The Hindu Business Line : Goodlass Nerolac: Book profits/Re-enter at lower levels

INVESTORS can consider booking profits in the Goodlass Nerolac stock and contemplate re-entry at lower levels. Business Line has `buy' recommendations on the stock at multiple price points; however, in the current backdrop, with crude prices ruling high, we believe that costs of key inputs will rule firm and curtail any margin expansion.

At the current price of Rs 510, the stock trades at a multiple of about 15 times its expected per share earnings for FY-05.

Our current view is also tempered by the sharp run-up in the stock price since the announcement of the company's third quarter results.

Even as the broad-based Sensex gained four per cent in this period, the stock moved up by close to 30 per cent.

It also moved up sharply on the back of the news that its parent, Kansai Paints, had got the approval to raise its holdings in the company to 75 per cent.

In spite of the sharp escalation in material costs in the third quarter (as a percentage of sales, material costs were close to 60 per cent compared to 47 per cent in the year-ago period), Goodlass managed to sustain operating margins at the 15 per cent mark.

Though earnings rose 67 per cent a year-on-year at Rs 28.3 crore, there was a significant contribution from `other income', which rose to Rs 8.3 crore compared to Rs 1.5 crore in the year-ago period.

If margins are to persist at this level, it would be a function of Goodlass' ability to pass on price increases to customers, as the decoratives market leader, Asian Paints, demonstrated last December. To an extent, the reduction in the peak import duty should be marginally beneficial.

Goodlass has transitioned from being primarily a player in the industrial paints segment to a company that derives revenues in almost equal proportion from decoratives and industrial spaces; however, with the industrial segment accounting for 45 per cent of revenues, Goodlass is exposed to any downturn in the automotive sector.

Given the higher bargaining power of players in the industrial sector, passing on a price increase is going to be difficult compared to effecting a hike in the decoratives segment.

Further, rising inputs costs are forcing auto manufacturers to raise their product prices; with fuel prices, too, likely to show an upward bias, the possibility of a drop in automobile demand appears to be on the cards. This, in turn, would have a negative impact on Goodlass.

With last year's Budget being announced in July, Q4FY-04 did not witness any slowdown in auto purchases; usually, when the Budget is announced in

February (as was the case this year), consumers tend to postpone buying decisions in anticipation of duty cuts.

Hence, the relatively higher base of the last quarter of the previous fiscal may take a bit of sheen off the latest quarter numbers.

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