Stock Pick From The Chemicals Sector
11/15/2012 9:00 PM Thursday
Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.
The company recommended as the Choice Scrip for this issue is a fast-growing player in the paints sector.
Here Is Why:
- The Indian paint industry has a very high growth potential.
- BPIL has massive capacity expansion plans.
- The company is bettering its distribution network, which will improve its organic growth.
- It is expanding its product portfolio to better its margins.
The Indian paint industry is currently at a relatively nascent stage as compared to that of other countries. It is the second largest player in the industry, and this offers significant potential for growth to Berger Paints India (BPIL). While the global average per capita paint consumption stands at approximately 15 kg per person, India has a per capita consumption of merely two kg per person, thus ensuring a consistent level of volume growth over the next few years.
Decorative paints account for more than 70 per cent of the overall revenues of the paint industry. This segment is dominated by Asian Paints (APL), which enjoys a market share of a tad above 50 per cent of the organised paint market. Though raw material prices have been on an upward spiral, the paint industry has managed to pass on the costs to customers in the case of decorative paints and, to a certain extent, in the case of industrial paints.
We believe that in an environment like this, BPIL has the potential to grow by building capacity, strengthening the distribution network, shifting to a healthier product portfolio and introducing new products. This would enable the company to improve margins and to gain a larger markets share.
BPIL currently has a production capacity of 275000 MTPA (metric tonnes per annum) and is carrying out both greenfield (at Hindupur, Andhra Pradesh) and brownfield (at Rishra in West Bengal and Goa) expansions. It has firmed up plans of spending around Rs 220-235 crore in FY13 and Rs 300 crore in FY14 on capital expenditure. This would be funded through internal accruals, thus maintaining a healthy debt-to-equity ratio of 0.43.
The Hindupur facility will have a total capacity of 320000 MTPA for water-based paints and 100000 MTPA for emulsions. This would strengthen the company’s standing in South India, which is important for the company considering the fact that North and East India account for 60 per cent of its distribution network. BPIL currently has approximately 14500 dealers, and an improvement in reach will improve its organic growth.
Most of the expansion that the company is currently undertaking revolves around water-based paints. Water-based paints, which command five to seven per cent higher margins than solvent-based paints, currently account for 50 per cent of its decorative paints revenues. The share of this segment in revenues has grown by 10 per cent in the last five years and is expected to maintain this momentum, thus giving a favourable forecast in terms of margins improvement.
| LAST FIVE QUARTERS (Rs/Cr)|
|Sep ' 12||Jun ' 12||Mar ' 12||Dec ' 11||Sep ' 11|
|Sales ||811.1 ||806.4 ||746.6 ||782.31 ||720.55 |
|Other Income ||4.9 ||8.4 ||8.9 ||8.19 ||8.69 |
|Operating Profit ||94.9 ||85 ||82.3 ||87.1 ||85.99 |
|Interest ||9.1 ||8.9 ||4.4 ||7.43 ||7.4 |
|Depreciation ||13.7 ||13.1 ||12.1 ||12.68 ||11.6 |
|Net Profit ||53.4 ||44.4 ||44.6 ||49.09 ||49.27 |
|Equity Capital ||69.3 ||69.23 ||69.23 ||69.23 ||69.23 |
In the last five years, it has reported robust financials, with revenue growth in the range of 13 to 27 per cent on a YoY basis. This has been accompanied by stronger growth in its operating profit and net profit, which have marked an overall improvement in margins over the years. Moreover, while other companies have been seeing moderation in volume growth, BPIL grew by 12 per cent in volume terms in FY12. On the valuations front, it looks attractive at a PE of 26.42x as compared to APL, which is trading at a PE multiple of 37.11x.
Overall, considering the potential of growth that the Indian paint industry has to offer, BPIL’s plans in terms of capacity expansion and enhancement of its distribution network seem to be well in place. Volume growth would also see a boost as the real estate sector, which has been stagnant so far, gains traction. Moreover, an improvement in the product portfolio and movement towards a larger scale would also result in expansion of margins. We are of the opinion that this company is positioned well enough to capture on the opportunity offered by the industry and is likely to paint a bright picture going forward.
|Shareholding Pattern As On 31/09/2012|
|Promoters ||75.54 |
|Institutional Investors ||12.95 |
|FIIs ||18.8 |
|DIIs ||3.42 |
|Non-Institutional Investors ||11.51 |
|Corporate Bodies ||1.72 |
|GRAND TOTAL ||100 |
|BEST OF LAST ONE YEAR|
|Company Name||Reco. Price (Rs) ||CMP(Rs)||Gain %|
|Ajanta Pharma ||171.00 ||362.00 ||111.70 |
|ING Vysya Bank ||325.00 ||460.00 ||41.54 |
|M&M Financial Services ||685.35 ||962.00 ||40.37 |
|Asian Paints ||2985.00 ||4114.00 ||37.82 |
|FAG Bearings India ||1261.00 ||1725.00 ||36.80 |
|Jammu & Kashmir Bank ||976.00 ||1305.00 ||33.71 |
|Colgate Palmolive (India) ||1014.00 ||1328.00 ||30.97 |
|HDFC ||621.00 ||790.00 ||27.21 |
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