Sirca Paints India Limited

[rk1771]

Business Overview:

Sirca Paints India Limited was incorporated in 2006. The company has come a long way since then and has emerged as a premium wood finish brand, which is the leader in northern India. Sirca Paints India Limited has the exclusive tie-up with Sirca S.p.A (Italy) for manufacturing and distributing rights of Sirca products in India, Nepal, Bangladesh, Sri Lanka. The Sirca range includes everything needed to protect and paint the wood and alternative supports used in the furniture industry and its accessories. Due to the premium brand positioning of Sirca Wood Coatings in the market, they compete primarily with high-end wood coating brands like ICA-Pidilite and Asian Paints. Sirca came out with IPO on BSE SME exchange in 2018.

It has entered into a Manufacturing License Agreement with SIRCA S.P.A. Italy for manufacturing the some products in India, under the mark “SIRCA”.

Sirca Paints India Limited has successfully commissioned its wall paint manufacturing unit in February 2019, with an annual manufacturing capacity of 24,00,000 Liters, at Rai, Sonipat (NCR). They are also in the process of commissioning manufacturing facility for the production of Melamine, Economical PU, NC Products, and Thinners. This manufacturing facility has been commissioned and management expects meaningful contribution to topline from the facilities in Q4, 2020.

Financials:

Financials of the company has been improving for last many years;

The company is debt-free.
The company has also a good retail/OEM ratio of 70:30.

Investment Theme:

The company is involved in distributing and selling wood coating/finishing products. Earlier the company was an importer and seller of products, imported from Sirca SRL Italy. Sirca SRL is also a minority shareholder in Sirca Paints India Limited.
The company has a 2-decade-old relationship with Sirca, Italy. The company has entered into a Manufacturing License Agreement, in 2018, with Sirca S.p.A pursuant to which the company is setting up a manufacturing plant to manufacture paints in India, under the mark “SIRCA”. Sirca S.p.A is also providing the technical know-how for the upcoming manufacturing facility. The company has also entered into a Distributorship agreement pursuant to which they have received exclusive selling rights for Sirca products in India, Sri Lanka, Bangladesh, and Nepal.
In 2019, the company made a sale of 131 crores with a net profit of 22 crores. The story continues in 2020, and in H1 the company has made a sale of 75 crores with a profit of 15 crores. In Q3,2020 sales have gone up by 27%.
The manufacturing facility was expected to start in September 2019. Management has guided that on full capacity, it shall add around 225 crores to the topline. Further, the company is increasing its sales and distribution reach from North India to other parts. Some new products are also being added. The manufacturing facility will not replace the sale of imported products, it shall add new product line.
Trial run for the new facility has started. In H2 results, we may see some addition in topline through the manufacturing facility. On a 30% capacility utilization, in next financial year the new facility can add substantially to top line. The company expects the Sonipat facility to contribute meaningfully from Q4, 2020 onwards.

Opportunity:

-Sirca, being a small niche player has substantial opportunity to grow as the niche market size is increasing.

• Geographical expansion out of north India to other parts of India is also a nice opportunity.

-With diversification in product portfolio, growth opportunity is there.

-Though not much is known to me about management, the management looks fair with detailed disclosures about the company, prompt reporting, issuance of bonus shares last year etc.

Valuation:

The company is valued around 850 Cr. Market Cap. With manufacturing facilities coming in operation, I expect [my view only] the company to do 250 crores in sales and around 40 crores in profit. For a company growing profitably at this rate, forward PE of 21 is reasonable; though not cheap.

Risk:

-Increase in sales and marketing cost. Recently they have set up additional stock depot and branch offices. With addition in dealership, working capital days/inventory level in increasing. It may affect the margins.

-How will new products be accepted in the market is not known.

[Disclosure- Invested]

[sameernics]

Rajesh Ji,

Thanks for your note. I had also done a detailed analysis of Sirca Paints and posted in the forum. Unfortunately forum has withdrawn my post, which sounds weird

Just please check the PAT figure (32 cr) that you reported for FY 18-19. I think it is 22 Cr?

Anyways the point is, Sirca Paints i think can’t go wrong. They are not a new company. They have been doing the business for last 15 years and as you rightly said, they have 2 decade old strong relationship with Sirca Italy.

On the fundamental side of the business, for me they look very superior. I have no doubts of what so ever on the promoters or management for the simple reason that they are selling Sirca brand which is known for high quality Italian product. Company’s quality and corporate governance cant go wrong, else Sirca Italy’s business, brand and reputation would be at risk. Moreover, there is a good amount of foreign promoter and Sirca Italy are party to shareholding. Moreover the exclusive 15 years distribution rights of Sirca Italy products in India, Nepal, Sri Lanka and Bangladesh are on the back of 2 decade relationship.

Indian operations shall be closely supervised by Sirca professionals. So therefore Indian operations will have to follow Italian protocols. As i look at their board of directors, there is MR. UGO PELOSIN: NON EXECUTIVE DIRECTOR, who indeed from Sirca SPA.

As i was looking at their recent Q3 investor presentation. The key highlights are:

1. Physical infrastructure: As part of the strategy to create infrastructure at pan India level, during the quarter they have added Depots in Kerala and Kolkata.
2. Launched new branch office in Kerala and Kolkata.
3. 28 additional sales team members added during Q3, which now makes total sales force to 143.
4. During Q3, they have added an additional studio in Dehradun, so now the total count of sirca studios stands at 14 (in my original note, I had mentioned 10).
5. Dealer network has significantly jumped to 1477 (earlier i had mentioned over 555). Thats really mind blowing the way it is penetrating pan India.
6. In January 2020, the company was mentioned in India s Growth Champions 2020 ranks: India s fastest growing companies by The Economic Times wherein Sirca Paints India Limited was the only company to be mentioned from the paints industry.
7. Their state of the art facility for coatings has started and according to presentation, they expect a meaningful contribution in Q4 and beyond. That’s great re-confirmation. With above developments, I am very confident that Sirca paints will grow from strength to strength.

In Sirca Paints, 2 things are certain in the next 3 years. That is:

1. The revenues will jump from 125 crores to minimum 450 crores and Profit will jump from 22 crores to minimum 80 crores (this includes both imported premium Italian plus Indian manufactured products).
2. Paints sector average PE is around 60-80 and Sirca Paints is still just around 30s. So a lot will happen in the coming quarters and years for the company and its share price.

Disclosure: Invested

[rk1771]

I agree. Once the manufacturing facilities are fully utilized, in 3 years time, revenue should be around 450 crores. Based on past performance of the company, expecting a profit of 80 crores at that time is reasonable. Still, a few things are there to be watched closely;
(i) Italian imported product portfolio is doing very well, known in the market and commands a good margin. It is likely to continue.
(ii) Indian manufactured products are not that premium products, and margin shall be a tad lower on those items. I expect to be around 15%.
(iii) We dont know acceptability of their wall paints in the market. If it is accepted well in the market, the company will do very well; however there is cut-throat competition there.
Investing is all about looking into future, and nobody can be sure of future. Let us keep a close watch on the company. Yes, it has a potential to be a multi-bagger.

[sameernics]

Regarding your point no (ii), just i want to point out, based on the last Q2 management concall, that the margins for imported as well as Indian manufactured coating products will be more or less same.
For (iii), all i can say is Sirca’s main thrust is on coating products and yes for wall paints, i am sure it will gain the momentum gradually due to Sirca’s brand recall and through pan India distribution visibility.

Precisely that is the reason why their wall paint (7 products) is manufactured in a leased land building model with minimal capital investment. Here the management is smart and knows where to put their money.

[sameernics]

Now that this thread is open for sharing. Herewith copied my analysis of Sirca Paints India.

I found Sirca Paints India is an interesting company. It is definitely a big tick in all my boxes to be a big multibagger. First about the company. The company has initially started its business in India as a trading company (for Indian market) of extremely high quality wood coatings, paints, PU products, thinners, abrasives, buffing cream and other allied products. Now the company majorly imports the products such as coatings and paints from Sirca SPA Italy, which is known for very high quality products in the global markets and in India. Note that the company has a very strong 2 decade relationship with Sirca Italy. Please also note Sirca SPA Italy is one of the leading international brand known for high quality products for various coatings and paints. For more about the Sirca SPA Italy please visit www dot sirca dot it.

Sirca Paints India got listed in NSE SME platform in mid of 2018 and subsequently migrated to NSE main board last year. The main reason for raising money was to set up own Indian manufacturing unit for various coatings products such as PU thinners, NC lacquers, melamine, wall paints and other PU products. Sirca paints is the first Company to launch wood filler in India and opened its wholly owned branches in Mumbai and Chennai.

Positives of the company. 1) The company has entered an exclusive distributorship rights of leading Sirca Italy brand products in India, Sri Lanka, Nepal and Bangladesh. 2) Company has also entered into a Manufacturing License Agreement dated 16th February, 2018 with SIRCA S.P.A. Italy for manufacturing the following products that the Company is currently distributing under the Product Distribution Agreement for Paints NC (Nitrocellulose Paint), Paints AC (Acrylic Paint), Thinner, Polyurethane Products. Which means that all the production and quality of Indian made products will be under the supervision of Sirca SPA Italy. 3) Sirca India has very strong leadership position and market share in north India due to Italian quality.

Now what are the game changer points for the company in 2020: 1) As we speak the company has established 2 manufacturing units in India during 2019 with the help of IPO proceeds (one for wall paints (24 lakh liters) and other for coating products and some new products (12000 tonnes)). The unit for coating products is a state-of-the-art facility and whilst wall paints (7 products) unit is built on leased land and building model with minimal capital expenditure. The wall paint unit has started its production in the beginning of 2019. The state of the art facility for coating products has got all the necessary government approvals and started its trial production in Oct 2019. From Q4 we will see regular production of coatings and the initial expected capacity utilization is around 25-30 percent. Company expects to ramp up the utilization at a faster pace with the help of SIrca Italy professionals. So I expect in 2-3 years these facilities will run at full capacity and generate sales of around 250 crores minimum. Please note the company will continue to import Sirca Italy products so the sales from this is over and above Indian operations. In the last fiscal they did about 125 crores and 22 crores net profit and company expects a top line growth of at least 25 percent CAGR for next few years with EBIDTA margins of 25 percent minimum. 2) It has now moved from a north centric (for last 15 years) player to a pan India player by aggressively setting up necessary infrastructure (over 555 dealers pan India, increased sales team to cover pan India. Recently they have appointed a distributor in Dubai as well. Apart from the 10 Sirca-brand studios that they are currently operating in 7 states, they have in pipeline another 6-7 studios that will be launched in the coming months. 3) The current sales are drawn from 30 percent OEM and 70 percent retail. In OEM there are names like Godrej, Jindal Stainless, Indoline, Space Wood, Pyramid, MAS Furniture, Alsorg, Soundarya Decorators and many more. Company s products are almost approved by 2 of IKEA s contract manufacturers in India so Sirca will be an automatic approved suppler for rest of the IKEA s contract manufacturers in India. 4) The exclusive 15 years Sirca Italy agreement for sales distribution in India, Sri Lanka, Nepal and Bangladesh will drive incremental sales to the company.

Now on the fundamental side of the company: 1) The company is run by very high quality promoters and management. Promoter holding is very high at 67.32 percent of which 19 percent is foreign holding by BGB Italia SRL. Of the 32.66 percent shareholding, Reliance MF is holding around 2 percent, FPI and DII about 4 percent, Sirca Italy holds about 4 percent. HNIs hold about 9 percent. Rest of the shares in the hands of general public. So which means about 86.32 percent shares are in the strong hands, which makes the stock highly illiquid. 2) The face value of the company is 10 rs and the market is just over 700 crore 3) It has paid maiden dividend in 2019 4) ROCE is over 40 percent and ROE is over 30 percent 5) Debt free company and the management is committed to remain debt free 6) Stock is trading below 30 PE as compared to its peers Asian paints (60 plus), Berger paints (60 plus), Pidilite (60 plus) and price to book value is way below its peers 7) Revenues, EBIDTA margins, PAT, EPS have consistently grown over last 5 years and market share is increasing every year. Growth for coating products is in double digits for several years and expected to grow by 15 and 20 percent by volume and value 8) As per management EBIDTA margins will remain more or less same for imported Italian products as well as Indian manufactured products 9) Their cash flows are consistently positive 9) Already paid bonus shares last year and the equity capital still very small at 27.4 cr. 10) Soon the company aims to list in BSE platform too. 11) The management has been absolutely transparent in terms of timely disclosures to exchanges since IPO.

Who are the main competitors? Though the main competitors are Asian paints and others, however Sirca s thrust is on the coating products and it believes that their main competitor for their products is ICA Pidilite, which Pidilite took over ICA in 2017 and predominantly it is a south centric player and ICA positioned more as a local Indian make quality. With Sirca, it deals in premium coatings with Italian quality endorsement, it remains one of the leaders in this space. For Indian PU, Italian PU and decorative, Asian paints is number 1, where as in terms of Italian PU, Sirca is number 2.

Summary: Sirca with high Italian quality and brand recall, with own Indian manufacturing under the supervision of Sirca Italy, Exclusive sales distribution rights for Sirca products in India, Nepal, Sri Lanka and Bangladesh, Rapid expansion across pan India, it is poised to emerge one of the leaders in Coatings and Paints in the next few years. With this enormous opportunity coupled with high fundamentals of the company as mentioned earlier it should be definitely become a big multibagger in the times to come.

Disclosure: Invested. All the information in my note was gathered from their IPO, AR, Investor presentation, management Concall.

[rk1771]

Excellent analysis Sameer. On valuation side I have a few doubts, please think over it and let us know your views:-
(i) Sirca India does not own its brands, unlike say Asian Paints or Pidilite. So, they need to pay some amount of royalty. Will it not keep Sirca’s valuations ratio at a much lower level than Asian Paints.
(ii) Market size of premium wood finishing products is much smaller; though growing at a much faster pace.

[raj1968]

Thanks for a detailed write up.
I have been following this company for more than a year and have it as part of my portfolio. I would like to caution against the bullish tone as it’s too early to project where the company will be 3-5 years from now. While the prospects look good there are various risks/concerns:

1. Receivables are very high. Management promised to bring it down in the various investor interactions. I will be watching for that very carefully. Now the focus has shifted from OEM to retail. This also needs higher working capital as they need to provide better credit to dealers.
2. Their main competitors are Asian paints and Pidilite. Both are very strong brands and have a lot of financial/marketing muscle. How they allow this incumbent to grow need to be seen. Management has accepted the fact that they face sudden promotional discounts from their larger competitors and then they have to match that.
3. New facility has come with a long delay and is expected to start sales from Q4 this year. How much they can sell that’s also need to be seen.
4. The products from the new facility is more to provide the range of products dealers/distributors wanted. Now how customers react to it, need to be seen as Sirca’s main competence is in high end wood paints.
   Regards,
   Raj
   Disc: Invested with 6% of my portfolio. No trading in last 4 months.

[sameernics]

Agree, here the business model of Sirca Paints is something like PAGE IND, who sell JOCKEY brand. In spite of royalty, the Sirca is growing at much faster pace.

Btw; Sirca paints is not just limited to wood coatings (yes, primarily), but there are other coatings too such as glass and metal. Wall paints is something could be exciting. The new Indian manufacturing unit will introduce some new products according to the management so let us see that.

Regarding point no (ii), the market has been growing in double digits and according to management it will continue to grow in double digits both volume and value. Their exclusive distribution rights in Nepal, Sri Lanka, Bangladesh are new markets for them. Hang on…, in the last management call, they also mentioned that they are entering Dubai (already appointed a distributor).

New OEMs such as IKEA could be again very interesting.

[sameernics]

Next in the pipeline is, listing in BSE platform. I am sure this will come in few months time.

[melwinambatt]

Agreeing to sameernics and also to the headwinds projected by raj. Interested to see how much sales they are able to make from new facilities in Q4. if they are able to make 45-50cr sales in Q4, market will react positively for sure. market itself is growing at 20% , so if products are good, we will see huge potential in next 3-4 years

[rk1771]

Shareholding of the stock is moving to stronger hands. Retail has around 18.5% holding, and share of small retail (less than 20,000 shares) is continuously decreasing. Retail holding having more than 20k shares has increased from 8.74% (Sep 18) to 14.1% (Dec. 19). Important investors In Sirca includes Gita Kriti Ambani [related to Amar Ambani, Head of research IIFL], Asha Mukul Agarwal and Sanjay Katkar [CTO of Quickheal Technology].

[sameernics]

Thanks Melwin.

As indicated in their last management call, i have just copied below the management answer to one of the investor’s similar question on the new facility. Hope this helps.

I am pretty confident that they will deliver, given what the company has done so far and what the market opportunity is ahead in the times to come.

[sameernics]

Yes that is true. I have put those names under HNIs. Just see the summary of the shareholding which i mentioned in the past.

Promoter holding is very high at 67.32 percent of which 19 percent is foreign holding by BGB Italia SRL. Of the remaining 32.66 percent public shareholding, Reliance AMC is holding around 2 percent, FPI and DII about 4 percent, Sirca SPA Italy holds about 4 percent. HNIs hold about 9 percent. Rest of the shares (13.68%) is in the hands of general public.

So which means about 86.32% shares are in the strong hands (since IPO times), which makes the stock highly illiquid and not easy to get a big chunk, unless the new HNIs, FIIs, DIIs, FPIs, MFs buying at upper circuit prices.

My good guess says, the demand for Sirca Paints shares will only increase in the coming quarters and years as the big potential of the company is yet to unfold.

[atul1082]

I think this forum does not work on the principle of guess sales, profitability and forcasting of target price based of these assumptions.senior boarders may PL look into it and advise

[sameernics]

Stock market investment is for future potential. To that extent, whole world economy estimates are based on certain assumptions. All brokerage research reports and targets are based on certain assumptions. Stock market indices movement is based on certain assumptions. So may i understand why not in this forum?

[kapil1301]

Hi Rajesh,

How to get this Info.
Could you please help which link you used to get this info.

Regards,
Kapil

[Znilesh]

This is interesting I found,

[sameernics]

Thanks for the video. As such the video seems slightly old as compared to what Sirca is today. But still a lot of good insights.

[rk1771]

On shareholding, I got the information on trendlyne. It is a public information as companies do declare name of shareholders holding more than 1%.

[kapil1301]

Thanks Rajesh For the Info