A well known brand like Nerolac paints hardly needs introduction. The company has been around for several decades and most of us have grown up watching their ads on TV.  The company makes all sorts of paints catering to decorative, automotive and industrial segments. The company is a subsidiary of global paint giant Kansai Paints of Japan. The Indian listed company has operations in India along with JVs in Nepal & Sri Lanka. The stock trades at NSE & BSE with symbol KANSAINER at LTP of 390.

Manufacturing facilities and expansion plans-

The Company has manufacturing facilities  located at Lote in Maharashtra, Bawal in Haryana, Jainpur in U.P. and Hosur in Tamil Nadu.

In addition to these, the company is setting up manufacturing unit of capacity 42000 MT/yr in Gujarat and 38000 MT/yr near Amritsar in Punjab at cost of 350cr and 180cr respectively. They also announced in January the plans to set up another plant in Andhra Pradesh at cost of 304cr.

Financials-

The company has low debt, healthy interest coverage and a good current ratio as well. It faces no financial strain and i believe it can easily cope through any unexpected challenges or growth slowdown. It can easily finance its proposed expansion plans from reserves and cash flows without creating any significant liabilities.The company had 2242cr as Reserves & Surplus at the end of FY16.

The company has generated a healthy Return on Equity (RoE) of 17.8% taking the average of last 5 yrs. The Return on Capital Employed (RoCE) has been at 24.8% over this time period.

Nerolac has managed to post robust growth in revenues and profits in recent times as shown in the table below.

YR FY11 FY12 FY13 FY14 FY15 FY16 9MFY17
REV (Cr) 2188 2625 2873 3174 3571 3855 3468
PAT (Cr) 206 216 214 207 272 356 390
NetMargin% 9.4 8.2 7.4 6.5 7.6 9.2 11.2

From FY11-16, Revenues and PAT have grown at a 12% CAGR. However there has been a sharp revival in last 3 yrs with profits almost doubling between FY14 to 17 on back of falling commodity prices which have taken margins to highest levels since 2006. profits for last 9 months are already higher than what the company reported during the full of FY16.

With margins at decade high, I am slightly  to be cautious in my estimates and am assuming an EPS CAGR of around 20% for next 3 yrs as one never knows when oil prices bounce up again.

YR FY16 9MFY17 FY17E FY18E FY19E FY20E
EPS 6.6 7.2 9.6 11.6 13.8 16.5

Valuations-

In recent quarters Nerolac has delivered industry leading profit growth. However, the stock is trading at  a TTM P/E of 45 times, which is slightly cheaper than peers Berger Paint (49X) and Asian Paint (52X). Still 45x is not cheap in absolute terms, but the company has grown profits at 44% in the last 12 months (excluding exceptional gains) to more than justify these valuations. It is natural for such fantastic stocks to trade expensive at times when business is booming and stock markets are near all time highs. There may not be much margin of safety in the stock price but the fundamentals remain strong and growth prospects exciting.

Over last 3 yrs, the P/E multiple has been in range of 30x to 53x for Nerolac with the average being  around 40x. Hence i consider the stock to be a good proposition to be accumulated on dips which I have been doing in last few months when markets fell because of demonetization. We are currently holding at an avg cost price of 356.

Technicals-

The stock has been in a steady uptrend over the last 3 yrs as seen in the chart below with price moving from 100 to 400 during this period.

Nerolac weekly uptrend

 

Price Target- 

I remain optimistic of stock hitting 500 this year. In long term, stock can be a steady compounder with scope of doubling in 3-4 yrs.

Disclaimer-

  • This does not constitute investment advice.
  • Actual earnings may vary significantly from projections made in this post.
  • Views biased. I & my family members hold this stock.

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