Shalimar Paints Ltd- Add Colour to your portfolio !

Year of operation: 109^th

Shalimar Paints is the 5^th 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:

Location	Total Plant area	Capacity ( MT) per annum
Howrah ( near Kolkatta, W.B.):	35.83 acres	21000
Nashik (Nashik Agra Rd, Maharashatra)	12.35 acres	20000
Sikanadarbad( UP)	10.20 acres	16000
Gumudipoondi , near Chennai (TN) ***( expcted to be operational by April 2012)		18000

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

Financials:

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 1/3^rd 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.