Multi Baggers

Shalimar Paints

Shalimar Paints, India's oldest and fifth largest organised paint manufacturer, has three manufacturing facilities at Howrah, Nasik and Sikandrabad (UP) and more than 54 branches and depots all across India, serving more than 7,000 dealers in urban and rural areas.

The 3 plants have a combined capacity to manufacture 57,000 tpa of paint. Almost 80% of this capability is flexible i.e. can be utilized either to manufacture decorative or industrial paints while only balance 20% capacity is exclusively for decorative paints. Thus, this flexible schedule helps the company to tweet its production schedule to efficiently meet market demand. The revenue split between decorative and industrial segment is 2:1 for the company.

Bragging the credit of painting the iconic Howrah bridge every 8-10 years in Kolkata since the year 1949, approximately 60% of company's sales are geographically spread across East and North India. Company is now of establishing a fourth manufacturing facility at Chennai with capacity of 18,000 tpa.

Its product portfolio include a range of architectural coatings, interior and exterior coatings, can coatings, stoving systems, marine coatings, water-based and high solid industrial paints, wood finishes, solvent borne paints and aviation coatings. It also has tinting systems under brand 'Color Space' installed at various retail outlets, offering over 9,000 shades.

Company's low equity base of just Rs. 3.79 crore is a big positive. With face value of Rs. 2 per share, post sub-division in November 2012, there are 1.89 crore shares outstanding, of which promoters hold 62.36% while insurance companies hold 1.76% as of 31st December 2012. Balance stake is held by Indian public (34.36%) and NRIs (1.52%).

For FY12, company's net sales were at Rs. 484 crore, while EBITDA Rs. 38 crore, resulting in 7.9% EBITDA margin. PAT for the year was Rs. 14.5 crore, with EPS (adjusted for sub-division) being Rs. 7.64 on 1.89 crore shares.

Q3 being a seasonally strong quarter, company has posted excellent financial performance with net sales for Q3FY13 standing at Rs. 144 crore. EBITDA was Rs. 14 crore, while EBITDA margins strengthened to 9.9%. Q3 PAT stood at Rs. 4.7 crore leading to net margin of 3.3%. Thus, third quarter EPS was Rs. 2.49.

For 9mFY13, its sales stood at Rs. 391 crore, while EBITDA Rs. 37 crore, resulting in whopping 9.5% EBITDA margin. PAT for the period was Rs. 10.6 crore, resulting in EPS of Rs. 5.61.

As of 30th September 2012, company's net worth was Rs. 70 crore. Based on yesterday's closing price of Rs. 124, the current market cap stands at Rs. 235 crore. It has debt of Rs. 85 crore, which is mainly cash credit towards working capital.

Estimating EPS of over Rs. 7 for FY13, share is ruling at a PE multiple of just 17 times, based on current year earnings. This is very low in comparison with other larger peers which as ruling much higher, such as Asian Paints 37x), Berger Paints (25x), Kansai Nerolac (30x) and Akzo Nobel (22x).

Even on a EV-to-Sales multiple, share of Shalimar Paints is ruling at EV/Sales of 0.6x vis-a-vis a range of 1.8x to 3.9x for peers. Thus, its valuations are the cheapest.

Paint industry is probably the only industry to have growtn in double digits during the past 2 decades, both in value and volume terms, which leads to healthy revenue visibility for the future.

Promoters (equal holding by Hong Kong based Shyam Sundar Jhunjhunwala Group and JSL Stainless' Ratan Jindal Group) are learnt to be looking for exit from this 110 year old company, which, if materialises, will lead to premium valuations, as there are many potential acquirers of the company (both existing and international entrants).

Share at 125.95 is recommended for buy with a target price of Rs 150 in the next six months.