The Paint industry, year on year, is growing at a consistent pace due to increased disposable income in the hands of consumers. Increasing affordability to buy homes has led to a rise in the sales of properties and in turn given rise to high paint sales. In addition to this, the frequency with which renovations are done has also been the major growth driver in paint sales. These factors and growing consumerism have also created buoyancy, which has led to higher demand for paints. Kansai Nerolac; the second largest paint company in the country with a market share of 21%, is one company, which would benefit from the robust economic growth and increasing demand from the user industry.
Business
The paint industry had grown at 15% in the last financial year. Kansai Nerolac has delivered a growth of more than 21%, outperforming the industry benchmark.
On the other hand, the company is a leader in industrial and automotive paints, supplying over 90% of OEM requirements. Maruti Suzuki is the largest customer and accounts for 90% of the revenues from industrial paints. According to Crisil, passenger car sales are expected to grow at a CAGR of 11.9% over FY07-FY10E. The leadership position in the automotive segment would drive the topline of Kansai Nerolac. The company is also a leader in the powder-coated segment. To strengthen its leadership position in the segment, it amalgamated Polycoat powders engaged in the manufacture of powder coatings.
In the case of the decorative segment, the company is continuously increasing its advertising and sales promotion expenditure. The expenditure has increased from Rs 36.45 crore in the FY2005-06 to Rs 38.22 crore in FY2006-07. It is expected to augment further in the current financial year.
It is also constantly bolstering its marketing network, which includes 11,000 dealers in the country. To support the increasing demand, it has expanded the capacity of paints, varnishes, and enamels from 151500 MT in FY2005-06 to 158700 MT in FY2006-07. It has doubled the capacity of thermo setting coating powders from 2400 MT to 4800 MT for the same period. To further augment the capacity, it is setting up a water-based paint facility at Hosur. The total outlay for the project will be Rs 69 crore.
Financials
The company is consistent in its performance year-on-year. However, there is pressure on the operating margins. It has declined from 21.87% in FY2005-06 to 15.18% in FY2006-07. This is due to the increase in the cost of crude oil-based raw material.
But the impact has been minimised on the back of rupee appreciation, as 30% of the raw material is imported. Its June quarter 2008 shows a decline in the operating margins from 15.5% in the corresponding quarter to 14.2%. The net sales had grown by 11.94% from Rs 283.66 crore to Rs 317.53 crore for the same period. The net profit also was up by 12.98 from Rs 28.74 crore to Rs 32.47 crore.
Considering the past growth and a liberal dividend paying company year-on-year, valuation looks pretty decent. The trailing twelve-month fully diluted earning per share is at Rs 40.07. At the current market price the P/E comes to 19.83(x). However, a major concern is the rise in the crude oil prices, which could adversely impact its operating margins.