Вы находитесь на странице: 1из 34

Contents of this Note :

Key Investment Arguments In Favour & Against Shalimar Paints Ltd. Key Investment Arguments In Favour & Against Shalimar Paints Ltd. Key Investment Arguments In Favour & Against Shalimar Paints Ltd. Key Investment Arguments In Favour & Against Shalimar Paints Ltd.
( Shalimar Paints Ltd. - Mcap Rs. 184 cr. with FY14e Revenues of Rs. 594 cr. ) Page 3-5
Why it Deserves to be a Part of One's Core Portfolio Why it Deserves to be a Part of One's Core Portfolio Why it Deserves to be a Part of One's Core Portfolio Why it Deserves to be a Part of One's Core Portfolio
Brief Overview Brief Overview Brief Overview Brief Overview
( ( ( ( India's 5
th
Largest Branded Paint Co. with 111 111 111 111 Years' Existence
History & Most Credible Promoters ) )) )
Change in Management Change in Management Change in Management Change in Management
Most Extensive & Professional in Co.'s 111 Years' Long History Most Extensive & Professional in Co.'s 111 Years' Long History Most Extensive & Professional in Co.'s 111 Years' Long History Most Extensive & Professional in Co.'s 111 Years' Long History
( ( ( ( Key ex- Ingersoll Rand, Blue Dart Express honchos inducted at Topmost Level) )) )
Judicious Capacity Expansions over Last Decade Judicious Capacity Expansions over Last Decade Judicious Capacity Expansions over Last Decade Judicious Capacity Expansions over Last Decade
( ( ( ( Last 10 Years' Debt v/s Capacity Enhancement Record ) )) )
Huge Spare Land at Co.'s Manufacturing Locations Huge Spare Land at Co.'s Manufacturing Locations Huge Spare Land at Co.'s Manufacturing Locations Huge Spare Land at Co.'s Manufacturing Locations
( ( ( ( Land in Possession v/s Land in Use at Each Location ) )) )
South Indian Greenfield Plant - Operational from Q2FY14 South Indian Greenfield Plant - Operational from Q2FY14 South Indian Greenfield Plant - Operational from Q2FY14 South Indian Greenfield Plant - Operational from Q2FY14
( ( ( ( 56 % Capacity Increase Productwise Capacity Breakup at the Plant ) ) ) )
Regionwise Sales Breakup of Industrial & Decorative Paints Regionwise Sales Breakup of Industrial & Decorative Paints Regionwise Sales Breakup of Industrial & Decorative Paints Regionwise Sales Breakup of Industrial & Decorative Paints
( ( ( ( Company v/s Industry ) ) ) )
Regionwise Production Capacity Breakup - Dedicated Industrial & Regionwise Production Capacity Breakup - Dedicated Industrial & Regionwise Production Capacity Breakup - Dedicated Industrial & Regionwise Production Capacity Breakup - Dedicated Industrial &
Decorative Production Decorative Production Decorative Production Decorative Production
( ( ( ( with Sales Region Catered & Annual Revenue Generation Potential
of each Manufacturing Plant ) ) ) )
Page 6-7
Page 8-10
Page 10-11
Page 11-12
Page 12-13
Page 13-14
Page 14-15
Capacity Utilisation Schedule of Greenfield South Indian Plant Capacity Utilisation Schedule of Greenfield South Indian Plant Capacity Utilisation Schedule of Greenfield South Indian Plant Capacity Utilisation Schedule of Greenfield South Indian Plant
( ( ( ( FY14 to FY17 with ~Revenue Contribution each Fiscal ) ) ) )
Replacement Value of Tangible Fixed Assets Replacement Value of Tangible Fixed Assets Replacement Value of Tangible Fixed Assets Replacement Value of Tangible Fixed Assets
( ( ( ( Freehold Land Asset Value + Production Capacities' Value ) ) ) )
Replacement Value v/s Co.'s MCAP & EV Replacement Value v/s Co.'s MCAP & EV Replacement Value v/s Co.'s MCAP & EV Replacement Value v/s Co.'s MCAP & EV
( ( ( ( Pure E.V. considered after including Off-BalanceSheet Debts ) ) ) )
Peer Valuation Co. Trading at 67.8 % Discount An Anomaly Peer Valuation Co. Trading at 67.8 % Discount An Anomaly Peer Valuation Co. Trading at 67.8 % Discount An Anomaly Peer Valuation Co. Trading at 67.8 % Discount An Anomaly
( ( ( ( Asian Paints, Berger Paints, Kansai Nerolac & Akzo Nobel ) ) ) )
Conservative Financial Forecast Conservative Financial Forecast Conservative Financial Forecast Conservative Financial Forecast
( ( ( ( FY14e, FY15e, FY16e alongwith Key Assumptions ) ) ) )
Conclusion Conclusion Conclusion Conclusion
( ( ( ( Rare Undervalued Consumer Discretionary Play Time to Have a Serious
Relook ) )) )
Overview of Company & Industry Overview of Company & Industry Overview of Company & Industry Overview of Company & Industry
( ( ( ( Marketshare of Key Players, Segmentation of Industry & Co.'s Offerings ) )) )
Important Data Points Important Data Points Important Data Points Important Data Points
( ( ( ( Co.'s Past Decade's Financial Performance alongwith
Segmentwise Breakup of Revenues ) ) ) )
Key Monitorables Key Monitorables Key Monitorables Key Monitorables
Page 16-16
Page 16-20
Page 20-21
Page 21-23
Page 23-26
Page 26-27
Page 28-31
Page 31-32
Page 33-34
Key Investment Arguments In Favour of Shalimar Paints Ltd. :
INR 397.37 cr. 397.37 cr. 397.37 cr. 397.37 cr.
being the Value of Tangible Fixed & Net Current Assets of the Company
v/s current MarketCap of the Company at INR 185 cr. 185 cr. 185 cr. 185 cr.
INR 287.58 cr. 287.58 cr. 287.58 cr. 287.58 cr.
being the Value of Tangible Fixed Assets of the Company
v/s current MarketCap of the Company at INR 185 cr. 185 cr. 185 cr. 185 cr.
INR 177.58 cr. 177.58 cr. 177.58 cr. 177.58 cr.
being the Value of Freehold Land Assets of the Company
v/s current MarketCap of the Company at INR 185 cr. 185 cr. 185 cr. 185 cr.
INR 259.37 cr.
being the Liquidation Value ( Orderly ) of the Company as at 31
st
March 2013
v/s current MarketCap of the Company at INR 185 cr. 185 cr. 185 cr. 185 cr.
[ i.e., if the company had to sell-off in entirety, then, this is the value of cash ( 259.37 cr. ) that will be in hands of shareholders of the
company after selling all the assets at current market value and paying off all the debt/liabilities as at 31
st
March 2013 ]
111 Years' Long continuous existence imparts strong Brand Credibility
Huge Spare Freehold Land in Possession of the Company by virtue of its Long Existence with one
spare land parcel ( 1 acre ) at a prime location in Gurgaon (Sector 32)
India's Fifth Largest Branded Paint Company and One of the World's Oldest Organised Paint Company
Credible Promoters in the form of Jhunjhnuwalas ( Ovolo Group, Hong Kong ) & Jindals ( Jindal Stainless, India )
with High Promoter Holding ( 62.36 % ) & nil Pledge
Change in Management with key ex- Ingersoll Rand, Blue Dart honchos inducted at Top Most Level
(CEO, MD, etc.) w.e.f. March'2013
Clear Growth Visibility because of Operationalisation of maiden Paint Manufacturing Plant in South India
(Tamil Nadu)
Minimum 18.49 % CAGR in Revenues visible over next 3 years to take FY16e Revenues to INR 882 cr.
All the current Manufacturing Plants of the company operating at ~ 90 % capacity utilisation since
last few years.
Capacities getting enhanced by 56 % in FY14 Single Largest Addition in Company's History
Post 2HFY14, company to have Manufacturing Presence across India ( East, West, North & South ) which is
likely to kick-in extensive operational efficiencies
Gross Undervaluation v/s All Peers ( Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel ) An Anomaly,
when gets corrected, could lead to substantial Rerating of the company on the bourses
( Trading at average 67.8 % Discount to All Peers )
Trading at :
0.34 0.34 0.34 0.34 x Mcap/Sales TTM,
0.58 0.58 0.58 0.58 x EV/Sales TTM,
8.13 8.13 8.13 8.13 x EV/EBITDA TTM
limiting Downsides Considerably with ample upside triggers already in place
Key Investment Arguments Against Shalimar Paints Ltd. :
External Risks in the form of Slowdown in Indian Industrial Activity as well as slowing Indian Consumer
Discretionary Spends likely to take a toll on both, Industrial Paints as well as Decorative Paints Sales. Recent
severe Rupee Depreciation threatens to put pressure on Paint companies' margins as 35 % of the Raw
Materials are imported. Amidst these gloomy backdrop, Indian Paint Companies are today experiencing one
of the worst phase in last decade.
Greenfield Project Commencement Risk in the form of company's maiden South Indian plant which is
scheduled to get operational in Q2FY14. This is one of the largest greenfield capacity being set-up by the
company in its history which is likely to increase its production capacities by ~56 %. Financial closure for this
project was already achieved in Q3FY13 and construction work started in Q4FY13. Any delay in
commencement of this facility beyond Q3FY14 could put undue pressure on company's finances.
Lumpiness in Quarterly Earnings as Q1FY14 & Q2FY14 could see dismal margin performance because of
initial costs associated with greenfield manufacturing facility coming up in South India. Also, margin
performance in whole FY14 could also remain subdued because of relatively higher finance and depreciation
costs associated with the said South-based facility. However, if the company manages to turn out a stable
EBITDA & PAT margin performance for FY14, then, it could very well be taken positively by the market
participants.
Loss of Marketshare to competitors ; although, is highly unlikely, but still is a remote possibility. So far, since
last decade, company has gradually lost its marketshare from 4.3 % in 2003 to current 3.1 % mainly because
of lack of manufacturing presence in fastest growing paint consuming region 'South India'.
Till date, South & West India is catered by only single manufacturing plant of the company based in West India
which itself is operating at ~ 90 % capacity utilisation since last many years. This results in lower
marketshare for the company in both the regions viz., South & West India.
Notable here is that industry derives 60 % of its revenues from these two regions whereas company derives
only 34 % of its revenues from South & West India mainly because of capacity constraints and lack of
dedicated region-specific manufacturing presence.
Hence, with operationalisation of South Indian manufacturing plant of the company from Q2FY14, its
marketshare in both the regions ( South & West ) is likely to enhance significantly as from Q4FY14 onwards, once
the new plant gets stabilised, South region will get catered to by the dedicated manufacturing plant based
there, whereas, production of West India based plant which is so far getting diverted to address South Indian
market will get freed up to cater to home market thereby making the company stronger in the strongest sales
regions of the industry viz., South & West India.
Relatively Weak Profit Margins . Company operates at one of the lowest EBITDA margins amongst all the
peers. To cite -- average FY13 EBITDA Margins of all the four peers is 11.78 % v/s Company's FY13 EBITDA
Margin of 7.17 % ( margin partially impacted by the fire accident at one of company's plant in Q4FY13 ).
The main reasons for this is company's relatively lower scale of operation, lack of manufacturing presence
across all sales regions of India, particulary South India as also higher contribution from low margin Industrial
Paints segment. With operationalisation of South Indian plant in Q2FY14, majority of these issues should get
addressed, but, it will take atleast two more years for margins to show any significant improvement. However,
the 67.78 % discount at which company is trading at v/s all its peers, more than captures such relatively weak
operational parameters and the discount deserves to narrow down to atleast 50 % even after taking into
consideration all the negative facts.
Why Shalimar Paints Ltd. [ NSE SHALPAINTS ; BSE 509874 ] deserves to be a part of one's core portfolio :
(1) In today's market, it is rare to find high 'Capital Preservation' safety alongwith considerable
scope of 'Capital Appreciation' in a single company and that too at a market value which is lower
than the Replacement Value of company's Tangible Fixed Assets.
Shalimar Paints Ltd. is such a company that deserves a closer look by any prudent fund manager as it
offers all the required elements together i.e.,
a credible & thoroughly Professional Management,
111 Years' Long Continuous Existence with Stable Growth track-record,
High Promoter Shareholding with nil Pledge
Consumer Discretionary Play being the 5
th
Largest Paint Company of India ,
Reasonable Scale of Operation which should approach INR 594 cr. in FY14
and still available at a valuation which can only be termed as
'Gross Undervaluation' mainly because of its undiscovered nature on the bourses and markets not
having discounted the recent developments ongoing within the company which make it the most
compelling relook candidate in its 111 years' long existence history.
(2) Investment Argument for Shalimar Paints Ltd. mainly hinges on five strong pillars viz., :
Recent Senior Level Management changes enacted within the company wherein top-notch
managers who are well recognised in their respective field in India are brought-in at
seniormost level. They include former Ingersoll Rand Vice President, Blue Dart Express' HR
Vice President, etc.
Judicious Capacity Expansions enacted by the company in the past, majorly from internal
accruals as also potential for further augmentation of Capacities at minimal cost because of
the Huge Land Bank at all existing manufacturing facilities ( current capacities sit on only
35 % of the land in possession of the company ).
Operationalisation of maiden manufacturing plant in South India (Chennai) which ensures a
minimum 18.49 % CAGR in revenues over next 3 years with improving EBITDA Margins,
Replacement Cost of only Tangible Fixed Assets (at current Market Value) of the company at INR
287.58 cr. 287.58 cr. 287.58 cr. 287.58 cr. which is considerably higher than company's current marketcap on the
bourses that stands at just INR 184.65 cr. (as on 12
th
July 2013)
Company trading at 67.78 % discount to its peers based on all valuation multiples ( EV/Sales,
EV/EBITDA, P/B, P/E )
(3) Without wasting any further time, let's start straightaway. However, before starting, its necessary to
have a brief overview of the company and its operating industry which we will do it below :
[ For detailed overview of the industry as also company alongwith various important data points like company's last
decade's financial performance, break-up of company's revenues between Decorative & Industrial segments, etc. please
refer page 28-32 of this Research Note. ]
As stated before, Shalimar Paints is one of the Oldest Paint Companies of the World and
first Organised Large-Scale Paint Manufacturing Company of India currently occupying fifth
largest position in India's Organised Paint Industry behind Asian Paints, Berger Paints, Kansai Nerolac
and Akzo Nobel. In particular sub-segments like High Performance Coatings (Industrial Paints),
Shalimar enjoys 3
rd
largest position in India. Company has its wide product offerings across both the
segments of the industry viz., Decorative Paints & Industrial Paints.
As at FY13, Shalimar enjoys an overall 3.1 % marketshare of India's Organised Paint
Industry while in particular sub-segments, especially of Protective Coatings (Industrial Paints), its
marketshare is higher at 9 % just behind Berger & Asian Paints. Similarly, in particular geographical
pockets, like North-East India, Shalimar's marketshare is substantially higher at 10.5 %.
Since last two years, company has become quite aggressive in forging partnerships with
Global Paint majors like Rudolf Hensel ( tie-up done in FY12 ) and Valspar Corporation ( tie-up done in
FY13 ) which depicts company's willingness to remain ahead of its peers in Industrial Paints
segment. On similar lines, over last two years, company has also expanded its geographical presence
and started selling its products in Bangladesh and Nepal.
In India, Company has a strong pan-India sales & distribution network consisting of 3
Regional Distribution Centres, 58 Sales Offices and 6200 dealers. Sales in Decorative segment are
mostly Retail that are made through Dealers while Sales in Industrial Segment are mostly direct
made to end-customer which include OEM, Public & Private sector enterprises.
(4) Company has strong and credible promoters in the form of :
Mr. Girish Jhunjhnuwala an NRI businessman who recently, in December 2012, won one
of Hongkong's highest business honor 'Owner Operator
Award' at 2012 DHL/SCMP Hongkong Business Awards, &
Mr. Ratan Jindal MD & Promoter of Jindal Stainless Ltd., India's Largest
integrated Stainless Steel Manufacturing Company enjoying
50 % marketshare of Indian Stainless Steel Flat market.
Combined promoters' shareholding in the company stands at 62.36 % with each of the promoter
group i.e. Jhunjhnuwala and Jindals holding 31.18 % each.
(5) Now, after having a brief overview above ( for detailed overview & data points refer page 28-32 of this Note ) let's start
with our main contention as to why in company's 111 years long existence history, it is today that it
deserves the most serious relook of any prudent fund manager. The main factor responsible for this
is the recent senior-level management changes enacted by the promoters of the company that
signify will and vision to see the company chart an aggressive growth path in the most professional
way in foreseeable future.
C.E.O. is now changed and a new dynamic CEO & MD is brought-in who has a good past
track-record of spearheading India Growth Strategy for a recognised MNC like Ingersoll
Rand,
Chief People Officer a post non-existent, uptill now in the company -- is now created to
induct the most professional talent in the company which signifies the recognition by the
promoters, of most important asset for any company its employees -- ; and who is
brought-in for this post - one of the most recognised HR managers of India who has
headed HR Dept. of Blue Dart Express in the past and made it amongst India's top 10
Preferred Employers,
Chief Technology Officer again a post non-existent, uptill now in the company is created
to innovate and adopt the best Technology which signifies the recognition by the promoters,
of the most important tool for success of any company the R&D --; and who is brought-in
for this post, one of India's well recognised scientist, a PhD, in the field of Surface Science
& Technology
Chief Financial Officer again a post non-existent, uptill now in the company ( as the
finances were so far handled by GM Finance ) is created to handle in the most efficient way
the finances of the company which signifies the recognition by the promoters, of the most
important goal of any company the profitability --.
It is worthwhile to note here that in 111 years' long history of the company, this is the first
time such a drastic and thoroughly professional senior level management is put up at the helm. Let's
have a look at key persons inducted as also their brief background as well as past accomplishments :
Appointed From Background Accomplishments
Sameer Nagpal
( Managing Director
& CEO )
April 2013 April 2013 April 2013 April 2013
21 Years of work career with 15 years
at Carrier Corporation and 3 years
each at Ingersoll Rand & Zicom.
In his previous stint before Shalimar,
was responsible for formulating entry
and growth strategies for expanding
Was part of Ingersoll's esteemed
global 'Code Standards &
Advocacy' committee and was
the leader of Ingersoll's cross-
functional global team comprising
of members from India, China,
Ingersoll Rand's footprint in India. He
was also responsible for identifying
key vertical markets and driving
Ingersoll Rands growth in them
through customized products and
solutions development.
He Successfully launched Ingersoll's
'Trane' brand of air-conditioners &
security products in India and was
Head of that division from inception
till joining Shalimar.
Europe & US.
Was an active member
of various industry bodies like
ISHRAE (Indian Society of
Heating, Refrigerating and
Air-Conditioning), ASHRAE
(American Society of Heating,
Refrigerating and Air-
Conditioning) and FSAI (Fire and
Security Association of India).
Barttanu Das
( Chief People Officer )
January 2013 January 2013 January 2013 January 2013
23 Years of work career with 6 years
at Blue Dart Express and 16 years at
NTPC.
In his previous stint at Blue Dart
Express he transformed entire HR
function and made the company
achieve India's Top 10 preferred
employer status.
Is regarded as one of the best
HR managers of India and under
his ledership, Blue Dart was
recipient of multiple HR awards.
Is a regular guest speaker at
many distinguished HRD forums
like World HRD Congress, AIMA,
NHRDN, etc.
Dr. B. K. Mishra
( Chief Technology Officer )
March 2013 March 2013 March 2013 March 2013
18 Years of work career with 4 years
each at Dulux, BARC and Clariant and
5 years at India Glycols.
In his previous stint at India Glycols,
was responsible for R&D and Quality
Control.
Was a Scientist in Bhabha Atomic
Research Centre and is well
known in India in the field of
Surface Science & Technology.
Has 30 publications and 8
patents to his credit and has
also co-authored or edited
various chapters in journals and
books.
Deepak Khetan
( Chief Financial Officer )
January 2013 January 2013 January 2013 January 2013
19 Years of work career with 4 years
at Jindal Praxair, 6 years at Xchanging
Group and 3 years at Metecno Group.
In his previous stint at Metecno group,
was Executive Director Finance.
(6) Second and most important thing that deserves our recognition is the judicious capacity expansions
enacted by the company in the past without burdening the balance sheet ( majorly from internal
accruals ) and the fact that company today sits on the potential of augmenting existing capacities with
minimal costs involved as all its capacities today sit on just 35 % of the land currently in possession
of the company.
Company, by virtue of its long existence history, has huge land banks at each of the
existing manufacturing locations which puts it in a sweet spot of potential expansion without
incurring additional cost on land, which is already scarce today and is available at exuberant prices
in the vicinity.
Company has 3 manufacturing plants currently under operation at :
Howrah ( in East India ),
Nashik (in West India), &
Sikandrabad ( in North India )
consistently operating at ~90 % capacity utilisation since last many years. Over last 10
years, company has judiciously enacted gradual increase in capacities at each of the plant because of which the total
capacity now stands increased from 39,200 MT p.a. in 2004 to 63,200 MT p.a. as at March'2013.
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004
Mfg.
Capacity
( in MT p.a. )
63,200 61,000 57,000 54,500 48,000 48,000 43,000 43,000 39,200 39,200
It is worthwhile to note here that all these capacity expansions are done majorly from internal accruals
without burdening the balance sheet. Mentioned below is past 10 Years' Debt on books of the company :
( fig. in ` cr. )
FY13 FY12 FY11 FY10 FY09 FY08 FY07 FY06 FY05 FY04
Debt
88.05 68.83 59.73 54.07 60.4 61.11 59.8 50.48 69.24 59.37
Capacity =
63,200 MT p.a.
Capacity =
39,200 MT p.a.
Scale of
Operation
= 530.18 cr.
Scale of
Operation
= 115.68 cr.
Three things need to be noted from above :
(a) Over last 10 Years, company has raised minimal debt for capacity expansion and majority
of the debt we are seeing is for working capital requirements. Its only in FY13 that company
has raised some debt for setting up a greenfield plant in South India which is likely to get
operational by Q2FY14.
(b) It is a logical thing that with increase in scale of operations, the working capital
requirement of business increases. This is especially true for Industrial Paints segment ( from
which Shalimar derives substantial portion of its revenues ) where customers demand longer
credit period and delivery schedules are tight. Despite this, over last 10 years, wherein
scale of operations of the company has increased by a whooping 358 % from just 115.68
cr. in FY04 to 530.18 cr. in FY13, debt has shown a minimal increase of 48.3 % from 59.37
cr. in FY04 to 88.05 cr. in FY13.
(c) Similarly, over last 10 years, company has increased its production capacity by 61.2 % from
39,200 MT in FY04 to 63,200 MT in FY13 majorly from internal accruals.
(7) Another important thing to note here is that manufacturing plants ( alongwith R&D Labs ) at each of
the three locations mentioned, stand at just 35 % of the land currently in possession of the
company thereby leaving ample scope for future capacity augmentation at each of the plants with
minimal cost involved :
Howrah Nashik Sikandrabad
Land in Possession of the
Company
1,45,000 sq.mtr. 49,800 sq.mtr. 41,242 sq.mtr.
Land Currently in Use by the
Company
40,600 sq.mtr. 22,900 sq.mtr. 16,080 sq.mtr.
% of
Spare Land Available
for
Capacity Augmentation
72 % 54 % 61 %
(8) Third and most important thing which provides ample future growth visibility for the company is
setting up of a greenfield paint manufacturing plant at Chinnapuliyur Village, Gummidipoondi in
Tamilnadu which is expected to begin commercial run from Q2FY14. This is company's first
manufacturing facility in South India and will enable it to have presence across India with its other 3
manufacturing facilities being already operational in East, West and North India respectively. Let's
first have a look at the manufacturing capacities of various products in this plant before discussing
any further :
Product Capacity
Industrial Paints 1200 KL per month
Solvent Based Decorative Paints 950 KL per month
Water Based Emulsion Paints 550 KL per month
Distemper Paint 300 KL per month
Total 3000 KL per month
Four things need to be noted here :
(a) This will be the single largest capacity addition in the history of the company
over last two decades as even in 2003, when Sikandrabad plant was acquired by the
company, the capacity addition was only to the tune of 20 % whereas with the
operationalisation of this greenfield plant, the company's production capacity will get
enhanced by ~56 %.
(b) At peak capacity utilisation, which is expected to be reached within 3 years of operation, the
plant can generate revenues of ~335 cr. which will ensure sustained revenue growth
momentum for the company for next 3 years.
(c) The plant will enable the company to cater to fastest growing Paints Market viz., 'South' in
more efficient way and free-up the capacities of Nashik Plant to cater exclusively to
Western market. Till now, Southern market is served from Nashik plant by the company.
(d) This will enable significant savings in transportation costs which will enable EBITDA margin
improvement from FY15 onwards.
(9) To understand importance of setting up of this manufacturing presence in South India better, let's
have an overview of regionwise sales-breakup of Industrial Paints segment as well as Decorative
Paints segment of the company and pitch it against the regionwise sales-breakup of the industry.
Also, post that, we will study the production capacity of each of the company's manufacturing plant
regionwise as also the breakup of dedicated industrial paints production in each plant to assess
correctly the implications of operationalisation of South region manufacturing plant on financials of
the company :
25%
27%
32%
16%
Industrial Paints Industry
( India )
North
South
East
West
24%
29%
30%
17%
Shalimar Paints Ltd.
North
South
East
West
Regionwise Distribution of
Industrial Paints Sales of
Industry v/s Shalimar
( Industrial Paints Sales )
Regionwise Production Capacity at each Manufacturing Plant of the company and break-up of
Industrial Paints & Decorative Paints Production in each plant :
East Region
(Howrah)
West Region
(Nashik)
North Region
(Sikandrabad)
Annual Production Capacity 21,200 MT 23,000 MT 19,000 MT
~Minimum Annual Revenue
Generation Potential at Peak Capacity
210 cr. 225 cr. 185 cr.
~Production - Decorative Paints
(FY13)
70 % 60 % 90 %
~Production Industrial Paints
(FY13)
30 % 40 % 10 %
Sales Region Catered
Mostly East India West & South India Mostly North India
35%
20%
14%
31%
Shalimar Paints Ltd.
North
South
East
West
27%
29%
31%
13%
Decorative Paints Industry
( India )
North
South
East
West
South & West Market for Decorative
Paints getting addressed
by only Single Plant in West at Nashik
resulting in lower marketshare
( Decorative Paints Sales )
Regionwise Distribution of
Decorative Paints Sales of
Industry v/s Shalimar
Six Things need to be noted from above :
(a) As can be seen from the regionwise sales breakup of Industrial paints of the company, it very
well matches up with the industry trend. This is because, company has focussed heavily on
Industrial Paints segment over last many years and so diverted the limited capacities
available towards serving Industrial customers as they are being directly catered to by
the company and often result into long term association.
(b) However, if one observes regionwise sales break-up of Decorative Paints of the company, it
is in sharp contrast to the industry trend wherein :
industry derives majority of its sales from Western & Southern Region
( 60 % ) ( 60 % ) ( 60 % ) ( 60 % )
whereas
company derives majority of its revenues from Northern & Eastern Region
( 66 % ) ( 66 % ) ( 66 % ) ( 66 % ).
This is because :
Company serves Western & Southern market from its Single Plant based at Nashik in West India
which results in lower sales in both the regions ( as capacities are limited in Nashik Plant )
Company dedicates only 60 % of the available capacities at Nashik Plant towards production of
Decorative Paints while dedicating remaining capacities to serve rising Industrial Paints demand in both the regions
(West & South) as it can't afford to loose Industrial customers which are long term sticky customers offering a good
stability to revenues of the company.
(c) This deviation from normal industry trend puts the company in a sweet spot as it is already
strong in otherwise perceived to be weak regions of East & North India and Southern
region is proving to be the fastest growing region for most of the organised players since last
few years ;
so, with the dedicated manufacturing facility in South India from 2HFY14, company will be
able to cater exclusively to rising demand there in a more effective way with the Western
plant capacity getting diverted to serve the home market thereby making the company
stronger in the strongest sales regions of the industry viz., South & West.
(d) Decorative Paints is traditionally a low-volume-high-margin business, so, with the expected
~210 cr. p.a. revenue potential from Decorative Paints capacity of Southern plant and
freeing up of ~90 cr. Decorative Paints revenue potential of Western Plant capacity which
is otherwise diverted to serve Southern Market, the company will experience significant
growth in Revenues over next 3 years coupled with improvement in EBITDA margins.
(e) Southern plant will have 40 % capacity dedicated to Industrial Paints, so, it will have similar
production ratio as Nashik plant at 60:40 between Decorative & Industrial, and, with the
said 40 % dedicated capacity, Shalimar will emerge as a stronger player in Industrial segment
too which will enable it to maintain current sales ratio of 67:33 between Decorative &
Industrial.
Conservative Capacity Utilisation schedule for Southern Plant of the company can be arrived as :
Fiscal Year Capacity
Utilisation
~Revenue
Contribution
South India Plant (Tamilnadu)
Location - Chinnapuliyur Village, Gummidipoondi Village, District - Tiruvallur
Production Capacity = 36,000 MT p.a.
Dedicated Decorative Paints Capacity = 60 %
Dedicated Industrial Paints Capacity = 40 %
~Minimum Annual Revenue Generating Potential at Peak Capacity = ` 335 cr.
FY14 12 %
` 38 cr.
FY15 35 %
` 115 cr.
FY16 65 %
` 210 cr.
FY17 90 %
` 290 cr.
(10) Fourth and most important thing which no prudent fund manager can ignore with respect to
Shalimar Paints Ltd. is the Replacement Value of Tangible Fixed Assets in possession of the company.
When we invest in a company, we are actually investing into its business. Hence, it is most proper for
us to look for any investment as if we are the suitor or acquirer of that business and assess as to
what value we can extract from such acquisition. Such an approach enables us to arrive at correct
valuations for any company and also limits our downsides considerably as we are knowing the value
of the hard assets in possession of the company and therefore if the company had to sell-off in
entirety tomorrow, this is the minimum value we will get.
While calculating the Minimum Replacement Value of Tangible Fixed Assets of Shalimar Paints Ltd.,
we have made two considerations :
First, we have calculated the bare minimum value of Freehold Land Assets in possession of the company by
considering the lowest 5 Years' average price per square meter at each of the exact location where company's
respective land asset is located. Alongside, we have also stated the current market value of respective land
asset by considering the price per square meter at respective location as at 25
th
June 2013.
Second, we have considered the Minimum Cost that is required to be incurred for setting up the said
quantum and nature of production capacities that company has as on date plus that is likely to be
commissioned in Q2FY14.
Calculation Starts
from Next Page
Location Freehold Area in
Possession of the
Company
Last 5 Years' Average
Rate Per Square Meter
of the Location
Bare Minimum Value
of Land in Possession
of the Company
[ Area x 5 Yrs. Avg.
Rate ]
~Current Market Rate
Per Square Meter of
the Location as at
25
th
June 2013
Market Value of
Land in Possession
of the Company as
at 25
th
June 2013
[ Area x Current Market Rate ]
West Bengal
[ Goaberia, PO. Danesh
Shaikh Lane, Howrah,
West Bengal ]
1,45,000 sq.mtr. 1,45,000 sq.mtr. 1,45,000 sq.mtr. 1,45,000 sq.mtr. ` 5920 per sq.mtr. ` 85.84 cr.
` 7480 per sq.mtr.
` 108.46 cr.
Maharashtra
[ Gonde Dumala,
Igatpuri, Nashik,
Maharashtra ]
49,800 sq.mtr. 49,800 sq.mtr. 49,800 sq.mtr. 49,800 sq.mtr. ` 3210 per sq.mtr. ` 15.98 cr.
` 4840 per sq.mtr.
` 24.12 cr.
Uttar Pradesh
[ Sikandrabad Industrial
Area, Sikandrabad,
Dist. Bulandsahar,
Uttar Pradesh ]
41,242 sq.mtr. 41,242 sq.mtr. 41,242 sq.mtr. 41,242 sq.mtr. ` 2780 per sq.mtr. ` 11.46 cr.
` 3830 per sq.mtr.
` 15.81 cr.
Tamil Nadu
[ Chinnapuliyur Village,
Gummidipoondi,
District Tiruvallur,
Tamil Nadu ]
32,800 sq.mtr. 32,800 sq.mtr. 32,800 sq.mtr. 32,800 sq.mtr.
At Book Value (i.e.
Purchase Price) since
Land purchased by the
company in 2009
` 2.02 cr.
` 730 per sq.mtr.
` 2.39 cr.
Gurgaon
[ Plot No. 75, Sector 32,
Gurgaon ]
4050 sq.mtr. 4050 sq.mtr. 4050 sq.mtr. 4050 sq.mtr. ` 36,900 per
sq.mtr.
` 14.94 cr.
` 66,170 per
sq.mtr.
` 26.80 cr.
Total
` 130.24 cr. ` 177.58 cr.
Bare Minimum Value
of Land in Possession
of the Company
Market Value of Land
in Possession of the
Company as at
25
th
June 2013
Manufacturing Plant Location Production Capacity at the Plant Minimum Cost Required to be Incurred for
Building Respective Capacities
West Bengal
[ Goaberia, P.O. Danesh Shaikh Lane, Howrah,
West Bengal ]
21,200 MT p.a.
` ` ` ` 23 cr.
Maharashtra
[ Gonde Dumala, Igatpuri, Nashik, Maharashtra ]
23,000 MT p.a.
` ` ` ` 26 cr.
Uttar Pradesh
[ Sikandrabad Industrial Area, Sikandrabad,
Dist. Bulandsahar, Uttar Pradesh ]
19,000 MT p.a.
` ` ` ` 19 cr.
Tamil Nadu
[ Chinnapuliyur Village, Gummidipoondi,
District Tiruvallur, Tamil Nadu ]
36,000 MT p.a.
` ` ` ` 42 cr.
Total
` 110 cr.
Bare Minimum
Replacement Value
of Company's Tangible Fixed Assets
= 240.24 cr.
Replacement Value
at Current Market Rate
of Company's Tangible Fixed Assets
= 287.58 cr.
Bare Minimum Value of
Land in Possession of the
Company
Minimum Cost Required for
Setting Up the Production
Capacities
130.24 cr. 130.24 cr. 130.24 cr. 130.24 cr. 110 cr. 110 cr. 110 cr. 110 cr.
Market Value of Land in
Possession of the Company
Minimum Cost Required for
Setting Up the Production
Capacities
177.58 cr. 177.58 cr. 177.58 cr. 177.58 cr. 110 cr. 110 cr. 110 cr. 110 cr.
Minimum Cost
Required for Setting
Up the Production
Capacities
+ +
Eight things need to be noted from above :
(a) Company is in possession of large :
~36 acres ( 145 thousand sq.mtr. to be precise ) land at Howrah since 1902,
~12 acres ( 49.8 thousand sq.mtr. to be precise ) land at Nashik since 1992,
~10 acres ( 41.24 thousand sq.mtr. to be precise ) land at Sikandrabad since 2003,
~8 acres land near Chennai (Gummidipoondi) since 2009.
All these locations are used to set-up manufacturing facilities & R&D Labs (Nashik & Howrah) of the company.
(b) In addition, company has in its possession, at a prime location in Gurgaon (Sector 32), a
~1 acre plot ( 4050 sq.mtr. to be precise ) which is a freehold plot allotted to the company in
2008-09 by Haryana Urban Development Authority (HUDA). This plot sits in the books of
company's 100 % owned subsidiary Shalimar Adhunik Nirman Ltd'.
The location of this plot (Sector 32) is today one of the most sought after property locations
of Gurgaon and we have only considered in our calculations, the basic land value and not its
development potential. In case the company decides to develop this plot in future, it could
easily fetch the company minimum 55 cr. based on current market trends in the vicinity.
(c) The revaluation of Fixed Assets was done the last time in the year 1995 by the company
when only Howrah and Nashik lands were under company's possession.
(d) We have not included the Value of Raw Materials, Finished Goods, etc. which are part
of Inventories of the company ; average value of which at any given date is always greater
than 60 cr. ( at lower of cost or net realisable value ).
To draw a comparison, Consortium of Banks which have granted the company Credit
Facilities as at FY12, as part of their hypothecation agreement, have valued entire stock of
raw materials, finished goods, stocks in process, consumable stores and spare parts, bills
receivable and book debts and all other moveables of the Companys factories, premises
and godowns situated at Howrah, Nashik and Sikandrabad (U.P.) and various places located
throughout the country at 247.76 cr. 247.76 cr. 247.76 cr. 247.76 cr.. This valuation does not include the valuations of
Freehold Land at each of the manufacturing location as also the Plant & Machineries at all
the manufacturing locations.
(e) For conservative assessment, we have also not included here the Replacement Value of
Intangible Assets of the company, especially the 111 year old brand 'Shalimar', the
extensive pan-India Sales & Distribution Network, R&D potential, etc.. Just to make a note, a
brand with an existing strong ground network which has the potential to generate average
715 cr. revenue over next 3 years is seldom valued below three digits.
(f) For arriving at 'Last 5 Years' Average Rate Per Sq. Mtr.' in our calculation, we have relied on
the past 5 years deal records provided by the respective professional real estate consultant
dealing in respective area. We have picked the lowest rate deal done each year and then
arrived at average calculation.
(g) In case of Tamil Nadu ( Chinnapuliyur Village ) where the company purchased the land only in
2009, we, as a prudent conservative policy, have decided to consider the company's
purchase price as 'Last 5 Years' Average Rate Per Sq. Mtr.' and have ignored the
appreciation in land value over last four years.
(h) For the current market rate per sq.mtr., we have picked the rate of last best deal done on or
before 25
th
June 2013 in the location concerned. Except Tamil Nadu ( Chinnapuliyur Village )
where last deal data was available only of five months before, we were able to garner the
most up-to-date data till date.
(i) For calculation of 'Minimum Cost' required for building production capacities already
existent with the company, we have considered the bare minimum cost that any entity
would need to incur to set-up such large paint manufacturing capacities.
Now, since we have already arrived at minimum Replacement Value as also Replacement Value at
current market rate, it is the right time to pitch those values against current Market Capitalisation commanded by the
company on the bourses as also its current as well as expected Enterprise Value :
( fig. In ` cr. )
FY13 FY14e FY15e FY16e
Market Capitalisation
( as at 12
th
July 2013 )
184.65 184.65 184.65 184.65
Enterprise Value
( considering the debt as on books )
257.59 292.59 307.59 317.59
Pure Enterprise Value
( considering the debt as on books + off-balance sheet
debts )
309.65 344.65 359.65 369.65
Minimum Replacement Value of Tangible
Fixed Assets
240.24 240.24 240.24 240.24
Replacement Value of Tangible Fixed Assets
at Current Market Rate
287.58 287.58 287.58 287.58
Six Things needs to be noted from above :
(a) Market Capitalisation is counted based on the Market Price of the company's share as at 12
th
July 2013 ( INR 97.6 ).
(b) We have considered in our calculation, two 'Enterprise Values' one which is widely
considered across financial community by including only debt standing on books (balance
sheet) of the company.
(c) Second EV which is termed as 'Pure Enterprise Value' -- in addition to including debt on
books, also takes into consideration debt which is standing out of the books ( off-balance-sheet
debt ) of the company like LCs, guarantees, etc.. This 'Pure EV' is more the true reflection of
the enterprise value of the company rather than only 'EV' as we can't arrive at the real
valuation of any company in isolation of its off-balance-sheet debts.
(d) Current FY13 'Pure EV' of 309.65 cr. implies that at current market price (CMP), after
deducting minimum Replacement Value of Tangible Fixed Assets of the company, we are
paying only 69.41 cr. which is compelling considering the fact that only inventories, debtors
and other current assets on the books of the company are worth more than 150 cr..
Here, 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 manyears of investment in setting up of large
distribution platform, branding, client-relationships, etc., then it effectively means that CMP
offers tremendous value-extracting opportunity for any acquirer.
(e) We have assumed a net debt addition of 35 cr. in FY14, 15 cr. in FY15 and 10 cr. in FY16
because of which, with MCAP remaining constant, 'Pure EV' of the company increases
proportionately for FY14e, FY15e and FY16e.
(f) Even at FY16e 'Pure EV' of 369.65 cr., we are currently paying just 129.41 cr. for Current
Assets and Intangible Assets in possession of the company which signifies gross
undervaluation for a company of FY 16 e scale operation of 882 882 882 882 cr.
(11) Another aspect, apart from 'Tangible Fixed Assets Replacement Value' theory ( discussed above )
which suggests gross undervaluation of Shalimar Paints Ltd., is its relative undervaluation vis-a-vis
its peers.
As stated before, Shalimar Paints Ltd. is the fifth largest paint company of India behind Asian Paints,
Berger Paints, Kansai Nerolac & Akzo Nobel. Fortunately, all of the top 5 paint companies of India are
publicly traded entities and therefore we are able to chart a detailed 'Peer Valuation Matrix' by taking
into consideration varied valuation multiples like 'EV/Sales. EV/EBITDA, MCAP/Sales, Price/Book and
Price/Earnings. Before discussing any further, let's first have a look at valuation multiples commanded
by all the listed paint companies of India including Shalimar Paints :
As at 12
th
July 2013
EV/Sales
( FY13 )
EV/EBITDA
( FY13 )
Mcap/Sales
( FY13 )
Price/Earnings
( FY13 )
Price/Book
( FY13 )
Asian Paints
( CMP = 4824 )
4.17 26.43 4.21 41.54 13.67
Berger Paints
( CMP = 235 )
2.53 22.83 2.43 37.32 8.57
Kansai Nerolac
( CMP = 1164 )
2.19 18.61 2.18 29.01 4.89
Akzo Nobel
( CMP = 1105 )
2.33 27.58 2.36 24.73 4.86
Shalimar Paints
( CMP = 97.60 )
0.58 0.58 0.58 0.58
[ Off-BalnceSheet Debts
Included ]
8.13 8.13 8.13 8.13
[ Off-BalnceSheet Debts
Included ]
0.34 0.34 0.34 0.34 16.76 16.76 16.76 16.76 2.56 2.56 2.56 2.56
It will be interesting to note here the discount at which Shalimar is trading at vis-a-vis each of its peer :
Shalimar Paints' EV/Sales EV/EBITDA Mcap/Sales P/E P/B
Discount to Asian Paints 86.09 % 69.23 % 91.92 % 59.65 % 81.27 %
Discount to Berger Paints 77.08 % 64.38 % 86.01 % 55.09 % 70.12 %
Discount to Kansai Nerolac 73.51 % 56.31 % 84.40 % 42.22 % 47.64 %
Discount to Akzo Nobel 75.10 % 70.52 % 85.59 % 32.23 % 47.32 %
Shalimar Paints' EV/Sales EV/EBITDA Mcap/Sales P/E P/B
Average Discount to all
its Peers
77.94 % 65.11 % 86.98 % 47.29 % 61.58 %
Discount to Lowest
Commanded Multiple of
any Peer
73.51 % 56.31 % 84.40 % 32.23 % 47.32 %
Four things need to be noted from above :
(a) While Calculating EV/Sales & EV/EBITDA of Shalimar Paints Ltd., we have considered 'Pure
EV' which includes off-balance-sheet debts whereas in case of all of its peers no such
consideration of off-balance-sheet debts is made.
Therefore, EV/Sales & EV/EBITDA of Shalimar Paints Ltd. is actually inflated relative to
peers. Had we considered normal 'EV' of Shalimar as we have done so in case of all other
peers, its EV/Sales would have been 0.48 and EV/EBITDA would have been 6.76 which
further widens the deep discount at which Shalimar is trading at v/s its peers.
(b) True and Fair comparison can only be made by the multiples EV/Sales, EV/EBITDA and
Price-to-Book (P/B) as P/E multiple incorporates substantial portion of 'Other Income' that
all Shalimar's peers have.
(c) Also, Mcap/Sales will give false picture of Shalimar's substantial discount as almost all of the
peers except Berger are cash-rich and almost debt-free and therefore it will be improper to
look at the valuations of Shalimar by excluding its debt component ( on- & off- BS ) which gets
very well captured by its Pure Enterprise Value (Pure EV).
(d) FY13 saw a major fire accident being suffered by Shalimar which impacted its profitability.
(12) So far we have touched upon almost all the aspects which are necessary to evaluate Shalimar Paints
Ltd.. However, one aspect is still missing, and that is a conservative forecast of future financials
without which our evaluation can't be said complete as it is this forecast that will enable us to
gauge the relative undervaluation of the company at the present stage and its potential to become a
'true wealth creator' in future. Let's first enumerate FY14e, FY15e & FY16e financials below and then
enlist the assumptions based on which the numbers are arrived at :
( fig. In ` cr. )
FY14e FY15e FY16e
Net Revenue 594 716 882
EBITDA 43.1 53.7 71.4
PAT 13.2 19.2 30.6
EPS ( in ` ) 6.98 10.15 16.19
We have taken the most conservative approach in forecasting the financials ; considering the
fact that we are facing one of the worst slowdown in industrial activity which could hamper Industrial Paints Sales
growth as also we are in the midst of visible slowdown in consumer discretionary spending which could again limit the
growth in Decorative Paints Sales.
Key Assumptions FY14e FY15e FY16e
YoY Growth in Existing Operations
( minus contribution from new South India Plant )
5 % 8 % 12 %
Utilisation Assumed from new South India Plant
12 % 35 % 65 %
Debt
( including off-balancesheet debt )
173 cr. 188 cr. 198 cr.
Depreciation Costs Considered
5.1 cr.
( 32.81 % YoY increase
over FY13 )
6 cr.
( 9.1 % YoY increase over
FY14 )
6.8 cr.
( 13.3 % YoY increase over
FY15 )
Interest Cost Considered
19.2 cr.
( 15.8 % YoY increase over
FY13 )
20.3 cr.
( 5.72 % YoY increase over
FY14 )
20.8 cr.
( 2.46 % YoY increase over
FY15 )
Tax rate Assumed
30 % 30 % 30 %
To explain in detail :
In current gloomy economy backdrop, for FY14e, we have assumed only 5 % YoY growth from company's
existing operations ( minus new South India Plant ) and only 12 % Utilisation of new plant based in South that
will get commissioned in Q2FY14. Adding both up, it takes us to a moderate 12.03 % YoY revenue growth
for the company in FY14.
With regards to EBITDA margin performance for FY14, we have assumed higher initial costs on account of
commercialisation of South India plant in Q2FY14 as also severe Rupee Depreciation likely to put pressure
on overall EBITDA margins.
Taking all these into consideration, we have assumed only 7.25 % EBITDA margin for FY14, which,
although seems marginally higher than 7.17 % EBITDA margin of FY13, but is considerably lower than
FY12's margin of 7.81 % and -- FY10-FY12 -- 3 Years' Average EBITDA Margin of 7.60 %. FY13's EBITDA
margin had suffered because of the fire accident faced by the Nashik plant in Q4FY13 and therefore is not
strictly comparable.
PAT for FY14 is arrived at after considering higher depreciation costs on account of commercialisation of
South based plant as also higher interest costs as the plant is to be funded in the debt:equity ratio of
1.5:1 ( project cost = ~50 cr. ).
FY15 should see some revival in Industrial activity as also consumer sentiment should also be far better
than current one. But, still, to be on a conservative side, we have assumed only 8 % YoY growth minus
contribution from South India plant and a modest 35 % utilisation of South India plant in the fiscal which
takes us to the company comfortably achieving 20.53 % YoY growth in revenues in FY15.
In case of EBITDA, we have again assumed only partial absorption of costs of South India plant and
therefore factored in only 25 basis points improvement in EBITDA margin for FY15 ( from 7.25 % to 7.50
% ). PAT for FY15 is arrived at after considering higher depreciation costs and higher interest costs ( as debt
taken for financing setting up of new plant is unlikely to be paid back till FY17 ).
FY16 should be a much better year for the company as South India plant will be fully operational,
company's sales network in Southern and Western regions should have been fully enhanced and macro
situation should be much better. Still, for FY16, we have assumed only a 12 % YoY growth in revenues
from existing operations ( minus South India plant ) with Southern plant turning out a utilisation of 65 %
which should take the overall revenue growth of the company for FY16 to 23.18 %
EBITDA for FY16 should be far better as operational efficiencies should fully kick-in by then and therefore
we have assumed a 60 basis points improvement in EBITDA margins for the year ( from 7.50 % to 8.10 % ).
PAT should also be better as interest costs and depreciation costs should stabilise by then and debt
burden should start easing out by then.
It is worthwhile to note here that in the above assumptions, we have considered almost all the
negative aspects whereas any possible positive aspects like higher utilisation of Southern plant, new management
pushing for aggressive sales growth, professional management instilling cost efficiences thereby improving margins,
etc., are totally ignored and we have preferred to remain the most pessimistic possible to enable us to limit
the downsides to our investments considerably.
So, now, let's convert our pessimistic financial assumptions into valuation multiples to check whether
Shalimar Paints is undervalued in real sense or not :
FY14e FY15e FY16e
EV/Sales
0.58 0.50 0.41
EV/EBITDA 7.99 6.69 5.17
MCAP/Sales 0.31 0.25 0.20
Price/Book
2.31 1.98 1.71
Price/Earning
13.98 9.61 6.02
In above,
(a) We have considered 'Pure EV' in EV/Sales & EV/EBITDA calculations and therefore included
all possible off-balance sheet debts,
(b) We have assumed net debt addition of 35 cr. for FY14, 15 cr. for FY15 and 10 cr. for FY16.
(c) We have assumed nil equity dilution till FY16
( Note Compay has not diluted its equity since last two decades ).
Conclusion :
To conclude, an Indian Consumer Discretionary company available at :
53.5 % discount to its Tangible Fixed & Current Assets Replacement Value,
35.8 % discount to its Tangible Fixed Assests Replacement Value,
3.9 % premium to its current Freehold Land Assets Value,
67.8 % valuation discount to all its peers,
0.58 x EV/Sales TTM,
8.13 x EV/EBITDA TTM,
0.34 x Mcap/Sales TTM,
inspite of it having :
India's Fifth Largest Paint Company status,
111 Years' Long Continuous Existence History,
One of the most Credible & Professional Management
Change at the top w.e.f. March'2013,
20 % + p.a. Revenue Growth Visibility over next 3 Years,
Huge Spare Land Bank at each of the Manufacturing
Locations offering potential of significant future capacity
additions at minimal costs and time
is an anomaly which has to correct sooner rather than later.
Markets might prefer to give some time for the new management to deliver as also for the greenfield maiden
South Indian plant to start contributing in any meaningful way ;
but, one thing is crystal clear that, on whiff of first sign
of any of these event materialising, the rerating of this company is bound to be sharp and significant.
This is because, in today's market, where almost all consumer plays are richly vlaued, this is one of the rare
consumer discretionary company with FY14e Scale of Operation of INR 594 cr. and FY16e Scale of Operation of
INR 882 cr. ; is trading at steep discount to even its inherent value i.e. Value of its Fixed & Current
Assets.
Disclaimer : Disclaimer : Disclaimer : Disclaimer :
This Research Note should only be taken as a direction for further research and should, in no way, be
construed as an advice to Buy/Sell concerned Company. While preparing this note, we have used all publicly
available information as also information from other sources which are thought of as most reliable. However,
although we have tried to be as genuine and as accurate as possible in publishing the data(s), still, reader of this note
is advised to cross-check the information and we should not in any way be held liable for any incorrect information.
Its safe to assume that we have the concerned company as part of our portfolio and so the views expressed in this
note should be seen in that backdrop. The reader assumes the entire risk of any use made of this note and we
should, in no way, be held liable for any loss arising out of the contents or action taken by the reader because of this
note. This Research Note should not be interpreted as a recommendation of any kind but is only for the information
purpose.
Overview of the Company & Industry
Shalimar Paints bears the distinction of being one of the Oldest Paint Companies of the World and is currently
the fifth largest Paint company of India.
Indian Paint Industry is today worth INR 275 bn. with ~69 % coming from organised segment and rest coming
from unorganised segment. India has one of the lowest per-capita consumption of paints at just 1.5 kg. ( World
Average = 8 kg. ) because of which Indian Paint Industry is projected to sustain its growth momentum to reach
~460 bn. by 2016. Organised segment is a very concentrated one with top 5 companies cornering ~90 %
marketshare.
52%
16%
15%
6%
3%
8%
Akzo Nobel
Asian
Paints
Kansai
Nerolac
Berger
Paints
Shalimar Paints
Others
Indian Paint Industry can be further subdivided into two segments viz.,
Decorative (Architectural), &
Industrial :
Marketshare of Top 5 Companies
in Indian Paint Industry
Now, after having a brief overview of the industry, let's straightaway understand Shalimar's offerings and
positioning in the industry.
52%
16%
15%
6%
3%
8%
Akzo Nobel
Asian
Paints
Kansai
Nerolac
Berger
Paints
Shalimar Paints
Others
Shalimar Paints
Present in
All the Segments
Shalimar Paints
Present in
All 3 Segments
Shalimar Paints
Present to a
Limited Extent
Shalimar Paints
will Enter in FY14
As can be seen from the first 'Marketshare' section, Shalimar Paints enjoys a 3.1 % marketshare of India's
Organised Paint Segment. It has its presence across both the segments of paint industry viz., Decorative &
Industrial.
In Decorative segment, company has its products across all categories and price-points viz., Economy, Mid-
Range and Premium with larger contribution from Economy & Mid-Range price-points.
In Industrial segment, Company has major presence in non-automotive category with it being the 3
rd
largest
player in High Performance Coatings enjoying an overall 9 % marketshare of India's Protective Coatings
market ( just behind Berger & Asian Paints ).
Important Data Points
Now, after having an overview of company's business, let's have a look at company's financial performance
over last decade as also its segmentwise breakup.
Depicted below is past 10 Years' Sales, EBITDA & PAT performance of Shalimar Paints Ltd. :
( fig. in ` cr. )
FY13* FY12 FY11 FY10 FY09 FY08 FY07 FY06 FY05 FY04
Net Sales
*530.18 486.44 407.16 365.56 330.88 300.13 256.49 217.29 189.91 115.68
EBITDA
*38.05 38 29.77 28.13 19.87 23.83 16.11 10.8 7.91 5.33
PAT
11.02 14.46 11.66 10 3.56 9.58 4.74 3.41 1.98 1.49
*There was a major fire incident on 4
th
January 2013 at company's Nashik plant because of which the plant had to remain out of operation for
around one month which resulted in ~18 cr. loss in revenues for Q4FY13. EBITDA margins for Q4FY13 were also partly impacted because of
this accident.
Mentioned below is the break-up of revenues between Decorative & Industrial Segments of Shalimar Paints
Ltd. for last seven years starting from FY06 till FY12. FY13 breakup data is still awaited :
( fig. in ` cr. )
FY12 FY11 FY10 FY09 FY08 FY07 FY06
Decorative
Paints
319 271 236 221 206 170 152
Industrial
Paints
162 131 124 108 92 78 54
Mentioned below is % contribution of Decorative & Industrial Segments to company's revenues for last seven
years starting from FY06 till FY12. FY13 breakup data is still awaited :
FY12 FY11 FY10 FY09 FY08 FY07 FY06
Decorative
Paints
65.57 % 66.55 % 64.55 % 66.79 % 68.63 % 66.28 % 69.95 %
Industrial
Paints
33.30 % 32.17 % 33.92 % 32.64 % 30.65 % 30.41 % 24.85 %
Key Monitorables :
Company's AR'2013 :
Company's Annual Report'2013 will be key monitorable to check for any future direction, newly appointed
management provides for the company.
Operationalisation of South India Plant :
Company has to commission its greenfield manufacturing facility in South India before the start of 2HFY14.
Capacity Utilisation at the plant for FY14 as also capitalisation of initial expenses associated with it will be key
monitorable aspects.
Branding Initiatives :
So far, the company has focussed only on contractor-pulling as its main penetration tool. On advertising front,
company has focussed majorly on local print/radio advertising and that too on a limited extent. Now, with new
dynamic management at the helm as also maiden South India plant getting operational thereby company having
manufacturing presence across India, branding will be key to success and therefore will be key monitorable aspect.
Gurgaon Project Development :
Company has in its possession a freehold one acre plot at Sector 32, Gurgaon which was acquired with an aim
to develop it in future. Market Value of this plot has aready reached ~26 cr. with its development potential pegged at
minimum ~55 cr.. Whether the new management takes some initiatives to develop this property so as to monetize its
idle Gurgaon land asset will be key monitorable.
New Operational Areas :
Any possible foray within the non-explored sub-segments of Indian Paint Industry as also allied activities will
be key monitorable.
Management of Debt :
Compay's overall debt positioning (on- & off B.S.) will be an ongoing monitorable aspect. FY14 will be very
crucial for this as although South India plant will get operational in this fiscal, its cash generation will start reflecting in
real sense only from FY15. FY14 will also see one of the worst phase as far as business environment is concerned and
so how the company manages its debt in this crucial year will be key monitorable aspect.
EBITDA Margin :
Although EBITDA margins are expected to be under pressure in FY14 because of tough business environment,
initial operationalisation costs of South India plant, severe Rupee Depreciation, company building up talent pool to
transform its HR into thoroughly professional one, etc. ; but, still, how much these factors pressurise EBITDA margins
will be key monitorable.
Raising of Funds via Equity :
So far, since last two decades, company has refrained from diluting its equity and has not raised any major
funds via equity route. Considering the fact that company has tiny equity capital of just INR 3.79 cr., new management
might prefer to raise some resources via equity route for company's aggressive future growth. Such moves, if any, will
be key monitorable.
Disclaimer : Disclaimer : Disclaimer : Disclaimer :
This Research Note should only be taken as a direction for further research and should, in no way, be
construed as an advice to Buy/Sell concerned Company. While preparing this note, we have used all publicly
available information as also information from other sources which are thought of as most reliable. However,
although we have tried to be as genuine and as accurate as possible in publishing the data(s), still, reader of this note
is advised to cross-check the information and we should not in any way be held liable for any incorrect information.
Its safe to assume that we have the concerned company as part of our portfolio and so the views expressed in this
note should be seen in that backdrop. The reader assumes the entire risk of any use made of this note and we
should, in no way, be held liable for any loss arising out of the contents or action taken by the reader because of this
note. This Research Note should not be interpreted as a recommendation of any kind but is only for the information
purpose.

Вам также может понравиться