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Analysing Sirca Paints – Should You Invest? : Stock Analysis for December 2023

Disclaimer:

The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.


Company Introduction/Profile

Sirca Paints India Ltd is a noteworthy player in the wood coatings and decorative paints sector, prominently known for its range of luxury Italian wood coatings and high-end wall paints under the brand ‘Sirca’. The company’s portfolio includes products for wall coating, wood coating, metals, and glass coating. Notably, Sirca Paints has established itself as a top three brand in India’s premium wood coatings category and a market leader in North India. The company’s expansive reach includes exclusive product sales rights in Nepal, Bangladesh, and Sri Lanka.

Sirca Paints boasts a strong market capitalization of ₹2,150 Cr with a current stock price of ₹392. The company has shown remarkable sales growth of 24.2% over the past five years. Impressively, it operates debt-free, as indicated by its zero debt status, and maintains a healthy promoter holding of 67.6%, which is stable and shows confidence in the company’s management. The operational profit margin (OPM) stands at a robust 22.7%, further affirming the company’s efficiency in operations. Additionally, the company’s earnings per share (EPS) of ₹8.84 signify strong profitability, and its cash equivalents of ₹65.3 Cr ensure ample liquidity.

Analysing Sirca Paints - Should You Invest? : Stock Analysis for December 2023

Should We Buy, Sell or Hold This Stock and Why?

Given the financial data and market position of Sirca Paints India Ltd, the recommendation would be a ‘Buy’. This decision is driven by several key factors:

  1. Low Debt-to-Equity Ratio: The company has no debt, which is a strong indicator of financial stability and reduced risk.
  2. Stable or Increasing Promoter Holding: The steady promoter holding at 67.6% suggests confidence in the company’s future prospects and stable management.
  3. Impressive Operational Profit Margin (OPM): With an OPM of 22.7%, the company demonstrates efficient operation and profitability.
  4. Healthy EPS and Dividend Yield: An EPS of ₹8.84 and a dividend yield of 0.38% are indicative of the company’s profitability and its ability to generate shareholder value.

However, investors should note the stock’s high Price to Earnings (P/E) ratio of 44.4, which is higher than the industry average of 40.9, and its trading at 7.52 times its book value, suggesting a relatively higher market valuation. Despite this, the company’s growth trajectory and financial health can make it a compelling buy.

The company is delivering consistent growth in both revenues and profits year-on-year. This indicates strong brand equity and pricing power. Expanding distribution reach and export opportunities also bode well for healthy growth ahead.

With zero debt and sufficient cash reserves, the balance sheet looks strong. Promoter holding is also high at 67% with no pledged shares, implying high confidence.

However, the valuations look expensive with P/E of 44x and P/B of 7.5x. But some premium is justifiable given its leadership in a niche segment, high ROI, good cash flows and zero leverage.

Considering everything, long-term investors can consider ACCUMULATE the stock on market corrections. Short-term investors should AVOID due to rich valuations.

Vital Company Ratios for a Layman

Understanding company ratios is crucial for making informed investment decisions. For Sirca Paints India Ltd, some key ratios to consider include:

  1. Price-to-Earnings (P/E) Ratio: Currently at 44.4, this ratio is high, indicating that the stock is valued at a premium compared to its earnings. A high P/E ratio can mean the stock is overvalued or that investors expect high growth in the future.
  2. Debt-to-Equity Ratio: This ratio is zero for Sirca Paints, showing that the company operates without reliance on debt, which is a positive sign for financial stability.
  3. Operational Profit Margin (OPM): At 22.7%, this indicates how much profit the company makes for each rupee of sales, after paying for variable costs of production. A higher OPM is desirable as it signifies better operational efficiency.
  4. Return on Equity (ROE): With an ROE of 18.8%, the company shows a good return on the investment made by its shareholders. It measures the profitability relative to shareholder’s equity.
  5. Dividend Yield: At 0.38%, it reflects the dividend income relative to the stock price. While not high, it indicates the company’s policy of distributing profits to shareholders.

Vital Ratios Analysis

Here are the key financial ratios of Sirca Paints that investors should analyze:

  1. Sales Growth – Sirca has delivered a healthy sales CAGR of 24% over 5 years, reflecting the strong brand equity and increasing distribution reach. This growth rate is expected to sustain given low penetration currently.
  2. Profit Growth – Profits have grown at 17% CAGR in-line with top-line growth. Going forward, margin expansion can drive faster profit growth.
  3. OPM – Operating margins are at healthy 23%. With premium products and pricing power, margins can improve further. This allows room to absorb raw material cost inflation.
  4. ROCE – Return on Capital Employed is exceptional at 25%, highlighting the efficient capital allocation of the company. Sirca generate Rs. 0.25 of annual earnings for every 1 rupee of capital employed.
  5. ROE – The Return on Equity is lower at 19% due to negligible debt currently. As the company scales up, ROE can expand significantly.
  6. Debt/Equity – With zero debt and Equity of ₹284 cr, the ratio stands at 0. This gives huge financial flexibility for growth investments. However, some debt can boost ROE.
  7. Valuations – Although richly valued with P/E of 44x, investors are paying a premium for its leadership in a high-growth niche. Valuations can moderate with consistent profit growth.
  8. Cash/Sales – Cash reserves of ₹65 cr against FY22 Sales of ₹290 cr indicates a healthy buffer that aids working capital needs.

Data Summary from Each Year/Quarter:

  • Promoter Holding: Has remained constant at 67.55% from Dec 2022 to Sep 2023.
  • FII/DII Holding: Not explicitly provided in the data.
  • Sales Trend: Increasing trend observed. Sales grew from ₹264 Cr in Mar 2023 to ₹290 Cr TTM (Trailing Twelve Months).
  • Profit Trend: Increasing. Profit after tax was ₹48.4 Cr, showing growth.
  • Debt Trend: The company is almost debt-free with ₹0.00 Cr debt.
  • Margin Trend: OPM has been consistent and strong at around 22.7%.
  • Latest News Updates: Not provided in the data.
  • Company PE and Industry PE: Sirca Paints PE is 44.4, higher than the industry average of 40.9.
  • Gap between Intrinsic Stock Value and Current Market Price: Intrinsic value is ₹155.2, current market price is ₹392, indicating a significant gap.
  • Market Cap: Sirca Paints has a market cap of ₹2,150 Cr. Peers’ market caps vary (e.g., Adani Enterprises at ₹321,725.42 Cr).
  • Industry Trend Based on Latest News: Not provided in the data.
  • Cash in Hand: ₹65.3 Cr cash equivalents.
  • Dividend Payout: The company maintains a healthy dividend payout of 17.8%.

Competing Companies and Performance Comparison

Sirca Paints India Ltd operates in a competitive segment with key players including Adani Enterprises, Mankind Pharma, Cello World, Aegis Logistics, Redington, Honasa Consumer, and MMTC. These companies vary in their market capitalization, P/E ratio, and financial health.

  1. Sales and Profit Trends: Sirca has shown consistent sales growth (24.2% over 5 years) and profitability, which is a positive indicator. In contrast, some peers like MMTC have shown negative growth trends.
  2. Debt Position: Sirca’s zero-debt status gives it a significant edge in financial stability over peers like Adani Enterprises and Aegis Logistics, which have higher debt figures.
  3. Operational Efficiency: With an OPM of 22.7%, Sirca Paints outperforms many of its peers, indicating better operational efficiency and cost management.
  4. Sales Trend – Sales have grown at a healthy CAGR of 24% over 5 years to reach Rs. 290 cr in FY22. Growth momentum continues with 14.6% increase in latest quarter.

  5. Profit Trend – Profits grown at 16.8% CAGR over 5 years. QoQ growth of 7.6% in latest quarter indicates momentum.

  6. Debt Trend – Sirca has remained debt-free over the years giving huge financial flexibility.

  7. Margin Trend – Operating margins have been sustained at healthy 22-23% levels in recent years.

  8. Industry PE – The Paints industry trades at an average P/E of 40x compared to Sirca’s PE of 44x.

  9. Intrinsic Value vs CMP – Sirca’s intrinsic value is estimated at Rs. 155 per share, significantly below its current market price of Rs. 392.

  10. Market Cap – Sirca’s market cap of Rs. 2,149 cr is lower compared to leading peers like Asian Paints, Berger Paints etc.

  11. Cash in Hand – Sirca has comfortable cash/cash equivalents of Rs. 65 cr as of latest quarter.

  12. Dividend Payout – Sirca has consistently paid 9-20% of its net profits as dividends over last 5 years.

Key Competitors

Key competitors include Asian Paints, Berger Paints, AkzoNobel India etc. Sirca has delivered higher sales growth compared to these players in recent years. It has also maintained better profitability margins than the industry average levels. However, Sirca’s scale of operations is still quite small compared to these peers.

 Sirca Paints India Ltd, while smaller in market cap compared to some industry giants, shows strong signs of growth and stability. Its zero-debt status, consistent promoter holding, and robust sales and profit growth make it an attractive option in its segment. However, its high P/E ratio and the significant gap between its intrinsic value and market price suggest it might be overvalued, which investors should consider. Overall, Sirca is performing well compared to its peers, especially in operational efficiency and financial health.

Sirca Paints operates in the premium decorative paints segment where its major competitors are:

  1. Asian Paints (Decorative paints segment)
  2. Berger Paints India
  3. Nippon Paint India

Here is a comparison of Sirca against these peers based on key financial parameters:

Market Share:

  • Asian Paints enjoys a dominant market share of over 50% in the Indian decorative paints segment
  • Berger Paints has the second highest market share of about 16%
  • Nippon Paints and Sirca Paints have a market share of under 5% each

So Sirca is a niche small player compared to the market leaders Asian Paints and Berger.

Revenue Growth:

  • Over last 5 years, Sirca Paints has registered the highest revenue CAGR of 24%
  • Asian Paints and Berger Paints clocked a CAGR of 11-12% over this period
  • Nippon Paints saw the lowest CAGR of just 1%

So Sirca has outpaced the giants Asian and Berger in terms of sales growth in recent years.

Profitability:

  • Sirca scores well on profitability metrics too with OPM of 23% and ROCE of 25%
  • This is much higher than OPM of 15-18% and ROCE of 20-22% for Asian Paints and Berger
  • Nippon in fact made losses over the last 5 years

Valuations:

  • Sirca trades at a P/E of 44.4x TTM earnings compared to P/E of 68.8x for Asian Paints and 63x for Berger Paints

Is Sirca Paints India Ltd Overvalued or Undervalued?

Evaluating whether Sirca Paints India Ltd is overvalued or undervalued involves scrutinizing several financial metrics:

  1. Price-to-Earnings (P/E) Ratio: Sirca Paints has a P/E ratio of 44.4, which is higher than the industry average of 40.9. This indicates that the market is pricing Sirca Paints shares at a premium compared to its earnings, often a sign of overvaluation. However, a higher P/E can also suggest that investors expect higher future growth.
  2. Price-to-Book (P/B) Ratio: The stock is trading at 7.52 times its book value. A higher P/B ratio typically indicates overvaluation, especially when compared to industry norms or historical averages.
  3. Intrinsic Value vs. Market Price: The intrinsic value of the stock is ₹155.2, while the current market price is ₹392. This substantial gap indicates that the stock is trading well above its estimated intrinsic value, a strong signal of overvaluation.
  4. Dividend Yield: A dividend yield of 0.38% is relatively low, which when combined with a high P/E ratio, often points towards overvaluation.

However, some premium is justified given factors like:

  1. Leadership in niche premium decorative paints segment
  2. Sales and profit growth of 20%+ CAGR over last 5 years
  3. High return ratios like ROCE of 25% and ROE of 19%
  4. Zero debt status and healthy cash/sales ratio

Sirca’s valuations are also largely in line with other paint industry peers like Asian Paints and Berger Paints trading at 60-70x P/E.

Considering these factors, Sirca Paints India Ltd appears to be overvalued in the market. The high P/E and P/B ratios, coupled with a significant gap between the intrinsic value and the market price, support this conclusion.

Should We Buy This Stock and Why?

The decision to buy Sirca Paints India Ltd should be based on a balanced view of its valuation, financial health, and growth prospects:

  1. Financial Health and Growth: Sirca Paints demonstrates strong financial health with zero debt, consistent sales growth (24.2% over 5 years), and a stable promoter holding. Its operational efficiency, as shown by the OPM of 22.7%, is commendable.
  2. Market Positioning: Being a leader in premium wood coatings in North India and its expanding market reach in neighboring countries position it well for future growth.
  3. Overvaluation Concerns: Despite its strong fundamentals, the stock appears overvalued based on its current P/E and P/B ratios, and the gap between its intrinsic and market values.
  4. Investment Horizon: For long-term investors, the company’s growth prospects and strong financials could justify an investment, even at a premium. However, short-term investors might be cautious due to the overvaluation concerns.

In summary, while Sirca Paints India Ltd shows robust financial health and growth potential, its current overvaluation suggests caution. Investors should consider their investment horizon and risk tolerance before deciding to buy. Those with a long-term perspective may find the company’s growth prospects appealing despite the high valuation.

Sirca Paints can be considered  a good case for long-term investment for patient investors given:

  • Long runway for growth in premium paints and coatings segment
  • Stellar financial track record till now
  • Strong brand and niche competitive advantages
  • High promoter skin with 67.6% holding

However, one should consider ACCUMULATE with a 3-5 year horizon given the near-term valuation concerns. The stock is considered best bought at 10-15% corrections to the current market price. Short term investors should avoid given the volatility risk. Partial profits can be booked along the way to fund fresh buying at declines.

How Is the Industry of This Company Growing?

Sirca Paints India Ltd operates in the wood coatings and decorative paints industry, which has shown significant growth, driven by various factors:

  1. Market Demand: The increasing urbanization, rising disposable incomes, and growing awareness about home aesthetics have spurred demand for decorative paints and coatings.
  2. Real Estate and Construction Growth: The industry is closely tied to the real estate and construction sectors. With increasing infrastructure development and housing projects, the demand for paints and coatings is expected to rise.
  3. Innovation and Product Expansion: Companies like Sirca Paints are innovating and expanding their product lines, catering to diverse customer needs, from luxury coatings to mass-market products, fueling industry growth.
  4. Regional Expansion: The expansion into neighboring countries like Nepal, Bangladesh, and Sri Lanka opens new markets for growth.
  5. Environmental Consciousness: There’s a growing trend towards eco-friendly and sustainable products, prompting companies to invest in green solutions, which can be a growth driver.
  6. Industry Peers’ Performance: Competitors in the industry are also showing robust growth, indicating a healthy overall industry trend. For example, companies like Asian Paints have reported strong financial performance, reflecting the industry’s potential.
  7. The wood coatings and decorative paints industry is experiencing substantial growth, driven by increased demand in urban and developing regions, innovation, and expansion in product lines and markets. Sirca Paints, with its strong market position and continuous innovation, is well-positioned to benefit from these industry growth trends
  8. The Indian paints industry has witnessed a steady CAGR of 10-12% over the last decade which has accelerated to 15-20% CAGR in recent years. It is slated for robust long-term growth.
  9. Growth drivers include – expanding real estate sector, rapid urbanization, changing consumer preferences towards premium branded paints, government infrastructure investments etc. This bodes well for Sirca given its niche presence in premium paints and coatings segment which is seeing faster growth vs mass paints.
  10. Moreover, the low penetration of per capita paint consumption highlights massive untapped potential. Rising disposable incomes over long term will induce shift towards premium paints driving growth for players like Sirca.
  11. Thus, strong tailwinds for long term profitable growth for the company.

Long-Term Performance of Sirca Paints India Ltd

When considering the long-term performance of Sirca Paints India Ltd, several factors suggest a positive outlook:

  1. Steady Growth and Financial Stability: Sirca Paints has demonstrated consistent sales growth, with a 24.2% increase over the past five years. Its debt-free status and robust operational profit margin (OPM) of 22.7% are indicative of strong financial health. Such stability is crucial for enduring growth and resilience in changing market conditions.
  2. Market Positioning and Expansion: As a leader in premium wood coatings in North India and with exclusive rights in Nepal, Bangladesh, and Sri Lanka, Sirca Paints is well-positioned to capitalize on regional market growth. This geographic expansion and strong brand presence could drive long-term revenue growth.
  3. Industry Growth Trends: The decorative paints and coatings industry is witnessing an upward trend, fueled by urbanization, increased infrastructure spending, and rising consumer awareness about aesthetics. Sirca Paints, with its diverse product portfolio, is poised to benefit from these industry dynamics.
  4. Innovation and Product Development: Continuous innovation and expansion in product offerings, including eco-friendly and sustainable solutions, can provide a competitive edge and cater to evolving consumer preferences.
  5. Promoter Confidence: The stable promoter holding (67.6%) suggests confidence in the company’s long-term strategy and governance, which is a positive signal to investors.
  6. Underpenetrated premium paints segment provides long growth runway – Per capita consumption in India is quite low indicating massive untapped demand potential as incomes grow
  7. Strong competitive edge in niche premium category – With leading brands like Sirca and Oikos, the company enjoys pricing power, customer stickiness and ability to drive premiumisation
  8. Expanding distribution reach – Growing from 550 dealers in FY16 to 900+ dealers now, focus is on deeper penetration across India
  9. Increase in exports/overseas business – Leveraging relationships and exclusive rights in markets like Sri Lanka, Nepal and Bangladesh
  10. Scope for margin expansion – Company has maintained industry leading margins. Further operating leverage can expand margins as scale grows.
  11. Strong balance sheet to pursue growth – Debt free status currently provides huge flexibility to fund expansion plans through internal accruals

Given the niche leadership and multiple levers for profitable growth, Sirca Paints is poised to deliver 25%+ CAGR in sales and profits over the next 5 years. This will enhance shareholder wealth. Considering these factors, Sirca Paints India Ltd is likely to perform well in the long term, benefiting from its strong financial position, market expansion, industry growth, and continuous innovation.

Short-Term Performance of Sirca Paints India Ltd

In the short term, the performance of Sirca Paints India Ltd may be influenced by several immediate factors:

  1. Market Valuation: Currently, the stock appears overvalued, with a high P/E ratio of 44.4 and trading at 7.52 times its book value. This overvaluation might lead to price corrections in the short term as the market adjusts to its intrinsic value.
  2. Economic Fluctuations: Short-term economic changes, such as interest rate adjustments, inflation, and consumer spending patterns, can impact the company’s performance. The paint industry, being somewhat reliant on the real estate and construction sectors, may feel the effects of any economic downturn.
  3. Competitive Landscape: Immediate shifts in market share due to competition or entry of new players could influence short-term performance. Sirca Paints needs to maintain its competitive edge to ensure short-term growth.
  4. Supply Chain and Operational Challenges: Any disruptions in the supply chain or operational inefficiencies could impact short-term profitability and sales.
  5. Investor Sentiment: The stock market is often influenced by investor sentiment, which can be volatile in the short term. Given the current overvaluation, investor sentiment may sway towards caution, affecting stock performance.
  6. Q3 FY23 results due in mid-Jan’23 – Growth momentum expected to continue with ~15% revenue/profit growth forecast
  7. Input cost inflation remains a concern affecting margins – Crude derivatives are key raw materials whose inflationary pressures may squeeze margins
  8. Capex plans in UP plant may increase fixed costs but boost capacity ahead – While margins may moderate in the near term, sets stage for long term growth
  9. Premium valuations limit major upsides in stock price – Stock is primed for some consolidation/correction as valuations (P/E of 44x) already factor stellar growth

 

In summary, earnings performance in the next 2-3 quarters is expected to remain healthy but there are risks of moderation in margins and stock price appreciation. Investors should utilize any 10-15% corrections as buying opportunity with 3-5 year perspective. While Sirca Paints India Ltd has strong fundamentals for long-term growth, its short-term performance could be subject to market volatility, economic fluctuations, and operational challenges. Investors should closely monitor these factors when considering short-term investments in the company.

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