Factors for success

Goodlass is a major supplier to most of the automobile players and hence its fortunes hinge on a sustained increase in the offtake of cars.

The company is the market leader in the industrial paints segment where it commands a market share in excess of 40 per cent.

If the momentum seen in car sales in the April-June quarter sustains, the company can expect more than a decent ride in the quarters to come.

Moreover, with car launches showing no signs of abating, Goodlass could leverage its relationship with car manufacturers to widen its scope of supply.

The decision to set up a manufacturing facility in Haryana (initially to cater to the industrial segment) to address the needs of auto majors in the North (such as Maruti) should play a role in softening costs associated with logistics.

From having been predominantly a supplier to the industrial segment, Goodlass has consciously sought to strengthen its presence in the decorative paints segment.

The reasons for this are not far to seek. One, decoratives constitute about 70 per cent of the total paint market and gaining a foothold in this segment enables the company to address a much larger market.

Two, price realisations are better than in the industrial paints segment. OEMs in the auto sector command substantial negotiating leverage, reining in the margins for Goodlass.

With the housing sector looking up as loans have become affordable, the decoratives segment is likely to witness steady growth. Goodlass is also beefing up its presence in the rural market by expanding its dealer network.

With the expectation of a normal monsoon, the rural market should provide a leg-up to Goodlass.

Material costs

For a paint company, more than 50 per cent of costs are on account of raw material, bulk of which is also imported.

A combination of factors — the easing in the price of crude (paint inputs are derivatives of crude), the reduction in peak import duties announced in the recent Budget, and the strength of the rupee vis-à-vis the dollar — would ensure that raw material costs continue to rule soft. This, in turn, should serve prop up margins.

Stock outlook

The stock trades at a multiple of about nine times its trailing four-quarter earnings per share. The market leader, Asian Paints, trades at a multiple of 18 times its year-ended March 2003 earnings per share.

For a company that has a strong MNC parentage (65 per cent of Goodlass' equity is held by global paint major, Kansai Paints), such a valuation appears to be on the lower end of the spectrum.

The track record of paying consistent, good dividends points to a company whose fortunes are on a steady upswing.

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