Shalimar Paints Buy Target Price: Rs225 ::Centrum

Shalimar Paints

Buy

Target Price: Rs225

CMP: Rs123

Upside: 84%

Painting bright future

m  Aggressive capacity expansion: Shalimar Paints is increasing its capacity by 36,000 MT over the next two years to 97,000 MT by installing a new plant in Chennai, with an installed capacity of 24,000 MT. The Chennai plant is expected to commence operation from April 2013 as the company has received all approvals and civil construction has already started with plant and machinery orders placed. The company is also in the process to expand capacities at existing manufacturing plants by ~ 25% and we expect the expansion to be over in FY14.
m  Focus on industrial segment: The share of industrial segment is expected to increase from ~33% to 42% by FY15E. At the new Chennai plant, 40% of the capacity will be dedicated to the industrial segment and the new expansion of 4,000 MT in Nasik plant in FY14E will also be dedicated to the industrial segment. The company is also exploring technological tie-ups with international paint companies in niche areas which could materialize in a few months.
m  Strengthening decorative portfolio: Company has been introducing more water based paints in the last few years and expects greater growth in this segment, especially in exterior emulsions, going forward. It has a complete portfolio of decorative products across price points with greater presence in the economy and mid-tier markets and derives ~ 75% - 80% of the revenue from these segments. The decorative segment currently contributes 76% by volume and 65% by value of revenues (FY2012). The top 5 brands contribute over 60% of the sales with North & East India key regions.
m  Strong financials: Net sales is expected to grow at a CAGR of 26.8% over FY12-15E to Rs9930mn in FY15E on the back of 57% capacity expansion over FY12-15E along with 10.4% CAGR in pricing over same period. Operating profit is expected to grow at a CAGR of 33.7% to Rs907mn in FY15E while margins are expected to increase steadily to 9.1% in FY15. Net profit is set to become 2.9x by FY15E and grow at a CAGR of 43% to Rs425mn. RoCE is expected to increase from 18.4% in FY12 to 22.4% in FY15E while RoE should grow to 39.3%. We expect the debt to peak in FY14E to Rs1.4bn while D/E will still be under control at 1.1x level. The company has always been free cash positive and post the capex of Rs600mn in FY13/FY14, will again become free cash positive in FY15.
m  Valuations: Domestic paint companies are trading at an average of 28x FY13E and 24x FY14E. Shalimar Paints is currently trading at 13x FY13E and 9.4x FY14E EPS of Rs9.4 and Rs12.9 respectively. The company is trading at 60% discount to average Indian peers. Given its strong fundamentals, and increasing return ratios the current discount should be narrowed. We expect the stock to re-rate from current levels and hence value the stock at 10x FY15E and arrive at a target price of Rs225 (84% upside from current levels) and initiate coverage with a BUY rating on the stock.

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