Industrial paint volume increased 1% on yearly basis while decorative paint volume increased 35% YoY
ConCall highlights:
Industrial segment reported muted volume due to slowdown in the economy and extended monsoon; volume declined 25% on sequential basis
Company is getting very good response from Northern and Eastern part of the country
Shalimar has posted positive EBITDA during the quarter and aiming to be cash positive in next two quarters
Putty volume increased four times on yearly basis
Shalimar won’t increase the credit period to boost sales; debtor days likely to improve going forward
Fixed expenditure per annum is around Rs 100 crore (excluding interest Rs 75-80 crore). Variable expenditure is around 75% of total expenditure
Total debt as on date around Rs 130 crore; average rate of interest around 13.5%. Shalimar requests State Bank of India to reduce the interest rate; likely to see some reduction by end of this month
Nashik plant commenced commercial production in the month of September; capacity utilization will increase to 50% by end of Q4FY20
Plants are running at around 55% of installed capacity post the commencement of Nashik plant
Shalimar’s product price is around 3-4% lower than the industry average
Debtor days around 50-60 days; creditor days around 90 days; inventory days around 50 days. Six months down the line Shalimar will improve the inventory days to industry average of 30-35 days
Current working capital is around Rs 170-180 crore, which is sufficient enough to take the revenue to Rs 600 crore
Shalimar will receive Rs 40-50 crore of insurance claim in next 3-4 months; first tranches of Rs 18 crore will come in current month and another Rs 22-30 crore in next 3-4 months. Shalimar can increase the revenue to Rs 800 crore with this money
Steel tube sector is key customer for Shalimar in industrial paint category
Shalimar will move to new tax rate but the decision is still to be taken
Gross margin will improve to 34% in next two quarters from 32-32.5% currently
Logistic cost around 8% of sales which will improve by 50-100 bps as Nashik plant have become operational
Shalimar will spend around 1.5-2% of revenue on branding and advertising as fund is limited; industry average is around 7-8%
Number of new painters who tried Shalimar’s paint is doubling every quarter
Capex:
Shalimar has incurred around Rs 50 crore on capex for Nashik plant in H1FY20 (this include the expenditure incurred last year for the Nashik project); would incur another Rs 2-3 crore in H2FY20 for regular maintenance
No major capex plan for next financial year
Company can increase the revenue to Rs 1,000 crore with a minor capex of Rs 4-5 crore
Guidance:
Shalimar likely to report around Rs 400 crore revenue this financial year and Rs 500-600 crore in FY21
Shalimar Paints Ltd (SPL) has reported 20% revenue growth YoY during this quarter. Industrial grew 16% and decorative grew 23%
Company has been EBITDA positive for the last three quarters
ConCall highlights:
SPL has spent Rs 4 crore on branding during the quarter which has impacted the EBITDA margin
Though overall sales is growing at 25-30%, company is able to achieve 45-50% growth in South and West
East market is growing at 15-17%; freight cost is very high in eastern market as the company has no unit in that region
Nashik plant, which was under construction since September 2018 has been fully commissioned; company was able to produce 35-40% of installed capacity in Q3FY20
Fixed cost is almost under control; employee cost increased only due to addition of sales staff
Production of Chennai plant drops as Nashik plant starts catering in western market and some parts of eastern market
Expenditure on branding and advertising will continue to be limited for the company till company has become cash positive
SPL has three plant with a capacity of 2000 KL each; but the company has environment clearance of only 1000 KL for Nashik plant
Company doesn’t need any equity capital or debt in the next 6-9 months to spur the growth
Debt level currently stands at Rs 120-130 crore
Company is expecting Rs 8 crore from insurance claim in next one month and another Rs 15-20 crore in next 6-8 months
Company will utilize the claim proceeds to pare debt as there is no need for working capital. Debt will be reduced by Rs 25-30 crore in next 6-8 months
SPL is primarily in economy range and average realization for decorative range is around Rs 100-110 per liter and for industrial it is around Rs 120-130 per liter
SPL has entered into premium paint segment in very a limited manner
As of now company is more focused on volume and not on margin as company has lot of underutilized capacity
Capacity utilization: Sikandrabad-80%; Nashik and Chennai at 35-40%
Sales staff cost will grow by 15-17% if revenue grows at 25-30%
Company is aiming to gain market share from small players as it is very difficult to gain market share from large players
Contribution of oil based paint is around 35-40% and water based around 60% for SPL
SPL currently adding 100-150 dealers every month; average revenue per dealer is around Rs 75,000 per month. Company is working to increase it to Rs 100,000 per dealer but it will take around 1-2 years
Company is working to improve the supply chain cost as SPL’s cost is much higher than other players
Capex:
SPL can achieve revenue of Rs 800 crore without any further capex and with minor capex of Rs 5-10 crore revenue can be increased to Rs 1,000 crore
Guidance:
SPL has guided 20-25% growth both for decorative and industrial segment
Company is trying to achieve cash positive as early as possible
SPL is targeting EBITDA margin of 7-8% in next financial year and in long run 10-12%
Why Shalimar paint is continuously making loss even all the paint companies are making good profit, fire broke out their plant and the damages happened in 2017 already recovered, Now a days, I think no major paints companies are incurred loss except this, As I remember management said FY 20 company will be in profit, but no major improvements
Infra.Market decided to acquire roughly 25% of Shalimar Paints for Rs 270 crore (US$36 million) last week. Can this private equity investment bring glory?
The below article is a great read on the current developments in the company:
Some excerpts: (ALL CREDIT GOES TO ARTICLE OWNER)
Hell Infra is desperately trying to acquire the company
Shalimar Paints is doubling production capacity from 78 million litres to 180 million litres by modernising existing facilities. The capex earmarked for FY24 is ₹190 crores
New R&D facility in Nashik to support new product launches like wood coatings & waterproofing
More hiring in functions like sales, R&D and operations to support expansion
Increase marketing spends; 5% of annual sales (from < 2%)
Added 2,000 dealers in the last 5 quarters contributing 15% of sales
Shalimar Paints hopes to cross ₹1,000 crores in sales by FY27 (₹486 crores in FY23).
On a relative basis, Indigo Paints is currently where Shalimar Paints wants to be by FY28 (sales = ₹1,250 crores, EBITDA margin = 17%)
If I play it conservatively and assume an EBITDA margin of 12%, a back-of-the-envelope calculation extrapolates to a market cap of ₹4,500 crores by FY28 – a potential annualized stock price return of 28.6%
I was really intrigued after reading the article by Mr Shankar Nath. Wanted to dig deeper to understand the capability and the track record of the management, specially Mr. Ashok Kumar Gupta who has done wonders with Jindal Stainless and APL Apollo Tubes.
There are two points which I am a little concerned about
In the interview - https://youtu.be/HgdbdmBBYfY?t=246 in Sept 2020, Mr Ashok Gupta talked about reaching 1000 Cr revenue in three years. Now there was another COVID wave after this so it would have definitely affected his plans. By march 21, there was revenue degrowth of ~5% and by march 22, they reported revenue growth of ~10%. Results begin to look good by March 23, where they reported revenue growth of ~35% (at 486Cr). The problem is, if you look at the end of dec quarter, FY 24, the revenue growth seems to have slowed down (TTM revenue is ~526 Cr.). At this rate it might be difficult to reach a 1000 Cr revenue even by FY 25. Is this a case of over-promising and under-delivering? I am not sure.
It seems, the 1000 Cr revenue target was later revised and is now targeted for FY27 - Shalimar Paints hopes to cross Rs 1,000 crore topline in coming years, ET RealEstate
The company does not seem to have published earnings call recordings/ transcripts for Q2/Q3 FY '24 . (Or is it that I am unable to find them?). Is this a red flag? Would love to understand fellow investors point of view here.
Another point is that the industry leader Asian Paints it trading close to 3 yr lows. Most experts are pointing to new competition in the market (Grasim) as the reason which will erode the margins in the future.
I believe its going to be even harder for Shalimar paints to turnaround and generate value given such intense competition in this sector.
