Monday, May 9, 2011

Shalimar Paints Ltd- Add Colour to your portfolio !

Year of operation: 109th
Shalimar Paints is the 5th largest  paints manufacturing companies in India. It has three manufacturing units and more than 54 branches and depots all across the country. Additionally, the Company has a wide product range in both Architectural and Industrial sectors. The Architectural Coatings cover both Interior and Exterior sectors. Where as the Husain Collection based on the best quality acrylic copolymer based emulsion is the Company's premium acrylic emulsion. The Company also has tinting systems under the brand name "Color Space" where the Company offers more than 9000 shades across all product lines to its customers.

Background history:
The company began its journey in 1902 when two British entrepreneurs AN Turner and AC Wright set up Shalimar Paints Colour & Varnish Ltd on the banks of river Hooghly, located close to the Botanical Gardens in Howrah. In 1928, Pinchin Johnson & Associates of UK bought control from the British entrepreneurs and made it a part of their marine division called the Rod Hand Composition Co and Shalimar was elevated to a multinational status. In 1963, management control of  Shalimar again changed hands to Turner Morisson & Co . This is when the company’s name was changed to Shalimar Paints Ltd.
In 1964, International Paints acquired Rod Hand Composition Co and Shalimar became a part of the behemoth Courtalds Group of US with a 40 per cent holding while another 20 per cent was held by the Mehtas of Jardine Henderson.
In 1972 Shalimar went to the Indian public for the first time and foreign capital was limited to 60 per cent. During 1985-90, Courtaulds equity shares was sold to Mr SS Jhunjhunwala of Hong Kong’s Delta Nominees and OP Jindal of the Jindal Group acquired 20 per cent in Shalimar buying it out from the Mehtas of Jardine Henderson. Currently, the Jindals and Jhunjhunwalas hold about 31.12 % and 31.18% stake respectively in the company.

Current promoters:
1)HongKong based Hind Strategic Investments promoted by Shyam Sunder Jhunjhunwala.The Hind Group is largely into hospitality and owns and manages high end luxury serviced apartments and hotels in HK & Singapore
Hind Group, started its first flag ship serviced apartment building in the heart of central, Ovolo, which currently has grown to over 6 different locations in Hong Kong, making it the largest independent operator in Hong Kong with over 245 designer apartments. Additionally the group owns and operates serviced offices under the brand name Izi, The Hind Group is already in the process to increase its portfolio in key countries such as Japan, Australia and other countries within the region, with projects in the pipeline.

In Addition, The Hind Group has done various different property developments primarily in Singapore with Residences at 338a, and the Domain, in Brisbane Australia. In 2007, Hind Group launched its first luxury hotel with the launch of Naumi, Singapore; garnering numerous accolades from the Singapore Government and making the international Hot Lists. Talks are already in the works to expand Naumi within cities in the region. The Singapore office additionally heads the long-term and listed investments for the family.

The Group also runs two components of the F&B business, with Café O in Hong Kong and Rang Mahal in Singapore.

2) O.P. Jindal group companies controlled by Mr Ratan Jindal

Indian Paint Market- Key Points:

·         Current size : approx Rs.17,000 cr per annum
·         Expected to grow @ 12-15% CAGR and touch Rs.30,000 to 34,000 cr by 2015
·         Per Capita consumption is 1.35 kg as against other emerging markets like Malaysia ( 5kg) and developed markets like USA ( 25 kg)
·         Organized players ( Asian paints, Kansai Nerolac, Berger, Akzo Nobel & Shalimar) have nearly 75% market share
·         Decorative paints account for nearly 70% market while Industrial paints account for 30% market of the total Indian paint market
·         Margins in Industrial paints are higher than Decorative paints
·         Global majors- Nippon Paints, Jotun, Sherwin Williams have the entered Indian market

Shalimar Paints :

Manufacturing Units:
Total Plant area
Capacity ( MT) per annum
Howrah ( near Kolkatta, W.B.):
 35.83 acres
Nashik (Nashik Agra Rd, Maharashatra)
12.35 acres
Sikanadarbad( UP)
10.20 acres
Gumudipoondi , near Chennai (TN) ***( expcted to be operational by April 2012)


Distribution capabilities: 3 Regional Distribution Centres and 55 depots servicing more than 5000 delaers pan India

Paid up equity capital : Rs.3.79 cr
Debt : Rs.60 cr
Current share price :Rs.328
Market Cap: Rs.124 cr
EV: Rs.184 cr
Year ended March 31 2011:
Net sales: Rs.404 cr
Other income: Rs.1.4 cr
Profit before tax: Rs.16.64 cr
Net profit: Rs.11.67 cr
EPS: Rs.30.82
Dividend: Rs.8 per share

Key points :
1)      Plant near Chennai should help more cost and time efficient servicing of South Markets
2)      Current plants utilize only 1/3rd of available land and hence offer siginificant scope for capacity expansion
3)      Strong presence in East & North India
4)      Increased focus on higher margin Industrial paints segment
5)      High level of flexibility in switching between manufacturing of industrial and decorative paints at each of the plants

Expected price catalysts:
1)  Currently both promoter groups have separate key focus areas ( Steel for Jindals & Hospitality for Jhunjhuwalas) . It would make financial & business sense for them to exit at strong valuations and use the funds for their core business.

2)      It is understandable that Shalimar should trade at a discount to its listed peers from the paint industry as most of them have market value & volume shares in excess of 10% besides focussed promoter groups and long history of profit growth .Notwithstanding the same,without getting into complex EV/EBIDTA valuation parameters, a rough back of the envelope calculation will show that at the current EV of  about Rs.184 cr, the company trades at a disproportionately high discount to its peers on most parameters.

3)      It commands approx 2.5% market share in the Indian paints industry and offers an excellent foothold point for a new MNC entrant or for expansion for one of the currently large players.

4)      My sense is that should a ownership change ever happen ( this is more in the nature of wishful thinking and for all one knows, it may never happen), it  should be at an EV of between Rs.400-450 cr, which translates into a price of about  Rs.875 to Rs.1000 per share.

On the flip side,the price of key raw material titanium dioxide, the key raw material have been on the rise putting pressure on margins.Going ahead, if the company is unable to arrest margin shrinkage, profitability could come under pressure.

The stock currently trades at 11 times 2011 EPS.It is an aggressive investment opportunity with a strong probablity of high returns if ownership change does happen.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.


  1. Hi sir,
    Congrats.Since your report published it is rocking.It went up by almost 150 per.Shall we know the trigger for this.

  2. Scripscan:Shalimar Paints Ltd

    Story:If you see the paints sector, there are five major players there. The largest, of course, is Asian Paints ,which does a turnover of close to Rs 6325 crore and commands a marketcap of Rs 27500 crore. Then comes Nerolac Paints, Berger Paints, Akzo nobel india and Shalimar Paints. If you see the valuation of these companies, there is a huge valuation gap between the fourth and the fifth largest player, even though there may not be such huge differences in the size of their business. Berger does a turnover of Rs 1700 crore and has a marketcap of Rs 3500 crore, while Akzo nobel India does a turnover of close to Rs 1000 crore and has got a marketcap of Rs 3000 crore.Shalimar does a turnover of close to Rs 405 crore and has a marketcap of just Rs 130 crore. There is a huge valuation gap between the fourth and the fifth largest player in the sector, which I believe should narrow down.Not many people are aware of the fact that this is a company, which belongs to the Delhi-based Jindal group. This is a 100-year-old company, which was acquired by the Jindals along with an NRI investor in 1989. Since the company is 100 years old, it is sitting on assets, which are valued at historical cost.The replacement value of the assets would be many times more than the marketcap of the stock, which is at the number one position. Secondly, the huge differential in the marketcap, which is there between the fourth and the fifth largest player will narrow down.The main concern in this stock is that this company has got low profit margins compared to the industry.The main reason for the low profit margin is the scale of operations, but the fact is that there has been an increased realization in the company and it is doing everything to increase the profit margins, of course, without sacrificing the market share.As the profit margins increase,the valuation gap is going to narrow down. At the current price of Rs 340, one does not have much to lose in this stock, but if one hopes that the profit margins will improve in the near future, which the management is confident of, then one can see a much higher marketcap for this stock


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