Goodlass Nerolac Paints: Hold

Recommendation: Hold

A. Srikanth

WITH its renewed focus on the decorative segment, the Goodlass Nerolac stock currently ruling at Rs 129, is poised to improve in valuation in the medium term.

The company posted a better performance in 1999-2000 when its turnover went up by 16.45 per cent to Rs 526.19 crore and its post-tax earnings by 17.50 per cent to Rs 29.98 crore. Margins at both the operational and the net level improved significantly. The company has continued its good performance into the first quarter this fiscal and hopes to do better in subsequent periods too.

Though the entire paints industry did well in 1999-2000, Goodlass Nerolac managed to outperform the industry average. With the commissioning of the new plant at Lote Parshuram at the end of 1998-99, the company has increased its capacity from 57,500 tonnes to 1.01 lakh tonnes. The company's sales volumes rose 17.30 per cent to 61,000 tonnes.

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Having overcome the constraints on capacity, the company has now decided to refocus on decorative paints. Increased concentration in industrial paints and capacity constraints over the last few years has resulted in stagnant market shares in decoratives. The strategy change could help the company counter a possible slowdown in general industrial paints and automotive paints. Even from the long term point of view, the focus on decoratives could help even out demand fluctuations in the industrial segment and consequently stabilise the earnings stream. On the whole, the efforts to reposition itself could reduce the company's overall business risk and consequently improve long term valuations.

Within decoratives, the company proposes to concentrate on interiors, specifically water-based emulsions and distempers, where the demand growth rates are high. The company's efforts to increase its product range in decoratives has been supplemented through the setting up of colour dispensing machines. The company also plans to double its advertisement expenditure in the current fiscal.

With the decorative business facing an increasing rate of commoditisation, volumes have become important. Towards this end, the company has already introduced a number of products at the lower end (especially alternatives to cement paints) to improve volumes.

The offtake from the automotive segment has been sluggish. But the company has been trying to make it up on other segments such as two-wheelers, LCVs and utility vehicles. Though sales volumes in decoratives could improve, margins could be under pressure in the medium-term due to firm raw material prices. However, there is a lot of scope for cost reduction. The company proposes to use a combination of both manufacturing and technology-related measures to derive cost savings. Though this could be beneficial in the long run, the bottomline could feel the pressure in the short term.

The stock is steady at Rs 129, at a price earnings multiple of 9.5 times the annualised quarterly EPS of Rs 13.65. Considering the scope for improvement in future earnings, investors with a long-term holding period horizon can enter the stock at current levels. Investors looking for medium term gains can take up small positions at current levels and accumulate at any declines from the present level.