Multi Baggers

Shalimar Paints Ltd.      CMP - Rs. 169         BSE Code -509874

Shalimar Paints Ltd. (Shalimar) was incorporated by British entrepreneurs under the name Shalimar Paint Colour & Varnish Company in 1902 to takeover the business of 'The Shalimar Works', a company which manufactured paints, colour and varnish from its factory at Shalimar and Goabaria in Bengal. Courtalds Coatings, UK was the holding company and it held majority shareholding through it's subsidiary International Paint Company, UK. It became a private limited company in 1956 and later on in 1961, it was converted into a public limited company. The company acquired its present name in 1963.

Courtalds slowly started disinvesting since 1978 and finally in 1989, it fully disinvested its stake and maintained only its technical and marketing collaboration with the Indian company till 1994. The Courtald's stake was acquired by Girish Jhunjhunwala, a HongKong based NRI (20%) and the Delhi-based O P Jindal group (42%). Thereafter in October 2001, the Jindal Group diluted a part of its equity in favour of Girish Jhunjhunwala group and both the groups currently holds 31.18% each in the company, thereby making the promoters shareholding at around 63 %.

Manufacturing Operations

The company currently has its manufacturing plants located at Howrah (West Bengal), Nasik (Maharashtra) and Sikandrabad (Uttar Pradesh).

Howrah Unit

The Howrah plant was the first large scale paint manufacturing plant to be set up not only in India but in entire South East Asia. It has an installed capacity of 14204 MT per year.

The Company's central Research and Development laboratory is located in the Howrah Plant. This state-of-the-art R&D unit was the first in-house paint R&D unit to be recognized by Dept. of Scientific and Industrial Research, Govt. of India.

Nasik Unit

The Nasik factory was set up in 1992 in western India in Nashik on Mumbai - Agra Highway . It was designed as a state-of-the-art-plant with installed capacity of 16000 MT per year.

Sikandarabad Unit

In 2003 the Company acquired the American Paints unit in Sikandrabad near Delhi, North India. The American Paints plant was set up in technical collaboration with Sherwin Williams of USA . The company acquired the unit spread over an area of 10 acres through an auction sale for a total consideration of around Rs.3.50 crores.

The company is putting up a Greenfield facility at Tamil Nadu at a total cost of Rs.15 crores, is expected to go on stream over the next few months. With this, the company will have one unit each in East, West, North and South India.

Product Portfolio

The company caters primarily to the Decorative & Industrial Segments :-

Decorative Segment

The Company manufactures a wide range of decorative products- both for the exterior and interior segments. It has paint systems for every application - interior or exterior, every surface - concrete, plaster, metal or wood. Shalimar's premium acrylic emulsion is marketed under the Hussain Collection. Its Xtra and Shaktiman brands are for exteriors while for interiors it has Superlac Acrylic emulsion and No.1 Silk emulsion. The company sells enamels under the Superlac Hi-Gloss enamel brand.
The company has also set up colour dispensing stations at its retail outlets under the name Shalimar Color Space - where the customer can choose amongst over 5000 colours & shades for his rooms/ exteriors.

Industrial Segment

The Company has been a pioneer in the Industrial Paint Segment by virtue of its long association with multinational giants like Pinchin Johnson Co. and International Paints PLC of the U.K. coupled with its own R&D strengths. Shalimar Paints has built up considerable expertise in manufacturing and marketing of high performance industrial coatings, Aviation coatings, marine paints and coatings for metal decoration and food can lacquers. The company manufactures specialized coatings for Oil & Gas sector, Refining Petrochemical, Fertilizers, Hydro Power plants, Paper & Pulp, Sugar and Cement sectors.
The company also manufactures specialized coatings for the Marine sector.

Distribution Network

The Company has a wide distribution network. The entire country is divided into 4 zones, each of which is headed by a Regional Business Manager.
The Company has more than 45 branches and depots who service more than 6000 dealers all across the country. With its wide distribution network the Company is able to reach not only the urban market but also the rural and up-country markets.

Financials

The latest financials of the company are given as under :-

QUARTERLY - LATEST RESULTS - Shalimar Paints Ltd  (Curr: Rs in Cr.)
Particulars	Quarter Ended (Sep 06)	Quarter Ended (Sep 05)	Quarter Ended  (% Var)	YTD / Latest Half  (Sep 06)	YTD / Latest Half  (Sep 05)	YTD / Latest Half  (% Var)	Year Ended  (Mar 06)  (12)	Year Ended  (Mar 05)  (12)	Year Ended  (%Var)
Sales	58.58	49.23	19	112.03	99.93	12.1	217.04	189.99	14.2
Other Income	0.56	0.51	9.8	0.99	0.89	11.2	1.7	1.13	50.4
PBIDT	2.82	2.11	33.6	5.05	3.8	32.9	10.67	7.37	44.8
Interest	1.03	0.63	63.5	1.78	1.12	58.9	2.92	1.78	64
PBDT	1.79	1.48	20.9	3.27	2.68	22	7.75	5.59	38.6
Depreciation	0.77	0.71	8.5	1.5	1.34	11.9	2.75	2.53	8.7
PBT	1.02	0.77	32.5	1.77	1.34	32.1	5	3.06	63.4
Tax	0.32	0.18	77.8	0.6	0.4	50	1.59	1.08	47.2
Deferred Tax	0	0	-	0	0	0	0	0	-
PAT	0.7	0.59	18.6	1.17	0.94	24.5	3.41	1.98	72.2

The company has a Equity Capital of Rs.3.79 crores with the promoters holding roughly 63%.

The share price chart is given below :-



(Source : Capitaline)

Comparison with the Peer Group

A comparison of the company with the peer group reveals that the valuation gap between the 3rd & 4th largest player in the sector -namely Berger Paints & ICI India and the 5th largest player - Shalimar Paints is Huge, even though the gap may not be that large in the size of their businesses.

	FY 05-06
	Sales	EPS	Mkt.Cap	PE Ratio	Mkt. Cap
	(Rs.cr.)	(Rs.)	(Rs. cr.)		to Sales
Asian Paints	2441	20	6740	32	2.76
Kansai Nerolac	1061	36.4	2226	22.5	2.09
ICI India	955	13.9	1576	22	1.65
Berger Paints	980	3.3	1530	23	1.57
Shalimar Paints	217	9.3	64	18.5	0.30

Even though the Sales Revenues of Berger Paints & ICI India may be 4 to 5 times of the Sales revenues of Shalimar Paints, the market cap of these companies is roughly 24 times more than Shalimar Paints. We believe that the valuation gap will narrow down.

However, our major concern with Shalimar Paints is its low profit margins compared to the industry. For example - the Operating Profit margin for ICI is around 11% whereas Shalimar does and Operating margin which is less than half of ICI. The primary reason for the low margins is its scale of operations. There is however a realization towards this fact in the company and the company hopes to improve its margins through cost cutting initiatives and through increased scales of operations as its Greenfield facility being put up in Chennai will be operational over the next few months.

Conclusion

Shalimar Paints being a company over 100 years old has been sitting on assets which have been acquired at historical valuations and would have a valuation which would be many times over its market cap. Even the manufacturing facility spread over 10 acres in Sikandarabad in Uttar Pradesh, which the company acquired in 2003 for just Rs.3.50 crores would also be currently worth much more.

The company expects to grow at 20% this year and expects to log higher margins compared to last year. Given the small Equity base of Rs.3.79 crores and a high Turnover to Equity, a small improvement in margins leads to a big increase in its Earnings per share.

Most paint companies have a market cap which is more than its sales revenues as is evident from the table above, ranging from 2.76 for Asian Paints to 1.57 for Berger Paints, Shalimar Paints commands a Market Cap to Sales of just 0.3. We believe that the company is grossly undervalued compared to its peers and carries potential to reduce the huge valuation gap which exists currently.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.