Opportunity in Sirca Paints' Correction: A Long-Term Perspective

Paint company growing its products, reaching more places in India.

Key Points:

• Revenue increased by 15 percent compared to the previous year in the first nine months of FY24.
• The core Italian PU business maintained its strong performance.
• Approximately 400 new dealers were added in the last nine months.
• Aiming for 15-20 percent growth over the next few years.
• Currently trading at 28 times FY25 earnings.

December-quarter earnings for Sirca Paints India (CMP: ₹ 325; Market Cap: ₹ 1,780 Cr; Rating: Over-weight) were slightly below market expectations. Despite various challenges like the construction ban in Delhi NCR, extended Diwali break, and labor shortages during the festive season, Q3 FY24 revenues grew by 11% YoY. The company's core Italian PU business showed robust growth, and emerging product categories like Unico, wall paints, and high-end decorative paints continued to perform well.

Changes in the types of products being sold have affected the company's gross margins negatively. Operating profits remained the same as margins dropped by 260 basis points compared to the previous year, reaching 19 percent in the last quarter. Although other expenses stayed steady, there was a significant increase of 39 percent in employee costs compared to the previous year. This rise was due to hiring more experienced staff and starting operations in new production units.

Expanding Across India

Sirca currently earns 70 percent of its revenue from northern India, with the rest coming from markets in the east, center, west, and south. To broaden its reach across India and diversify its income, Sirca aims to aggressively increase its dealer presence in regions outside the north. Additionally, the company plans to achieve a 10-15 percent growth in dealers across northern markets.

In the third quarter, Sirca welcomed approximately 200 new dealers, marking a significant increase compared to previous quarters. As of December 2023, the company's network comprised around 2,250 dealers and distributors.

Expanding Manufacturing Capabilities

Recently, Sirca has increased the manufacturing capacity of its Sonipat unit from 12,000 tonnes to 16,000 tonnes. Additionally, the company has entered into an agreement with Sirca Italy to produce imported Italian Polyurethane (PU) wood coating products in India, aiming to strengthen its wall paint segment. The initial production batches have already been approved by the Italian parent company, and the final product approval stage from OEMs and other customers is underway. The management expects a significant increase in Italian PU volumes over the coming quarters.

Industry Correction

Paint stocks have been undergoing a correction in recent weeks due to Grasim Industries' entry into the sector. Investors are concerned as Grasim has entered the paint business with the Birla Opus brand, and its production capacity is nearly equivalent to that of Berger Paints, the second-largest player in the market. Alongside major competitors like Asian Paints, Kansai Nerolac, Berger Paints, and Indigo Paints, Sirca's stock has also experienced a significant correction of approximately 25 percent from its peak in January 2024.

Despite the competitive market conditions, Sirca is effectively implementing its expansion strategy, and the business possesses various growth opportunities. For long-term investors, Sirca remains an attractive investment option. With a valuation of 27 times FY25 estimated earnings, the company's stock is reasonably priced, and the recent market correction presents an appealing opportunity for investment.