected]|

[email protected]

Stock Review Reports:These are Soft coverage’s on companies where Management access is difficult or Market capitalization is below Rs. 2000 mn. Views and recommendation on such companiesmay not necessarily be based on management meeting but may be based on the publicly available information and/or attending Company AGMs. Hence Stock Reviews maybe just one‐time coverage’s with an occasional Update, wherever possible.

Disclaimer:This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re‐circulated, published in any media, website or otherwise, in anyform or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or publicdissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent.

This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken inpreparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors arerequested to use the information contained herein at their own risk.q

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete descriptionof the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to bereliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to changewithout notice.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, fromtime to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained hereinprior to the publication thereof

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prior to the publication thereof.

The Investment horizon of this report is approximately 1 year. Any calls which lapse the time duration of a year would be auto closed without any furthernotifications/updates. Clients are requested to keep track of the same.

January 06, 2014

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