Shalimar Paints Ltd. -- Worth a Serious Look -- Significant Rerating Triggers Inplace

Stock Opportunities Untested - but worth a good look
1

http://www.scribd.com/doc/153871680

Attached is link to 34-pages Research Note on Shalimar Paints Ltd. [ NSE â SHALPAINTS ; BSE â 509874 ], India's Fifth Largest Branded Paint Company and one of the Oldest Paints Manufacturing Company of the World dating back its Brand inception to 1902 i.e. A Rare 111 Years' Long Existence History.


The company needs thoughtful consideration by any serious fund manager because of its Current Valuation on the Bourses being 28.66 % lower than even its Orderly Liquidation Value ( INR 259.37 cr. ) with its Tangible Fixed & Net Current Assets Value standing at INR 397.37 cr. as aginst current MCAP of the company at just INR 184.65 cr.


Possession of Huge Freehold Land ( ~67 acres ) with one key spare land parcel at the most sought after property location in Gurgaon ( Sector 32 ) limits the downside risk to current valuation considerably, while the recent Senior Management Change, with ex- Ingersoll Rand, Blue Dart honchos being inducted at seniormost level, offer possibility of multiple Valuation Upside Triggers starting 2HFY14. The senior management now stands thoroughly professional and reasonably dynamic â the best senior management structure company had in its 111 years' long existence history.


Operationalisation of Maiden South Indian Plant starting Q2FY14, which will enhance the production capacities of the company by 56 %, ensures the much needed 20 % p.a. Revenue Growth Visibility for the Company for atleast next three fiscals, whereas, Company's current Positioning in Decorative Paints segment wherein it derives 66 % of its revenues from Industry's Weakest Sales regions ( North & East ) ensures Significant Marketshare Capture by the company in Industry's strongest Sales regions ( South & West ) once its pan-India Manufacturing Presence gets established post Operationalisation of said South Indian plant.


Reasonable Scale of Operations at INR 594 cr. (FY14e) with FY16e

INR 882 cr. coupled with consistent Profitability Track-Record with improving EBITDA & PAT Margins make the company a compelling relook candidate ; with its status of being the only Branded Paint company of India available at reasonable valuations which are at an average 67.78 % discount to all peers make it hard to ignore by any prudent fund manager.


Views are Invited from fellow members on this promising Indian Consumer Discretionary Story.


Rgds.

Mahesh

http://www.scribd.com/doc/153871680

Contents of this Note :





Key Investment Arguments In Favour & Against Shalimar Paints Ltd.

( Shalimar Paints Ltd. - Mcap â Rs. 184 cr. with FY14e Revenues of Rs. 594 cr. ) Page 3-5






Why it Deserves to be a Part of One's Core Portfolio

Brief Overview

( India's 5th Largest Branded Paint Co. with 111 Years' Existence History & Most Credible Promoters )




Change in Management â

Most Extensive & Professional in Co.'s 111 Years' Long History

( Key ex- Ingersoll Rand, Blue Dart Express honchos inducted at Topmost Level)



Judicious Capacity Expansions over Last Decade

( Last 10 Years' Debt v/s Capacity Enhancement Record )




Huge Spare Land at Co.'s Manufacturing Locations

( Land in Possession v/s Land in Use at Each Location )






South Indian Greenfield Plant - Operational from Q2FY14

( 56 % Capacity Increase â Productwise Capacity Breakup at the Plant )





Regionwise Sales Breakup of Industrial & Decorative Paints

( Company v/s Industry )




Regionwise Production Capacity Breakup - Dedicated Industrial & Decorative Production

( with Sales Region Catered & Annual Revenue Generation Potential of each Manufacturing Plant )

Capacity Utilisation Schedule of Greenfield South Indian Plant

( FY14 to FY17 with ~Revenue Contribution each Fiscal )




Replacement Value of Tangible Fixed Assets

( Freehold Land Asset Value + Production Capacities' Value )




Replacement Value v/s Co.'s MCAP & EV

( Pure E.V. considered after including Off-BalanceSheet Debts )





Peer Valuation â Co. Trading at 67.8 % Discount â An Anomaly

( Asian Paints, Berger Paints, Kansai Nerolac & Akzo Nobel )




Conservative Financial Forecast

( FY14e, FY15e, FY16e alongwith Key Assumptions )




Conclusion

( Rare Undervalued Consumer Discretionary Play â Time to Have a Serious Relook )





Overview of Company & Industry

( Marketshare of Key Players, Segmentation of Industry & Co.'s Offerings )




Important Data Points

( Co.'s Past Decade's Financial Performance alongwith

Segmentwise Breakup of Revenues )



Key Monitorables



Page 6-7







Page 8-10





Page 10-11





Page 11-12






Page 12-13





Page 13-14







Page 14-15


Page 16-16





Page 16-20






Page 20-21








Page 21-23






Page 23-26



Page 26-27








Page 28-31






Page 31-32




Page 33-34


2

Posting Important Sections of Research Note in this and next posts for members’ quick reference :

Key Investment Arguments In Favour of Shalimar Paints Ltd. :

  • INR 397.37 cr.

being the Value of _**Tangible Fixed & Net Current Assets **_of the Company

v/s current MarketCap of the Company at INR 185 cr.

  • INR 287.58 cr.

being the Value of Tangible Fixed Assets of the Company

v/s

current MarketCap of the Company at INR** 185 cr.**

  • INR 177.58 cr.

being the Value of Freehold Land Assets of the Company

v/s

current MarketCap of the Company at INR** 185 cr.**

  • INR 259.37 cr.****259.37_ __c._

being the Liquidation Value( Orderly ) of the Company as at 31st March 2013

v/s

current MarketCap of the Company at INR** 185 cr.**

[ i.e., if the company had to sell-off in entirety, then, this is the value of cash ( 259.37 cr. ) that will be in hands of shareholders of the company after selling all the assets at current market value and paying off all the debt/liabilities as at 31st March 2013 ]

  • 111 Years’ Long continuous existence imparts strong Brand Credibility

  • Huge Spare Freehold Land in Possession of the Company by virtue of its Long Existence with one spare land parcel ( 1 acre ) at a prime location in Gurgaon (Sector 32)

  • India’s Fifth Largest Branded Paint Company and One of the World’s Oldest Organised Paint Company

  • Credible Promoters in the form of Jhunjhnuwalas ( Ovolo Group, Hong Kong ) & Jindals ( Jindal Stainless, India ) with High Promoter Holding ( 62.36 % ) & nil Pledge

  • Change in Management with key ex- Ingersoll Rand, Blue Dart honchos inducted at Top Most Level (CEO, MD, etc.) w.e.f. March’2013

  • Clear Growth Visibility because of Operationalisation of maiden Paint Manufacturing Plant in South India (Tamil Nadu)

  • Minimum 18.49 % CAGR in Revenues visible over next 3 years to take **FY16e Revenues to **INR

882 cr.

  • All the current Manufacturing Plants of the company operating at ~90 % capacity utilisation since last few years.

  • Capacities getting enhanced by 56 % in FY14 â Single Largest Addition in Company’s History

  • Post 2HFY14, company to have Manufacturing Presence across India ( East, West, North & South ) which is likely to kick-in extensive operational efficiencies

  • Gross Undervaluation v/s All Peers ( Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel ) â An Anomaly, when gets corrected, could lead to substantial Rerating of the company on the bourses

( Trading at average 67.8 % Discount to All Peers )

  • Trading at :

0.34 x Mcap/Sales TTM,

0.58 x EV/Sales TTM,

8.13 x EV/EBITDA TTM

limiting Downsides Considerably with ample upside triggers already in place

Key Investment Arguments Against Shalimar Paints Ltd. :

  • External Risks in the form of Slowdown in Indian Industrial Activity as well as slowing Indian Consumer Discretionary Spends likely to take a toll on both, Industrial Paints as well as Decorative Paints Sales. Recent severe Rupee Depreciation threatens to put pressure on Paint companies’ margins as 35 % of the Raw Materials are imported. Amidst these gloomy backdrop, Indian Paint Companies are today experiencing one of the worst phase in last decade.

  • Greenfield Project Commencement Risk in the form of company’s maiden South Indian plant which is scheduled to get operational in Q2FY14. This is one of the largest greenfield capacity being set-up by the company in its history which is likely to increase its production capacities by ~56 %. Financial closure for this project was already achieved in Q3FY13 and construction work started in Q4FY13. Any delay in commencement of this facility beyond Q3FY14 could put undue pressure on company’s finances.

  • Lumpiness in Quarterly Earnings as Q1FY14 & Q2FY14 could see dismal margin performance because of initial costs associated with greenfield manufacturing facility coming up in South India. Also, margin performance in whole FY14 could also remain subdued because of relatively higher finance and depreciation costs associated with the said South-based facility. However, if the company manages to turn out a stable EBITDA & PAT margin performance for FY14, then, it could very well be taken positively by the market participants.

  • Loss of Marketshare to competitors ; although, is highly unlikely, but still is a remote possibility. So far, since last decade, company has gradually lost its marketshare from 4.3 % in 2003 to current 3.1 % mainly because of lack of manufacturing presence in fastest growing paint consuming region ‘South India’.

Till date, South & West India is catered by only single manufacturing plant of the company based in West India which itself is operating at ~ 90 % capacity utilisation since last many years. This results in lower marketshare for the company in both the regions viz., South & West India.

Notable here is that industry derives 60 % of its revenues from these two regions whereas company derives only 34 % of its revenues from South & West India mainly because of capacity constraints and lack of dedicated region-specific manufacturing presence.

Hence, with operationalisation of South Indian manufacturing plant of the company from Q2FY14, its marketshare in both the regions ( South & West ) is likely to enhance significantly as from Q4FY14 onwards, once the new plant gets stabilised, South region will get catered to by the dedicated manufacturing plant based there, whereas, production of West India based plant which is so far getting diverted to address South Indian market will get freed up to cater to home market thereby making the company stronger in the strongest sales regions of the industry viz., South & West India.

  • Relatively Weak Profit Margins. Company operates at one of the lowest EBITDA margins amongst all the peers. To cite – average FY13 EBITDA Margins of all the four peers is 11.78 % v/s Company’s FY13 EBITDA Margin of 7.17 % ( margin partially impacted by the fire accident at one of company’s plant in Q4FY13 ).

The main reasons for this is company’s relatively lower scale of operation, lack of manufacturing presence across all sales regions of India, particulary South India as also higher contribution from low margin Industrial Paints segment. With operationalisation of South Indian plant in Q2FY14, majority of these issues should get addressed, but, it will take atleast two more years for margins to show any significant improvement. However, the 67.78 % discount at which company is trading at v/s all its peers, more than captures such relatively weak operational parameters and the discount deserves to narrow down to atleast 50 % even after taking into consideration all the negative facts.

3

Another important thing to note here is that manufacturing plants ( alongwith R&D Labs ) at each of the three locations mentioned, stand at just 35 % of the land currently in possession of the company thereby leaving ample scope for future capacity augmentation at each of the plants with minimal cost involved :

Howrah

Nashik

Sikandrabad





Land in Possession of the Company

1,45,000 sq.mtr.

49,800 sq.mtr.

41,242 sq.mtr.





Land Currently in Use by the Company

40,600 sq.mtr.

22,900 sq.mtr.

16,080 sq.mtr.





% of

Spare Land Available

for

Capacity Augmentation


72 %


54 %


61 %







(8) Third and most important thing which provides ample future growth visibility for the company is setting up of a greenfield paint manufacturing plant at Chinnapuliyur Village, Gummidipoondi in Tamilnadu which is expected to begin commercial run from Q2FY14. This is company's first manufacturing facility in South India and will enable it to have presence across India with its other 3 manufacturing facilities being already operational in East, West and North India respectively. Let's first have a look at the manufacturing capacities of various products in this plant before discussing any further :



Product

Capacity



Industrial Paints

1200 KL per month

Solvent Based Decorative Paints

950 KL per month

Water Based Emulsion Paints

550 KL per month

Distemper Paint

300 KL per month



Total

3000 KL per month




Four things need to be noted here :


(a) This will be the single largest capacity addition in the history of the company over last two decades as even in 2003, when Sikandrabad plant was acquired by the company, the capacity addition was only to the tune of 20 % whereas with the operationalisation of this greenfield plant, the company's production capacity will get enhanced by ~56 %.



(b) At peak capacity utilisation, which is expected to be reached within 3 years of operation, the plant can generate revenues of ~335 cr. which will ensure sustained revenue growth momentum for the company for next 3 years.




(c) The plant will enable the company to cater to fastest growing Paints Market viz., 'South' in more efficient way and free-up the capacities of Nashik Plant to cater exclusively to Western market. Till now, Southern market is served from Nashik plant by the company.




(d) This will enable significant savings in transportation costs which will enable EBITDA margin improvement from FY15 onwards.








(9) To understand importance of setting up of this manufacturing presence in South India better, let's have an overview of regionwise sales-breakup of Industrial Paints segment as well as Decorative Paints segment of the company and pitch it against the regionwise sales-breakup of the industry. Also, post that, we will study the production capacity of each of the company's manufacturing plant regionwise as also the breakup of dedicated industrial paints production in each plant to assess correctly the implications of operationalisation of South region manufacturing plant on financials of the company :



Regionwise Production Capacity at each Manufacturing Plant of the company and break-up of

Industrial Paints & Decorative Paints Production in each plant :

East Region

(Howrah)

West Region

(Nashik)

North Region

(Sikandrabad)





Annual Production Capacity

21,200 MT

23,000 MT

19,000 MT





~Minimum Annual Revenue Generation Potential at Peak Capacity

210 cr.

225 cr.

185 cr.





~Production - Decorative Paints (FY13)

70 %

60 %

90 %





~Production â Industrial Paints (FY13)

30 %

40 %

10 %





Sales Region Catered

Mostly East India

West & South India

Mostly North India


Six Things need to be noted from above :



(a) As can be seen from the regionwise sales breakup of Industrial paints of the company, it very well matches up with the industry trend. This is because, company has focussed heavily on Industrial Paints segment over last many years and so diverted the limited capacities available towards serving Industrial customers as they are being directly catered to by the company and often result into long term association.




(b) However, if one observes regionwise sales break-up of Decorative Paints of the company, it is in sharp contrast to the industry trend wherein :


industry derives majority of its sales from Western & Southern Region

( 60 % )

whereas

company derives majority of its revenues from Northern & Eastern Region

( 66 % ).


This is because :


Company serves Western & Southern market from its Single Plant based at Nashik in West India which results in lower sales in both the regions ( as capacities are limited in Nashik Plant )


Company dedicates only 60 % of the available capacities at Nashik Plant towards production of Decorative Paints while dedicating remaining capacities to serve rising Industrial Paints demand in both the regions (West & South) as it can't afford to loose Industrial customers which are long term sticky customers offering a good stability to revenues of the company.




(c) This deviation from normal industry trend puts the company in a sweet spot as it is already strong in otherwise perceived to be weak regions of East & North India and Southern region is proving to be the fastest growing region for most of the organised players since last few years ;

so, with the dedicated manufacturing facility in South India from 2HFY14, company will be able to cater exclusively to rising demand there in a more effective way with the Western plant capacity getting diverted to serve the home market thereby making the company stronger in the strongest sales regions of the industry viz., South & West.




(d) Decorative Paints is traditionally a low-volume-high-margin business, so, with the expected ~210 cr. p.a. revenue potential from Decorative Paints capacity of Southern plant and freeing up of ~90 cr. Decorative Paints revenue potential of Western Plant capacity which is otherwise diverted to serve Southern Market, the company will experience significant growth in Revenues over next 3 years coupled with improvement in EBITDA margins.




(e) Southern plant will have 40 % capacity dedicated to Industrial Paints, so, it will have similar production ratio as Nashik plant at 60:40 between Decorative & Industrial, and, with the said 40 % dedicated capacity, Shalimar will emerge as a stronger player in Industrial segment too which will enable it to maintain current sales ratio of 67:33 between Decorative & Industrial.



Conservative Capacity Utilisation schedule for Southern Plant of the company can be arrived as :



Fiscal Year

Capacity Utilisation

~Revenue Contribution

South India Plant (Tamilnadu)

Location - Chinnapuliyur Village, Gummidipoondi Village, District - Tiruvallur



Production Capacity = 36,000 MT p.a.



Dedicated Decorative Paints Capacity = 60 %


Dedicated Industrial Paints Capacity = 40 %



~Minimum Annual Revenue Generating Potential at Peak Capacity = ` 335 cr.




FY14

12 %

` 38 cr.




FY15

35 %

` 115 cr.




FY16

65 %

` 210 cr.




FY17

90 %

` 290 cr.




4

Fourth and most important thing which no prudent fund manager can ignore with respect to Shalimar Paints Ltd. is the Replacement Value of Tangible Fixed Assets in possession of the company.

When we invest in a company, we are actually investing into its business. Hence, it is most proper for us to look for any investment as if we are the suitor or acquirer of that business and assess as to what value we can extract from such acquisition. Such an approach enables us to arrive at correct valuations for any company and also limits our downsides considerably as we are knowing the value of the hard assets in possession of the company and therefore if the company had to sell-off in entirety tomorrow, this is the minimum value we will get.



While calculating the Minimum Replacement Value of Tangible Fixed Assets of Shalimar Paints Ltd., we have made two considerations :


  • First, we have calculated the bare minimum value of Freehold Land Assets in possession of the company by considering the lowest 5 Years' average price per square meter at each of the exact location where company's respective land asset is located. Alongside, we have also stated the current market value of respective land asset by considering the price per square meter at respective location as at 25th June 2013.



  • Second, we have considered the Minimum Cost that is required to be incurred for setting up the said quantum and nature of production capacities that company has as on date plus that is likely to be commissioned in Q2FY14.


    Location

    Freehold Area in Possession of the Company

    Last 5 Years' Average Rate Per Square Meter of the Location

    Bare Minimum Value of Land in Possession of the Company

    [ Area x 5 Yrs. Avg. Rate ]


    ~Current Market Rate Per Square Meter of the Location as at

    25th June 2013

    Market Value of Land in Possession of the Company as at 25th June 2013

    [ Area x Current Market Rate ]


    West Bengal


    [ Goaberia, PO. Danesh Shaikh Lane, Howrah, West Bengal ]



    1,45,000 sq.mtr.



    ` 5920 per sq.mtr.



    ` 85.84 cr.




    ` 7480 per sq.mtr.



    ` 108.46 cr.


    Maharashtra


    [ Gonde Dumala, Igatpuri, Nashik, Maharashtra ]



    49,800 sq.mtr.



    ` 3210 per sq.mtr.



    ` 15.98 cr.




    ` 4840 per sq.mtr.



    ` 24.12 cr.


    Uttar Pradesh


    [ Sikandrabad Industrial Area, Sikandrabad,

    Dist. Bulandsahar,

    Uttar Pradesh ]



    41,242 sq.mtr.



    ` 2780 per sq.mtr.



    ` 11.46 cr.




    ` 3830 per sq.mtr.



    ` 15.81 cr.


    Tamil Nadu


    [ Chinnapuliyur Village, Gummidipoondi,

    District Tiruvallur,

    Tamil Nadu ]



    32,800 sq.mtr.



    At Book Value (i.e. Purchase Price) since Land purchased by the company in 2009



    ` 2.02 cr.




    ` 730 per sq.mtr.



    ` 2.39 cr.


    Gurgaon


    [ Plot No. 75, Sector 32, Gurgaon ]



    4050 sq.mtr.



    ` 36,900 per sq.mtr.



    ` 14.94 cr.




    ` 66,170 per sq.mtr.



    ` 26.80 cr.


    Total

    ` 130.24 cr.



    ` 177.58 cr.







    Manufacturing Plant Location

    Production Capacity at the Plant

    Minimum Cost Required to be Incurred for Building Respective Capacities





    West Bengal


    [ Goaberia, P.O. Danesh Shaikh Lane, Howrah,

    West Bengal ]


    21,200 MT p.a.



    ` 23 cr.


    Maharashtra


    [ Gonde Dumala, Igatpuri, Nashik, Maharashtra ]


    23,000 MT p.a.



    ` 26 cr.


    Uttar Pradesh


    [ Sikandrabad Industrial Area, Sikandrabad,

    Dist. Bulandsahar, Uttar Pradesh ]


    19,000 MT p.a.



    ` 19 cr.


    Tamil Nadu


    [ Chinnapuliyur Village, Gummidipoondi,

    District Tiruvallur, Tamil Nadu ]


    36,000 MT p.a.



    ` 42 cr.


    Total


    ` 110 cr.













    Bare Minimum

    Replacement Value

    of Company's Tangible Fixed Assets



    = 240.24 cr.

    Replacement Value

    at Current Market Rate

    of Company's Tangible Fixed Assets



    = 287.58 cr.

    Bare Minimum Value of Land in Possession of the Company

    Minimum Cost Required for Setting Up the Production Capacities

    130.24 cr.

    110 cr.


    Market Value of Land in Possession of the Company

    Minimum Cost Required for Setting Up the Production Capacities

    177.58 cr.

    110 cr.


    Eight things need to be noted from above :



    (a) Company is in possession of large :


    ~36 acres ( 145 thousand sq.mtr. to be precise ) land at Howrah since 1902,

    ~12 acres ( 49.8 thousand sq.mtr. to be precise ) land at Nashik since 1992,

    ~10 acres ( 41.24 thousand sq.mtr. to be precise ) land at Sikandrabad since 2003,

    ~8 acres land near Chennai (Gummidipoondi) since 2009.


    All these locations are used to set-up manufacturing facilities & R&D Labs (Nashik & Howrah) of the company.



    (b) In addition, company has in its possession, at a prime location in Gurgaon (Sector 32), a ~1 acre plot ( 4050 sq.mtr. to be precise ) which is a freehold plot allotted to the company in 2008-09 by Haryana Urban Development Authority (HUDA). This plot sits in the books of company's 100 % owned subsidiary âShalimar Adhunik Nirman Ltd'.


    The location of this plot (Sector 32) is today one of the most sought after property locations of Gurgaon and we have only considered in our calculations, the basic land value and not its development potential. In case the company decides to develop this plot in future, it could easily fetch the company minimum 55 cr. based on current market trends in the vicinity.




    (c) The revaluation of Fixed Assets was done the last time in the year 1995 by the company when only Howrah and Nashik lands were under company's possession.




    (d) We have not included the Value of Raw Materials, Finished Goods, etc. which are part of Inventories of the company ; average value of which at any given date is always greater than 60 cr. ( at lower of cost or net realisable value ).


    To draw a comparison, Consortium of Banks which have granted the company Credit Facilities as at FY12, as part of their hypothecation agreement, have valued entire stock of raw materials, finished goods, stocks in process, consumable stores and spare parts, bills receivable and book debts and all other moveables of the Companyâs factories, premises and godowns situated at Howrah, Nashik and Sikandrabad (U.P.) and various places located throughout the country at 247.76 cr.. This valuation does not include the valuations of Freehold Land at each of the manufacturing location as also the Plant & Machineries at all the manufacturing locations.




    (e) For conservative assessment, we have also not included here the Replacement Value of Intangible Assets of the company, especially the 111 year old brand 'Shalimar', the extensive pan-India Sales & Distribution Network, R&D potential, etc.. Just to make a note, a brand with an existing strong ground network which has the potential to generate average 715 cr. revenue over next 3 years is seldom valued below three digits.





    (f) For arriving at 'Last 5 Years' Average Rate Per Sq. Mtr.' in our calculation, we have relied on the past 5 years deal records provided by the respective professional real estate consultant dealing in respective area. We have picked the lowest rate deal done each year and then arrived at average calculation.



    (g) In case of Tamil Nadu ( Chinnapuliyur Village ) where the company purchased the land only in 2009, we, as a prudent conservative policy, have decided to consider the company's purchase price as 'Last 5 Years' Average Rate Per Sq. Mtr.' and have ignored the appreciation in land value over last four years.



    (h) For the current market rate per sq.mtr., we have picked the rate of last best deal done on or before 25th June 2013 in the location concerned. Except Tamil Nadu ( Chinnapuliyur Village ) where last deal data was available only of five months before, we were able to garner the most up-to-date data till date.



    (i) For calculation of 'Minimum Cost' required for building production capacities already existent with the company, we have considered the bare minimum cost that any entity would need to incur to set-up such large paint manufacturing capacities.





    Now, since we have already arrived at minimum Replacement Value as also Replacement Value at current market rate, it is the right time to pitch those values against current Market Capitalisation commanded by the company on the bourses as also its current as well as expected Enterprise Value :




    ( fig. In ` cr. )

    FY13

    FY14e

    FY15e

    FY16e






    Market Capitalisation

    ( as at 12th July 2013 )

    184.65

    184.65

    184.65

    184.65






    Enterprise Value

    ( considering the debt as on books )

    257.59

    292.59

    307.59

    317.59






    Pure Enterprise Value

    ( considering the debt as on books + off-balance sheet debts )

    309.65

    344.65

    359.65

    369.65


    Minimum Replacement Value of Tangible Fixed Assets


    240.24




    Replacement Value of Tangible Fixed Assets at Current Market Rate


    287.58




    Six Things needs to be noted from above :



    (a) Market Capitalisation is counted based on the Market Price of the company's share as at 12th July 2013 ( INR 97.6 ).


    (b) We have considered in our calculation, two 'Enterprise Values' â one which is widely considered across financial community by including only debt standing on books (balance sheet) of the company.




    (c) Second EV which is termed as 'Pure Enterprise Value' -- in addition to including debt on books, also takes into consideration debt which is standing out of the books ( off-balance-sheet debt ) of the company like LCs, guarantees, etc.. This 'Pure EV' is more the true reflection of the enterprise value of the company rather than only 'EV' as we can't arrive at the real valuation of any company in isolation of its off-balance-sheet debts.




    (d) Current FY13 'Pure EV' of 309.65 cr. implies that at current market price (CMP), after deducting minimum Replacement Value of Tangible Fixed Assets of the company, we are paying only 69.41 cr. which is compelling considering the fact that only inventories, debtors and other current assets on the books of the company are worth more than 150 cr..

    Here, if we take into consideration the value of intangible assets of the company which is in the form of multi-year financial as well as manyears of investment in setting up of large distribution platform, branding, client-relationships, etc., then it effectively means that CMP offers tremendous value-extracting opportunity for any acquirer.






    (e) We have assumed a net debt addition of 35 cr. in FY14, 15 cr. in FY15 and 10 cr. in FY16 because of which, with MCAP remaining constant, 'Pure EV' of the company increases proportionately for FY14e, FY15e and FY16e.




    (f) Even at FY16e 'Pure EV' of 369.65 cr., we are currently paying just 129.41 cr. for Current Assets and Intangible Assets in possession of the company which signifies gross undervaluation for a company of FY16e scale operation of 882 cr.



5

So far we have touched upon almost all the aspects which are necessary to evaluate Shalimar Paints Ltd.. However, one aspect is still missing, and that is a conservative forecast of future financials without which our evaluation can't be said complete as it is this forecast that will enable us to gauge the relative undervaluation of the company at the present stage and its potential to become a 'true wealth creator' in future. Let's first enumerate FY14e, FY15e & FY16e financials below and then enlist the assumptions based on which the numbers are arrived at :


( fig. In ` cr. )

FY14e

FY15e

FY16e





Net Revenue

594

716

882





EBITDA

43.1

53.7

71.4





PAT

13.2

19.2

30.6





EPS ( in ` )

6.98

10.15

16.19






We have taken the most conservative approach in forecasting the financials ; considering the fact that we are facing one of the worst slowdown in industrial activity which could hamper Industrial Paints Sales growth as also we are in the midst of visible slowdown in consumer discretionary spending which could again limit the growth in Decorative Paints Sales.




Key Assumptions

FY14e

FY15e

FY16e





YoY Growth in Existing Operations

( minus contribution from new South India Plant )

5 %

8 %

12 %





Utilisation Assumed from new South India Plant

12 %

35 %

65 %





Debt

( including off-balancesheet debt )

173 cr.

188 cr.

198 cr.









Depreciation Costs Considered

5.1 cr.


( 32.81 % YoY increase

over FY13 )

6 cr.


( 9.1 % YoY increase over FY14 )

6.8 cr.


( 13.3 % YoY increase over FY15 )





Interest Cost Considered

19.2 cr.


( 15.8 % YoY increase over FY13 )

20.3 cr.


( 5.72 % YoY increase over FY14 )

20.8 cr.


( 2.46 % YoY increase over FY15 )





Tax rate Assumed

30 %

30 %

30 %


To explain in detail :


  • In current gloomy economy backdrop, for FY14e, we have assumed only 5 % YoY growth from company's existing operations ( minus new South India Plant ) and only 12 % Utilisation of new plant based in South that will get commissioned in Q2FY14. Adding both up, it takes us to a moderate 12.03 % YoY revenue growth for the company in FY14.



  • With regards to EBITDA margin performance for FY14, we have assumed higher initial costs on account of commercialisation of South India plant in Q2FY14 as also severe Rupee Depreciation likely to put pressure on overall EBITDA margins.

    Taking all these into consideration, we have assumed only 7.25 % EBITDA margin for FY14, which, although seems marginally higher than 7.17 % EBITDA margin of FY13, but is considerably lower than FY12's margin of 7.81 % and -- FY10-FY12 -- 3 Years' Average EBITDA Margin of 7.60 %. FY13's EBITDA margin had suffered because of the fire accident faced by the Nashik plant in Q4FY13 and therefore is not strictly comparable.




  • PAT for FY14 is arrived at after considering higher depreciation costs on account of commercialisation of South based plant as also higher interest costs as the plant is to be funded in the debt:equity ratio of 1.5:1 ( project cost = ~50 cr. ).


  • FY15 should see some revival in Industrial activity as also consumer sentiment should also be far better than current one. But, still, to be on a conservative side, we have assumed only 8 % YoY growth minus contribution from South India plant and a modest 35 % utilisation of South India plant in the fiscal which takes us to the company comfortably achieving 20.53 % YoY growth in revenues in FY15.



  • In case of EBITDA, we have again assumed only partial absorption of costs of South India plant and therefore factored in only 25 basis points improvement in EBITDA margin for FY15 ( from 7.25 % to 7.50 % ). PAT for FY15 is arrived at after considering higher depreciation costs and higher interest costs ( as debt taken for financing setting up of new plant is unlikely to be paid back till FY17 ).



  • FY16 should be a much better year for the company as South India plant will be fully operational, company's sales network in Southern and Western regions should have been fully enhanced and macro situation should be much better. Still, for FY16, we have assumed only a 12 % YoY growth in revenues from existing operations ( minus South India plant ) with Southern plant turning out a utilisation of 65 % which should take the overall revenue growth of the company for FY16 to 23.18 %



  • EBITDA for FY16 should be far better as operational efficiencies should fully kick-in by then and therefore we have assumed a 60 basis points improvement in EBITDA margins for the year ( from 7.50 % to 8.10 % ). PAT should also be better as interest costs and depreciation costs should stabilise by then and debt burden should start easing out by then.






It is worthwhile to note here that in the above assumptions, we have considered almost all the negative aspects whereas any possible positive aspects like higher utilisation of Southern plant, new management pushing for aggressive sales growth, professional management instilling cost efficiences thereby improving margins, etc., are totally ignored and we have preferred to remain the most pessimistic possible to enable us to limit the downsides to our investments considerably.

So, now, let's convert our pessimistic financial assumptions into valuation multiples to check whether Shalimar Paints is undervalued in real sense or not :

FY14e

FY15e

FY16e





EV/Sales

0.58

0.50

0.41





EV/EBITDA

7.99

6.69

5.17





MCAP/Sales

0.31

0.25

0.20





Price/Book

2.31

1.98

1.71





Price/Earning

13.98

9.61

6.02




In above,


(a) We have considered 'Pure EV' in EV/Sales & EV/EBITDA calculations and therefore included all possible off-balance sheet debts,



(b) We have assumed net debt addition of 35 cr. for FY14, 15 cr. for FY15 and 10 cr. for FY16.



(c) We have assumed nil equity dilution till FY16

( Note â Compay has not diluted its equity since last two decades ).



6

Discl. - Invested into Shalimar Paints so my views have to be taken in that regard.

7

Hi Mahesh,

That’s some great research.I understand this is a play on the management shuffle(strange why the former management never tried to increase capacity utilisation at its plants or increase capacity) Also,it seems to have a lot of value,especially since their biggest land holding was picked up at peanut prices in 1902.
Some naive questions:
1)Why were the Q4 results so dismal? (PAT down by 93%!)

  1. I hardly see anyone using Shalimar products in my city(Dehradun) SInce presently around 64% of their revenue comes from North & East markets,isn’t this bad?

  2. How is their product quality? What is their product range? How much do they invest in R&D?

  3. Most paint cos are strong brands.So much so,that they hardly require any advertising.How good is the Shalimar brand in South?

  4. How do they plan to grab market share from rival cos? Do they enjoy any pricing power?

8

Hi Mahesh,

That’s some great research.I understand this is a play on the management shuffle(strange why the former management never tried to increase capacity utilisation at its plants or increase capacity) Also,it seems to have a lot of value,especially since their biggest land holding was picked up at peanut prices in 1902.
Some naive questions:
1)Why were the Q4 results so dismal? (PAT down by 93%!)

  1. I hardly see anyone using Shalimar products in my city(Dehradun) SInce presently around 64% of their revenue comes from North & East markets,isn’t this bad?

  2. How is their product quality? What is their product range? How much do they invest in R&D?

  3. Most paint cos are strong brands.So much so,that they hardly require any advertising.How good is the Shalimar brand in South?

  4. How do they plan to grab market share from rival cos? Do they enjoy any pricing power?

9

Hi Sagar,

Please find my replies in bold below :

That’s some great research.I understand this is a play on the management shuffle(strange why the former management never tried to increase capacity utilisation at its plants or increase capacity) Also,it seems to have a lot of value,especially since their biggest land holding was picked up at peanut prices in 1902.

Its case of a high potential company available at compelling valuations wherein even iffew of the expected events turn out well then it could result in co.'s substantial rerating on the bourses…Will explain u in slight detail…occasionally we come across certain cos. where productive assets are mismanaged in the past because of which their current market value becomes cheaper then even their liquidation value…such plays can give exceptional returns if picked at right time but, at the same time, they demand patience as well…most of such plays often burn cash but fortunately in case of shalimar its not burning cash so far thats extremely positive…second, recent developments like management change, south indian plant operation, etc. add a growth angle to the story and when value meets growth it immediately commands its deserved valuation on the bourses on whiff of smallest sign of that happening…The only thing we need to monitor is that co. should not go into red – rest all factors are mangeable…

Some naive questions:
1)Why were the Q4 results so dismal? (PAT down by 93%!)

As mentioned in research note too, Q4FY13 was partially impacted by fire accident faced by co.'s main Nashik plant in Jan’2013 because of which the plant had to remain out of major operation for 1 month which resultd in loss of revenues to the tune of ~18 cr. for the qrtr…EBITDA margins were also partially impacted by this whereas PAT was more impacted because of one time restructuring costs incurred during the qrtr. to the tune of 2 cr…

  1. I hardly see anyone using Shalimar products in my city(Dehradun) SInce presently around 64% of their revenue comes from North & East markets,isn’t this bad?

I believe you are talking about Decorative paints right…I don’t know about particular pockets like Dehradun but overall channel checks suggests the company beingreasonably strong inNorth-Eastern part ofIndia…Also, in most of the govt. tenders/contracts, shalimar is a visible name alongside other major players…In some particular requirementsof Industrial Paints, Shalimar is first or second preferred brand in govt. contracts…

Also, since you are based in Dehradun, it will be great if you can collect some feedback fromPaint dealers based there as also from Shalimar dealers as I find many dealers of Shalimar’s products in Dehradun…

  1. How is their product quality? What is their product range? How much do they invest in R&D?

Product quality can be best described average relative to decorative peers so far as its only in FY12 that company had started launching innovative products like ‘Self Clean’…Majority of the sales of Shalimar in decorative segment are from economy- and middle- price points…

Product quality of Shalimar is talked in high regards when we talk to industrial customers and they are on par with peers in this segment…

R&D has so far been focussed on Industrial Paints segment and thre is not much innovation going on in decorative paints by the co.

  1. Most paint cos are strong brands.So much so,that they hardly require any advertising.How good is the Shalimar brand in South?

As mentioned in the research note, Shalimar relies majorly on contractor-pulling as its main brand strength…so far this strategy has given the co. a steady growth in aggressively growing industry but i expect some branding initiatives to take place by the co. alongwith some new product launches by next year…As far as South market is concerned, Shalimar brand visibility is quite muted so far as company has not focussed on branding in this part as also West because of lack of dedicated manufacturing presence…

All these i am talking about decorative segment otherwise in Industrial segment Shalimar’s brand is quite strong across India…

  1. How do they plan to grab market share from rival cos? Do they enjoy any pricing power?

Paints industry is a very concentrated one and so any cost pressures are always passed on by the cos…Leaders take the lead…but, Shalimar’s products are always priced lower than its peers even in premium segment…

As far as grabing of marketshare is concerned, this might be true for FY14 when there is a slowdown but if we look 2-3 years down the line, all the five top players have enough room to grow irrespective of major change in marketshare…the problem will be with unorganised segment and it is from this segment that organised players will grab major marketshare…

However, we need to keep closely monitoring how the company takes initiatives, if any, towards this angle…

Feel free to get back to me in case of any further query.

Rgds.

10

**

Hi Sagar,

Please :

**

**

Its iffew

mangeable…

**

1)Why

**

As **

cr…

**

I **

beingreasonably strong inNorth-Eastern part ofIndia…Also, requirementsof

** contracts…Also, **

fromPaint

Dehradun…

Let me tell you that the brand is not prominent here.Asian Paints & to a much smaller extent,Dulux,are the preferred brands(I first heard about Shalimar when Tulsian recommended it a few months back)
Will surely do some scuttlebutt & get back to you.You can state what you want to know about Shalimar.

**

Product

** points…Product **

** segment…R&D **

co.

Can you tell what % of sales goes into R&D & whether they are planning to increase it or not?

**

**

As **

** presence…All **

India…

**

Paints

** segment…As **

** marketshare…However, **

** angle…

Feel **

query.

Rgds.

**

11

Hi Mahesh,

Gone through your report containing avalanche of info,really very useful. Excellent work by you and team.

I also gone through March 2011 corporate presentation of Shalimar. Pls download and see if you haven’t done already. According to it,

The 4th Manufacturing plant was expected to start by April 2012 and its capacity scheduled only 18000MT. The location of Plant is South Chennai,East Coast Road.

But your report says its location is North Chennai, Gummidipoondi and its slated capacity is 36000MT and is yet to go on stream

So why this anamoly ?? Do you have any info ?

Also Shalimar has acquired Eastern Speciality Paints and Coating Pvt Ltd on 31 March 2013. Any synergies arising out of this acquision ? Purpose of this acquisition …any info on this.?

Also I believe all the free hold land is consolidated under the subsidiary Adhunik Nirman. Any concrete plan to sell them or develop them ?

The idea behind Adhunik Nirman, I understand is, to separate costly historical tangible land assets under another co, so that in future if there is sales, only bldg, machines and stocks are sold to acquiring co. There were rumuors of Sherwin Williams bidding for Shalimar paints. Any info on these lines ?

Thanks for ur reply.

12

Srinivasan…Please find my replies in bold below :

I also gone through March 2011 corporate presentation of Shalimar. Pls download and see if you haven’t done already. According to it,

Have already gone through the said presentation before preparing the research note.

The 4th Manufacturing plant was expected to start by April 2012 and its capacity scheduled only 18000MT. The location of Plant is South Chennai,East Coast Road.

But your report says its location is North Chennai, Gummidipoondi and its slated capacity is 36000MT and is yet to go on stream

So why this anamoly ?? Do you have any info ?

From where you got this info rgdg. location of plant being in ‘South Chennai, East Coast Road’ ? ? ?..

its incorrect, the exact location of the plant is as mentioned in the research note "Chinnapuliyur Village, Gummidipoondi Village, District - Tiruvallur "

This location is confirmed with the company personnel as well as Tamil Nadu Pollution Control Board.

Rgdg. the capacity of the plant, originally it was planned to be of much smaller capacity but before attaining final financial closure for the plant, its capacity was enhanced to the mentioned quantum…Again, this 3000 kl per month of capacity is confirmed with the company personnel as also credit rating agency.

Rgdg. the delay in commercialisation of the plant, its because a serious sell-off attempt was made by the promoters post acquisiton of Tamilnadu land ; in the year 2010-2011 which eventually failed due to valuation differences as promoters were not willing to settle below 1.5-2 times EV/Sales…post that a consultant was appointed to suggest restructuring of the company so as to make the company more productive and profitable…the recent management changes that you are seeing is part of that restructuring drive…hence, post submission of report by the consultant in 2012, the blueprint for the said TN plant was drawn where capcity was enhanced to 3000 kl per month…All these info is from a highly placed source very close to the promoters and is not confirmed officially…however, since the construction work had already begun at the site (confirmed) and financial closure for the project already achieved (confirmed) at the time of making the notedelay isa thing of the past…afterall, Shalimar is a play on past minsmanagement of productive assets because of which its trading at below its liquidation value which is rare for any Indian Consumer Discretionary company of the size of 500 cr. +

Also Shalimar has acquired Eastern Speciality Paints and Coating Pvt Ltd on 31 March 2013. Any synergies arising out of this acquision ? Purpose of this acquisition …any info on this.?

No update as on date on this…but, i believe it should be for strengthening industrial paints segment as there is oflate hightened activity in R&D in Shlimar especially at Nashik lab and majority of the focus is on Industrial Paints segment.

Also I believe all the free hold land is consolidated under the subsidiary Adhunik Nirman. Any concrete plan to sell them or develop them ?

No…Only the freehold land at Gurgaon (4050 sq.mtr. alloted by HUDA) sits in the 100 % owned subsidiary ‘Shalimar Adunik Nirman’ otherwise all other freehold lands (Howrah, Nashik, Sikandrabad, TamilNadu) are under the standalone entity ‘Shalimar Paints Ltd.’.

There is no confirmed development or sell of this freehold lands as new management is only 3 months old and might take time to take grip of company’s affairs ; but, i belive, there could only be joint development or sell off of Gurgaon land in near future and sell off or development at other lands is out of question…Nashik & Sikadrabad lands will only be used to augment capacities and only there is some scope of development at huge Howrah land but that is quite distant and one should not rely on this…

The idea behind Adhunik Nirman, I understand is, to separate costly historical tangible land assets under another co, so that in future if there is sales, only bldg, machines and stocks are sold to acquiring co. There were rumuors of Sherwin Williams bidding for Shalimar paints. Any info on these lines ?

Your understanding is wrong…the purpose of establishing 100 % owned subsidiary Adhunik Nirman was to explore the potential to foray into real estate development which was subsequently put-off ; allied to that purpose was a desire to develop some portion of huge spare Howrah land which was also put-off…Gurgaon land was acquired with the aim to enter into real estate development but because of slowdown and static management company has so far not been able to do anything on this front…

Also, please make a note that Shalimar can’t get sold off w/o its freehold land which house its plants…No acquirer will let this happen and this is the main reason of difference in valuations in the acquistion talk…Only the freehold land at Gurgaon can be left off otherwise all other lands will go the acquirer in case of acquisition…

Rgds. acquistion talks, such rumours come and go, but, sell-off now seems out of question atleast for 2 years as the whole goal of the current restructuring is to professionalise the entire senior- & mid- management structure and give a free hand to them to improve the productivity and profitability of the company so that company can command higher valuations on the bourses…

Lastly, let me make one thing clear that an investor wanting to invest in Shalimar should not invest in it based on the likelihood of future development of land under company’s possession or some big fish acquiring the company…The investment should be made only on expected improvement in company’s financials…

The value of land in possession of the company as also its other Fixed and Net Current Assets provide downside safety and they should only be looked from that angle…

If any possible acquistion is made of Shalimar by some big co. then it could be a great addedbonus to the investor…However this should not be the basis of investment…

The main investment argument in favour of Shalimar is its a High Potential co. available at great valuations where even if some of the expected positive things turn out well then rerating could be sharp and significant…Its a long term play and in short term it could exhibit wild gyrations…Most Negatives seem fairly discounted at current rate whereas positives seem to be ignored at current valuations…Unless the company goes into Red for two subsequent years, itdeserves to trade at much higher valuations than current one…

I am invested into Shalimar so my views have to be taken in that regard.

Feel free to get back to me in case of any further query.

Rgds.

13

Will the new TN plant not face any power problems. Cos like LG Bala are facing secere shortage of power

14

Mahesh,

Once again a few queries which only you can answer.

I could be wrong in Chennai plant location, I was trying to recollect, but couldn’t. I will take your report’s address.

From the co.presentation and in your report plants from north, east and west installed manufacturing capacity,has actually increased in your report. Has the capacity already enhanced or to be enhanced in the 3 plants by FY14.?

Do you have the split of revenues from India, Nepal and Bangladesh. Your report mentions export revenues as well from abroad ? Annual report isn’t giving entire picture.

How long existing CEO Sandeep Sarda continue to provide support for the new team ? He has been in the co.for 10 yrs or so I believe, and has really grown the revenues well.

What reason mgmt gave for fire breakout in one of the plants ? Are the plants quality certified ? I thought it was really unprofessional by the management to let these accidents happen.

Also the mgmt was thinking of bringing the corporate head office to Mumbai from Kolkata for effective centralized communication and management. Has it happened already or postponed ?

Does the company have any dividend payout policy ? Will they compensate this year’s dividend in the next year by doubling it next year ?

From the sound of things, I like the overhaul of mgmt, new capacities coming up etc. I believe this co is shedding the past lethargy and trying to compete seriously and grab the sectoral opportunities. Valuations are compelling. Looks like growth in organic ways and from acquisition from big fish, is truly possible.

15

As discussed with you yesterday Rajeev…if the power situation doesn’t improve within 1 year in TN then it can partially impact the costs…Dcorative paints produce will not be impacted as the higher costs are normally passed on to consumers thereby protecting the margins…Industrial paints produce will experience squeeze in already low margins if the power situation doesn’t improve beyond 1 year…As stated in research note, for FY14 already the TN plant is expected to prove a dent on margins so there will be no unexpected cost increase in FY14 because of current TN power situation…

Feel free to get back to me in case of any further query.

Rgds.

16

Srinivasan...Please find my replies in bold below :


From the co.presentation and in your report plants from north, east and west installed manufacturing capacity,has actually increased in your report. Has the capacity already enhanced or to be enhanced in the 3 plants by FY14.?


The capacity mentioned for East, West & North plant are as on 31st March 2013.


Do you have the split of revenues from India, Nepal and Bangladesh. Your report mentions export revenues as well from abroad ? Annual report isn't giving entire picture.


Both the geographies have first full year of operations as FY13.....Revenues ex-India for FY13 is ~8 cr.


How long existing CEO Sandeep Sarda continue to provide support for the new team ? He has been in the co.for 10 yrs or so I believe, and has really grown the revenues well.


Mr. Sarda has already provided support to the new team for ~3 months till end-June 2013...

Mr. Sardawas COO from FY04 till FY07 when Mr. Agarwal was MD......and from FY07 he was made CEO......From FY07 till FY13 when Mr. sarda was responsible for growth and profitability of the company, company has grown its revenues at a CAGR of 12.86 %......It was a stable growth achieved by him........


What reason mgmt gave for fire breakout in one of the plants ? Are the plants quality certified ? I thought it was really unprofessional by the management to let these accidents happen.


All the three plants of the company are ISO 9000 certified with its Nashik plant being also ISO 14001 certified....

No particular reason or justification was given for Nashik accident.....

Although its unfortunate to have such accidents happen and management should take due care for it but sincethis isthe first major accident in the long history of Shalimar we can move ahead and need to monitor that it doesn't appear again.


Also the mgmt was thinking of bringing the corporate head office to Mumbai from Kolkata for effective centralized communication and management. Has it happened already or postponed ?


Corporate office is already there in Mumbai....however, location of power is quite dispersed till now because of lack of professional structure of management......with new professional management inplace, we need to monitor where exactly the location of power resides which should be known by Diwali'2013


Does the company have any dividend payout policy ? Will they compensate this year's dividend in the next year by doubling it next year ?


The company doesn't have a stated dividend policy but has consistently paid dividends over last two decades even in worst times when PAT was not sufficient for such payout...

Given below is last 18 years dividend payment history of the company with payout ratio w.r.t. PAT....

Dividend

Payout â wrt -- PAT

FY96

10 %

18.18 %

FY97

10 %

Loss

FY98

10 %

26.38 %

FY99

12 %

25.13 %

FY00

10 %

20.65 % (Loss after Extra Ord.)

FY01

12 %

22.84 %

FY02

12.5 + 12.5 = 25 %

(Spl. Div. 12.5 % on 100 yrs.)

60.12 %

FY03

20 %

38 %

FY04

20 %

50.66 %

FY05

25 %

47.97 %

FY06

35 %

38.70 %

FY07

50 %

39.87 %

FY08

70 %

27.66 %

FY09

30 %

31.93 %

FY10

75 %

28.4 %

FY11

80 %

25.96 %

FY12

100 %

26.21 %

FY13

0 %

0 %

Rgdg. compensating shareholders for Fy13's skip of dividend, I am not in the management of the company to answer this........but, my logical conclusion makes me believe that although we can't expect huge dividend payouts even in next 2 years because of requirement of cash for growth, but, management could easily reward the shareholders with a bonus issue once visibility of growth and profitability improves ; as there has been no bonus issue post the Jhunjhnuwala-Jindal entry into the company 25 years before as also there has been no equity dilution since last 20 years with the equity capital even today standing small at just 3.79 cr.


From the sound of things, I like the overhaul of mgmt, new capacities coming up etc. I believe this co is shedding the past lethargy and trying to compete seriously and grab the sectoral opportunities. Valuations are compelling. Looks like growth in organic ways and from acquisition from big fish, is truly possible.


True Srinivasan....we need to keep closely monitoring various aspects with rgds. to this co. as its clearly a high potential co. available at compelling valuations and if it doesn't go into red for 2 subsequent years, then it could really prove to be a great wealth creator.....Let's keep our fingers crossed and watch the developments....

Feel free to get back to me in case of any further query.

Rgds.

17

Mahesh,

Thanks for taking time out for a detailed reply. So a negligible 1.5% revenues coming from exports last year.

Also can you compare the color tinting system provided by Asian paints and Shalimar paints to their distributors/retailers if possible.

You state the possibility of co, going into red in next two years. I see things like slackening demand, rupee depreciation, debt and interest outgo, power shortage, new management as the key risks for this. All of the listed competitors are also increasing capacity at the same time. So sudden supply increase and the demand fall scenario is also looming large. Which of these do you see as bigger factor which could play the spoilsport, the most discomforting factor or anything outside of these ?

Being a big bull over long term, do you see immediate bearish case in near future with certainty ?

When can we expect latest annual report, if you have any info on this…

Please keep bulldozing us with any other info/developments, if and when you have it.

Thanks again.

18

Hi Srinivasan,

Don’t get me wrong…I am not saying that there is possibility of Shalimar going into Red in current and next fiscal…what i am saying is that for the current dismal valuations to sustain, the company has to go into red for two subsequent years…in other words, the biggest risk to our positive view on the stock is the company going into red for current and next fiscal which is a remote possibility…But, when we invest, and that too in current uncertain market and macros, we need to think of the worst scenario and then check whether we want to invest in a particular co. or not…

Now, rgdg. your query on biggest spoilspot…they could be debt & Interest outgo and high branding expenses if the management decides to focus on recreating Shalimar brand…

Rgdg. your next question addressed to me…if you ask me then i am more certain about positive scenario over medium term for Shalimar rather than bearish scenario…Short term scenario will depend majorly on Q1 & Q2 numbers…

I don’t have particular info on when the AR’2013 will be out ; but, logically, it should be out by next week.

Latest development rgdg. Shalimar is its Q1FY14 results date on 6th Aug. 2013…will come out with my expectations in next post…

Feel free to get back to me in case of any further query.

Rgds.

19

Results on 6th August 2013....Given below are my expectations :

( fig. In ` cr. )

Q1FY14e

Q1FY13




Net Revenue

131 - 134

121.74




EBITDA

8.2 â 9.3

9.06




PAT

1.4 â 2.4

3.13




EPS ( in ` )

0.74 â 1.26

1.65
20

Link to Annual Report’2013 of Shalimar Paints Ltd.

http://www.shalimarpaints.com/images/pdf/Shalimar%20Paints%20Limited%20Annual%20Report%202013.pdf

Rgds.