Catching up fast

Shalimar Paints is one of the low profile paint companies in the countries and comes behind the 4 known biggies – Asian Paints, Kansai Nerolac, Berger Paints and Akzo Nobel (formerly ICI). It was originally formed as a JV between Girish Jhunjhunwala, a HongKong based NRI (20%) and the Delhi-based O P Jindal group (42%). Thereafter in October 2001, the Jindal Group diluted a part of its equity in favor of Girish Jhunjhunwala group and both the groups currently holds 31.18% each in the company, thereby making the promoters shareholding at around 63 %. Besides this a set of public (including some insurance companies like Oriental and NIC) together hold about 17%. It has a very low equity base of 3.79 cr. leading to very low floating stock since promoters and some others together hold as big a chunk as 80%. The company currently has its manufacturing plants located at Howrah (West Bengal), Nasik (Maharashtra) and Sikandrabad (Uttar Pradesh).

Last year, the promoters who hold 63% between them had tried to offload their stake since this was a non-core activity for them (as is known, Jindals are totally focused on steel) besides being of insignificant size. Paint majors like Kansai Nerolac (a listed company) and Sherwin-Williams (a US paint major with presence in India but no manufacturing base) had shown interest then. Sherwin Williams currently imports its paints and have been marketing it for the last 4-5 years. So this fits in well with their plans of getting a ready manufacturing base in India. But the entire process was abandoned or put on the back burner for some reason. Then the stock had nearly doubled to close to 1000. Now it appears that this thought has resurfaced and there appears to be informed buying in the stock over the last few days. The company is thus catching up fast with its peers.

They recently declared very good results and their ttm EPS is nearly 39. So at the current price of 600 (after the recent run up), it trades at about 16 PE multiple. However, if the last quarter results were anything to go by, the current year’s EPS could be much bigger (last quarter they made an EPS of 16), leading to an even lower discounting. The other 4 paint biggies whether Asian Paints, Kansai Nerolac,  Berger Paints or AkzoNobel all are ruling at a PE multiple of Rs 25 plus. So there is ample scope for a higher price going forward. And once the stake sale news is out, all hell will break loose. Remember there is very low floating stock so everybody will scramble for whatever share of the pie is available.

Most paint companies have a market cap which is more than its sales revenues as is evident from the table below, ranging from 4.48 for Asian Paints to 1.66 for Akzo Nobel (ICI). Shalimar Paints commands a Market Cap to Sales of just 0.47. The company thus appears grossly undervalued compared to its peers and carries potential to reduce the huge valuation gap which exists currently.

	Price (Rs.)	M-Cap (Cr.)	Sales (Cr.)	M-cap/sales
Asian Paints	3,700.20	35,492.24	7,924.70	4.48
Berger Paints	133.20	4,610.91	2,100.82	2.19
Kansai Nerolac	911.00	4,909.56	2,585.90	1.90
Akzo Nobel	876.20	3,227.42	1,942.52	1.66
Shalimar Paints	604.90	228.99	483.78	0.47

The major reason for this stock not getting a good discounting is its comparatively low OPM compared to the other paint companies. This can be attributed to its low scale of operations. The company has taken cognizance of this and has initiated moves to address this such as expansion of its facilities. If it falls into good hands, this will surely be a thing of the past.