The Hindu Business Line : Goodlass Nerolac: Hold

SHAREHOLDERS can retain their holdings in the Goodlass Nerolac stock. Though we have multiple `buy' recommendations outstanding on the stock at various price points, our current view is tempered by the rising prices of crude, which, by extension, would have an inflationary impact on Goodlass' raw material costs (key inputs are derivatives of crude).

While this is a near-term concern, it is counterbalanced by the continuing strength in demand. At the current price level of Rs 320, the stock trades at a multiple of about 13 times its expected per share earnings for FY05.

Goodlass' performance in the just-ended quarter has been robust, with topline up by 17.5 per cent.

There has been a substantial expansion on margins at the operating level, which at 14.5 per cent is up by 4.2 percentage points compared to the corresponding previous quarter. Sustaining such a big improvement in margins would be Goodlass' key challenge.

Should prices of crude continue to rise as they have been in recent times, margins would remain under pressure.

Replicating the success seen in FY04 may be a tough act to follow under the circumstances. We assume that Goodlass would grow earnings by about 15 per cent in FY05.

On the positive side, demand drivers for Goodlass continue to remain in place in both the decorative and industrial paints. Importantly, with Goodlass now deriving more than half of its revenues from the decorative segment, the two quarters that follow assume significance, on account of festival season painting demand.

Further, as the percentage of revenue derived from the decorative segment goes up, it provides a leg-up to the bottomline, as this segment is more remunerative. In contrast, customers of industrial paints, by virtue of their bargaining power, would be able to extract better prices from Goodlass, which would restrict margins. Goodlass might also be able to put through price increases in the decorative segment, in the context of an escalating cost environment, without it having a dampening impact on offtake.

On the industrial paints front, the automobile segment, which Goodlass dominates, continues to grow at a steady clip. While a boom in pick-up, as was seen last year, may not play itself out again this year, demand is likely to remain steady.

n this context, the price cuts undertaken by a player such as Maruti (a key Goodlass customer), should perk up demand and impact Goodlass positively.

While investors could derive comfort from the positive demand outlook, the rising prices of crude and the impact it has on inputs is something that needs to be monitored.

Hence, at this juncture, remaining invested appears to be the appropriate course of action.

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