Shalimar Paints zooms 32% in one week on hopes of margin improvement

Shares of Shalimar Paints (SPL) rallied 7 per cent to Rs 158.85 on the BSE in Wednesday's intra-day trade, surging 32 per cent in the past one week on hopes of improvement in margins going forward.

The stock of the paint maker was trading close to its 52-week high level of Rs 163.50, touched on April 21, 2022. Trading volumes on the counter jumped over three-fold today as a combined 765,000 equity shares changed hands on the NSE and BSE till the time of writing of this report. In comparison, the S&P BSE Sensex was down 0.33 per cent at 12:00 PM. The index has gained 2.3 per cent in the past one week.

Other paint companies like Indigo Paints, Akzo Noble India and Berger Paints slipped in the range of 1 per cent to 2 per cent, while Kansai Nerolac and Asian Paints gained 4 per cent and 1 per cent, respectively, in the past one week.

SPL belongs to Delhi-based Ratan Jindal faction of the O.P. Jindal group, and Girish Jhunjhunwala, a Hong Kong-based businessman, through various group companies. SPL is engaged in manufacturing of a wide range of paints in both decorative and industrial paint segments.

Meanwhile, on June 4, 2022, CARE Ratings reaffirmed the rating of long-term banking facilities and short-term banking facilities of SPL to factor in the significant fund infusion by Hella Infra Market Private Limited (Hella) and promoter's group in the company boosting the liquidity position and improvement in financial risk profile of SPL over the medium term.

"The improved liquidity position, increased reach and distribution network through Hella is expected to improve the operating margins of the company going forward on account of expected improvement in capacity utilization leading to better apportionment of fixed cost," the rating agency said.

The ratings continue to derive strength from SPL's long track record of operations and its experienced management, established brand name of the company's products and presence across different locations. The ratings also factor in the satisfactory capital structure albeit weak coverage indicators in FY22, it added.

That said, the ratings remain constrained by working capital-intensive nature of operations and sharp decline in cash profits despite growth reported in total operating income in FY22. 

"The ratings further continue to remain constrained by the vulnerability of margins to volatility in raw material prices, high competition in paint industry and limited pricing flexibility of the company," CARE Ratings said.

For January-March quarter (Q4FY22), the company reported Ebitda profit of Rs 20 lakh as against Ebitda loss last year. The company, however, reported loss of Rs 12.7 crore in Q4FY22 mainly on account of high cost of the raw materials and the increasing trend in the commodity cycle.

SPL's management, in its Q4FY22 earnings call, said that Ebitda level will further improve, because fixed cost are not going to increase. "The fixed cost are sufficient to take us to the revenue of Rs 1,000 crore level, so we expect that the Ebitda level margin to also significantly increase as and when the revenue goes up," it said.