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


Any reasons why Shalimar paints has hit the lower circuit today ?

Hi Srinivasan,

Even I am surprised…market sources inform that one NBFC which is holding a large lot of Shalimar is selling in the market…otherwise the story seems intact as only last month in July’2013 another key personnel from Ingersoll, its Trane brand head has moved on to Shalimar as Head Marketing & Communications…he was with LG for 11 years looking after its brand activations and communications.


Shouldn’t one worry about the management-Jindals ?Looking at their past, i feel one should be very careful while making investments in any jindal group company.

Jindals are just one of the owners, not with full control. Jhunjhunwala is the other owner. So it is somewhat safer than a fully controlled Jindal’s.

Even though yesterday’s stock price fall was alarming, but ideally for such a small co, this should be the valuation it should trade for the next year or so, where business visibility is very mediocre and with no stake sale on the cards.

Mahesh, What I don’t like in this counter is, as you said there are so many non-promoter public Finance companies, that regularly trade in and out of this counter in bulk quantities, unnecessarily disturbing the share price discovery mechanism. Otherwise this stock would have never reached such fancy multiples in the first instance, and then go for free fall. People holding this co, should have felt the jittery yesterday, isn’t it Mahesh ?

yes srinivasan…you are right…people holding this co. including me felt jittery yesterday by just seeing the quantum of the fall…but also I took the opportunity to add some more as also churn my portfolio a bit by shifting some funds from PI to Shalimar…because, new management is just inplace and by October we should see some concrete initiatives as otherwise no company could afford such highly-paid executives appointment…other than NBFC selling what i feel is playing a part in this fall is allotment of 1.45 % expanded equity to newly appointed MD Mr. Nagpal as ESOP for which exercise price might get decided immediately after AGM due on 6th August 2013…it is after this grant, that initiatives should start reflecting in the public domain…and as we all know Shalimar counter is always prone to sharp fall as also sharp bounce and fall might be nearing its end and yesterday we might have seen the capitulation…delivery of ~1.13 Lakh shares yesterday indicate this…

Having said all these, this might also be a precursor to bad Q1FY14 numbers due on 6th Aug. but anyway I have not expected much good performance in Q1 & Q2 and real reflection in financials is expected only from Q3FY14.

Lets hope for the best and I am keeping my fingers crossed as this is the first company I have tracked in which I am seeing a divergence from seeming logical fundamentals…


Mahesh, I was also averaging last week. But the fall was reminiscent of MCX, and Ftech counters. There were no buyers at all. Looks like there is still more to this fall, and I speculate it may settle at levels of 50.Market is expecting loss or something disastrous from the company results as you say. Your speculations of loss earlier, looksominousnow .Let’s see how results go. Mahesh, at this rate of fall, averaging in this counter can go on for the next 6 months.

Prima facile …revenues are below estimates but Ebitda & Pat are within the estimates which suggests focus on operational efficiency…interest costs are increased because of debt taken for TN plant…the plant should be operational by October & co. sources suggest ~25% utilisation this fiscal…

Recent correction till 58 and may be lower tomorrow is unwarranted as co. is still in black and not in red…insiders are holding buying pending allotment of 1.5 % equity to newly appointed MD…once allotment is done clear trend should emerge as initiatives will then be out in public domain…will use recent correction and will be a buyer tomorrow…markets are giving such valuations to stocks as if there is no tomorrow…correction in shalimar may be nearing end that’s what I feel…

I am holding shalimar so my views have to be taken in that regard.



Congrats on getting most estimates right. Sales numbers are even below your pessimistic estimates. That is very sad. In fact if you notice they have not been able to achieve the level of sales done in 2011 in volume terms till this year. The bad news is capacity increase is taking place, when demand is surely slowing down. Sales also visibly going down. Already the existing capacity may not be fully utilized for atleast next year and there is capacity increase taking place. With increased debt burden for this, I estimate this price level of 59 is 11x eps 2014. So I believe it is fairly valued unless the business cycle turns within the next 12 months. So there is plenty of time to average. All I can see is you cannot lose money in this over a 3-4 year term, but there are hardly any immediate upside triggers. If there are no opportunity costs, one can invest here and wait. I feel markets are valuing this efficiently atleast for next 1 year. My main concern now is meaningful sales increase, I can’t see it coming for next 1 year.

let the time pass by srinivasan…you are ignoring one fact that markets always run on sentiments and discount the future well in advance…professional management, especially the one that Shalimar has put up seems very efficient in this and once the vision and initiatives of the new management are well talked of in public domain this valuations can’t remain thats what i feel and i can be wrong…anyway i am in this counter for long term and feel its an excellent time to accumulate more…did some buying at 59 today…


Shalimar Paints plans to grow faster than its peers…aims to double revenues in next 3 years…

Press Release Attached :


Hi Mahesh,

You have any research report on Shalimar?


Have already attached the link to my research note in the beginning of this thread.



What kind of operating leaverage do you expect to kick if they can double the sales ?

that will depend on how fast and how well they utilise South Indian plant capacity…as this facility will be key driver for growth going forward and it is commisioning of this facility because of which they are confident of doubling the revenues by FY16-17…almost 60 % of the projected growth is going to come from this facility…also, whether they can monetise Gurgaon land or not that also will be key thing to watch as in such a scenario debt requirement will be that much lower…they will need to spend heaviliy on branding and this may initially pressurise margins…


Hi Mahesh, thank you very much forthe detailed report on Shalimar.

The new management in yesterdayas press release targeted doubling revenues in 3 years; I hope it is profitable growth. I think management should focus more on improving profitability. Shalimar is the least profitable company in the industry. Shalimaras OPM is stagnant at 7% for past six year. Margins are lower by 100 to 400 bps compared to Akzo, kansai and Berger. ROCE is lower by anywhere 10 to 20% compared to peers. Hence profitable growth is what investors will be interested in.

Leverage also seems to be on higher side, net debt/ebitda is at 2x. Co is reporting Rs.44.3 cr of bill discounting amount under sundry creditors (page 36 of AR), if this is added to debt then leverage shoots up to 3x ebitda. With planned capex of around 60cr leverage goes up further in short to medium term.

Company tried some _facelift_ exercise in 2005 despite which decorative paints mkt share fell from 6% to 3%. If absence of plant in _south_ is hindering growth prospects then why it took so _long_ for them to set up capacity in south?

Rumors of Shalimar up for sale surfaced in _2007_ and _2011_.

_2007_ and _2011_.

Sameer nagpal joined Zicom building solution group in _Jan, 2008_. Sales of building solutions group increased from 164 cr to 245 cr and this group of zicom was sold to Schneider in _March, 2010._ There after Sameer joined Ingersoll rand India in _July, 2010_. In his _August, 2010_ interview to indiainfoline, he said his short term target is to more than double revenues in there years. Ingersoll randas revenues grew from 500crs in 2010 to 580crs in _2013_(india))-ltd/ingersol/500210/).

New CEO is well incentivized to perform with ESOPs amounting to 1.5% of outstanding shares. But it will be more interesting to see if new management team buys stock from open market at current low price. (Which insider wonat be interested in buying a co whose stock price is near 3yr low and whose sales are going to double in 3yrs?)

In short run softening demand, increase in employee cost (becoz of highly paid new team) and increasing interest cost will be big challenges. Would co sell some surplus land? This co is worth watching closely to check whether new management delivers to the expectations.

I have serious doubts whether the Gurgaon land which is claimed as freehold can be sold off. They are talking of JV. If the land is indeed freehold why not just monetize it. It beats my logic that the land which was allotted to them by the Development Authority for a nominal cost if at all, can be sold off for around Rs.50 crores. If that is the case it looks like this type of transactions are another scam in the making.

Mahesh, Thanks for the detailed analysis. I generally believe that turnarounds rarely turn around and tend to give these kind of opportunities a miss. But few pointers which makes this worthy of a relook are:
-20% + ROCE in the past
-New management changes
-Capacity expansion
-Consumption theme (though this has become too clich©d these days)

You have already highlighted the above. Could you help me answer the following:

1). How can someone like me(a retail investor)be sure of the progress made on the new TN plant? Is there actually any progress being made? I was a bit surprised to see no mention of the new plant in the Fy13 Annual Report.

2). How did they fund the capex (the new TN plant + the expansion in the existing plants)?

3). Currently the D/E is above 1. How do you see it going forward? Do you think they will have to take up more loans?


P.S : I have posted the same on TED. But the post is still pending approval

Hi Vijay,

Please find my replies in bold below :

1). How can someone like me(a retail investor)be sure of the progress made on the new TN plant? Is there actually any progress being made? I was a bit surprised to see no mention of the new plant in the Fy13 Annual Report.

You can contact company secretary to check the progress. In AR it was just mentioned in last page as coming soon…even i was disappointed of no detailed future direction in AR.

2). How did they fund the capex (the new TN plant + the expansion in the existing plants)?

New plant is to be funded via D:E ratio of 1.5:1…

3). Currently the D/E is above 1. How do you see it going forward? Do you think they will have to take up more loans?

Yes…in the short to medium term i see debt going up…maximum in FY14…

All said, its a company for the long term and to keep in close radar…don’t add up significantly if you are planning to invest as its a high beta share…


Hi Mahesh,

As always, the research note on Shalimar paints has your stamp of quality and an eye for detail. Many thanks.

I had a few basic questions.

1). In the Indian scenario, is it prudent to base an investment case on the liquidation value of physical assets of the company? The Indian legal process will put flowing tar to shame when it comes to speed. In this scenario, what will the equity investors stand to recover when the entire plant and machinery and the raw materials have rusted or are worth no more than scrap metal. Kolkota has innumerable such examples where the plants are shut and the creditors and shareholders have been doing rounds of courts for the better part of 30 yrs.

2). The same is the case with the intangible asset called brand name. SBI and other lenders have learnt this the hard way when they lent money against the Kingfisher airlines brand name.

3). If this is a takeover target, who would want to take this over. I think that it would only be a foreign investor who wants to have a built capacity and a distribution network in place. It is unlikely that any of the existing Indian players would want to take this company over. I think that it would be far easier for the existing companies to introduce their own economy brands through their own networks. In such a scenario, how much weight does the replacement asset value theory carry.

4). Another assumption in the note is that the only thing holding back Shalimar paint is their manufacturing capacity. Does this brand really have the kind of a pull that it can sell all that it can produce? Shalimar may be a price leader, but does that count for much in the competitive branded play of the paints industry in India.

5). The profitability numbers are really the worst in the industry. Some of this might be explained by their greater focus on Industrial vs decorative paints and the higher logistics costs owing to no manufacturing presence in the South. Is this all or is there more to it? Is it because that they have no pricing power and any price increase leads to market share erosion? How do they plan to address this and this cannot be remedied without serious action on the brand building front?

I think that the only thing going for this scrip is the valuation. The Mcap is close to Rs 100 crs as i write this. Other than this, it is a serious case of a turnaround which might or might not happen and in my opinion, in the absence of profitable growth, the scrip might not go anywhere. Asset plays rarely pay in the indian market.

Hi P Sharma,

As rightly put by you in the last para, its a clear case of undervaluation…secondly, I have not based an investment argument on liquidation value, but, have arrived at the possible dowsides to our investment…thirdly, more than a forign player, it will be semi-Indian player like Kansai which will be interested in takeover of Shalimar as it has some good products in industrial segment in addition to huge capcity increase possibility at each of the location…fourthly, in industrial segment, shalimar has a brand pull but in decorative it doesn’t…profitability is impacted more because of mismanagement and can be improved if managed well…

Shalimar is a case of a high potential co. managed pathetically…and the new management provides hope for that…however, there is no harm in waiting for a while and check what and how management delivers or atleast provides direction…current markets provide such opportunity…