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					                        Ashish Chugh’s   HIDDEN                     GEMS
                                         ……. in search of Market Beating Stocks




E-Mail ID - nexgenfin@yahoo.com

September 23, 2006

HIDDEN   GEMS   REPORT     SENT                               TO        PAID
SUBSCRIBERS ON AUGUST 28, 2006

Shalimar Paints Ltd.

CMP – Rs. 165                                         BSE Code –509874

Shalimar Paints Ltd. (Shalimar) was incorporated by British entrepreneurs under
the name Shalimar Paint Colour & Varnish Company in 1902 to takeover the
business of 'The Shalimar Works', a company which manufactured paints, colour
and varnish from its factory at Shalimar and Goabaria in Bengal. Courtalds
Coatings, UK was the holding company and it held majority shareholding through
it's subsidiary International Paint Company, UK. It became a private limited
company in 1956 and later on in 1961, it was converted into a public limited
company. The company acquired its present name in 1963.

Courtalds slowly started disinvesting since 1978 and finally in 1989, it fully
disinvested its stake and maintained only its technical and marketing
collaboration with the Indian company till 1994. The Courtald's stake was
acquired by G  irish Jhunjhunwala, a HongKong based NRI (20%) and the Delhi-
based O P Jindal group (42%). Thereafter in October 2001, the Jindal Group
diluted a part of its equity in favour of Girish Jhunjhunwala group and both the
groups currently holds 31.18% each in the company, thereby making the
promoters shareholding at around 63 %.


Manufacturing Operations

The company currently has its manufacturing plants located at Howrah
(West Bengal), Nasik (Maharashtra) and Sikandrabad (Uttar Pradesh).

Howrah Unit

The Howrah plant was the first large scale paint manufacturing plant to be set up
not only in India but in entire South East Asia. It has an installed capacity of
14204 MT per year.

The Company's central Research and Development laboratory is located in the
Howrah Plant. This state-of-the-art R&D unit was the first in-house paint R&D
unit to be recognized by Dept. of Scientific and Industrial Research, Govt. of
India.

Nasik Unit

The Nasik factory was set up in 1992 in western India in Nashik on Mumbai -
Agra Highway . It was designed as a state-of-the-art-plant with installed capacity
of 16000 MT per year.

Sikandarabad Unit

In 2003 the Company acquired the American Paints unit in Sikandrabad near
Delhi, North India. The American Paints plant was set up in technical
collaboration with Sherwin Williams of USA . The company acquired the unit
spread over an area of 10 acres through an auction sale for a total consideration
of around Rs.3.50 crores.

The company is putting up a Greenfield facility at Tamil Nadu at a total cost
of Rs.15 crores, is expected to go on stream over the next 6 months. With
this, the company will have one unit each in East, West, North and South
India.
Product Portfolio

The company caters primarily to the Decorative & Industrial Segments :-

Decorative Segment

The Company manufactures a wide range of decorative products- both for the
exterior and interior segments. It has paint systems for every application -
interior or exterior, every surface - concrete, plaster, metal or wood.

Shalimar's premium acrylic emulsion is marketed under the Hussain
Collection. Its Xtra and Shaktiman brands are for exteriors while for interiors
it has S uperlac Acrylic emulsion and No.1 Silk emulsion.

The company sells enamels under the Superlac Hi -Gloss enamel brand.

The company has also set up colour dispensing stations at its retail outlets under
the name Shalimar Color Space – where the customer can choose amongst
over 5000 colours & shades for his rooms/ exteriors.


Industrial Segment

The Company has been a pioneer in the Industrial Paint Segment by virtue of
its long association with multinational giants like Pinchin Johnson Co. and
International Paints PLC of the U.K. coupled with its own R&D strengths.
Shalimar Paints has built up considerable expertise in manufacturing and
marketing of high performance industrial coatings, Aviation coatings, marine
paints and coatings for metal decoration and food can lacquers.

The company manufactures specialized coatings for Oil & Gas sector,
Refining Petrochemical, Fertilizers, Hydro Power plants, Paper & Pulp, Sugar
and Cement sectors.

The company also manufactures specialized coatings for the Marine sector.
Distribution Network

The Company has a wide distribution network. The entire country is divided
into 4 zones, each of which is headed by a Regional Business Manager.

The Company has more than 45 branches and depots who service more than
6000 dealers all across the country.

With its wide distribution network the Company is able to reach not only the
urban market but also the rural and up-country markets.



Financials

The latest financials of the company are given as under :-


QUARTERLY - LATEST RESULTS - Shalimar Paints Ltd (Curr: Rs in
Cr.)

                                              Year       Year
                Quarter   Quarter   Quarter   Ended     Ended      Year
                Ended     Ended     Ended                         Ended
                                               (Mar      (Mar
                 (Jun      (Jun       (%        06)      05)
  Particulars     06)       05)      Var)      (12)      (12)     (%Var)
Sales             53.45      50.7       5.4   217.04    189.99      14.2
Other Income       0.43      0.38      13.2       1.7      1.13     50.4
PBIDT              2.23      1.69        32    10.67       7.37     44.8
Interest           0.75      0.49      53.1      2.92      1.78       64
PBDT               1.48       1.2      23.3      7.75      5.59     38.6
Depreciation       0.73      0.63      15.9      2.75      2.53      8.7
PBT                0.75      0.57      31.6         5      3.06     63.4
Tax                0.28      0.22      27.3      1.59      1.08     47.2
Deferred Tax          0         0         -         0         0         -
PAT                0.47      0.35      34.3      3.41      1.98     72.2

(Source : Capitaline)

The company has a Equity Capital of Rs.3.79 crores with the promoters
holding roughly 63%.
The share price chart is given below :-




(Source : Capitaline)




Comparison with the Peer Group

A comparison of the company with the peer group reveals that the valuation
gap between the 3rd & 4th largest player in the sector –namely Berger
Paints & ICI India and the 5th largest player – Shalimar Paints is Huge,
even though the gap may not be that large in the size of their businesses.


                               FY 05-06
                                                                PE
                           Sales          EPS      Mkt.Cap     Ratio    Mkt. Cap
                          (Rs.cr.)        (Rs.)    (Rs. cr.)            to Sales

Asian Paints                   2441           20        6187      32         2.53
Kansai Nerolac                 1061         36.4        2076     22.5        1.96
Berger Paints                   980          3.3        1540      23         1.57
ICI India                       955         13.9        1250      22         1.31
Shalimar Paints                 217          9.3          60     16.5        0.28
Even though the Sales Revenues of Berger Paints & ICI India may be 4
to 5 times of the Sales revenues of Shalimar Paints, the market cap of
these companies is 20 to 25 times more than Shalimar Paints. We
believe that the valuation gap will narrow down.

However, our major concern with Shalimar Paints is its low profit
margins compared to the industry. For example – the Operating Profit
margin for ICI is around 11% whereas Shalimar does and Operating
margin which is less than half of ICI. The primary reason for the low
margins is its scale of operations. There is however a realization
towards this fact in the company and the company hopes to improve its
margins through cost cutting initiatives and through increased scales of
operations as its Greenfield facility being put up in Chennai will be
operational after 6 months.



Conclusion

Shalimar Paints being a company over 100 years old has been si tting on
assets which have been acquired at historical valuations and would
have a valuation which would be many times over its market cap. Even
the manufacturing facility spread over 10 acres in Sikandarabad in Uttar
Pradesh, which the company acquired in 2003 for just Rs.3.50 crores
would also be currently worth much more.

The company expects to grow at 20% this year and expects to log
higher margins compared to last year. Given the small Equity base of
Rs.3.79 crores and a high Turnover to Equity, a small improvement in
margins leads to a big increase in its Earnings per share.

Most paint companies have a market cap which is more than its sales
revenues as is evident from the table above, ranging from 2.53 for Asian
Paints to 1.31 for ICI India, Shalimar Paints commands a Market Cap to
Sales of just 0.28. We believe that the company is grossly undervalued
compared to its peers and carries potential to reduce the huge valuation
gap which exists currently.
Ashish Chugh is an equity analyst and investment consultant based at New
Delhi, INDIA. At the time of writing this article, he, his firm and dependent family
members have a position in the stocks mentioned above. The author, his firm or
any of his dependent family members may make purchases or sale of the
securities mentioned in the report while the report is in circulation. The author
invites readers to send him email and welcomes comments, feedback & queries
at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the
information contained herein may not be deemed to be an investment
advice. Such information is impersonal and not tailored to the investment
needs of any specific person. The information contained herein is not a
complete analysis of every material fact representing any company,
industry or security. The views expressed may change. While the
information contained herein has been obtained from sources believed to
be reliable, no responsibility (or liability) is accepted for the accuracy of its
contents. Investors are advised to satisfy themselves before making any
investments and should consult with and rely upon their own advisors
whether and how to use such information in making any investment
decision. Neither the author nor his firm accepts any liability arising out of
use of the above information/ article.

				
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