Stock Pick From The Furniture, Furnishing, Paints Industry

HERE IS WHY

• The amalgamation of its the three businesses has worked very well for the company’s growth.
• It has widened its business beyond paints to other categories, which has helped it diversify and lower dependence on the paints’ business.
• With major capex already behind it, the dividend fl ow is likely to improve.

Akzo Nobel is the largest coatings company in the world and holds around 73 per cent stake in Akzo Nobel India. We feel Akzo Nobel still seems to be one of the undervalued stocks in the paints segment with a strong dealer network, eight strategically located plants across the country, debt-free cash surplus balance-sheet and excellent dividend payment track record. We are of the opinion that Akzo Nobel is writing an entirely new chapter of growth after its current promoters acquired majority stake in the company. The current promoters’ stake in the company stood at 54 per cent in March 2008, which has eventually increased to 73 per cent as of June 2014.

Akzo Nobel manufactures and sells paints, coatings and specialty chemicals. Its top brand is Dulux, which is one of the most popular brands in the paints’ category. Earlier, the company had only one line of business, i.e. paints. In May 2012, under a scheme of amalgamation, the management merged Akzo Nobel Car Refinishes (AN Car), Akzo Nobel Chemicals (AN Chemicals) and Akzo Nobel Coatings (AN Coatings) to form a new entity called Akzo Nobel India.

The amalgamation has served the company well, as it now has eight manufacturing plants at different locations. It has also widened its businesses beyond paints to coatings, chemicals, wood finishes and adhesives. This has helped it diversify and has lowered its dependence on the paints business.

That apart, it is expected to be a key beneficiary of the upturn in the capex cycle and will derive advantage from the fact that coatings mainly find their application for new plants or maintenance of existing plants. The overall improvement in the economy should lead to improving demand in the coatings segment. Secondly, the traction seen in the earnings is likely to continue further. It has been witnessing a decent improvement in its EBITDA margins. With the recently commissioned Gwalior plant operating at around one-third of the installed capacity, we expect the improvement to continue going forward on the back of better asset utilisation ratios due to an expected surge in demand. The company also has one of the best balance-sheets in the sector with cash and investments aggregating to around 14 per cent of the market-cap.

It has also been a consistent dividend paying company. Investors in Akzo Nobel have received a dividend of Rs. 155 per share over the last 18 months. Considering the fact that a major portion of capex is behind with the setting up of the Gwalior plant and strong operational cash flows accruing going forward, in addition to the robust balance-sheet, we expect the same trend to continue in the future as well. On the financial front, the company posted another strong round of performance in June 2014 where the topline stood at Rs. 641.10 crore and the bottomline at Rs. 55.18 crore as against Rs. 573.64 crore and Rs. 34.81 crore in June 2013. On the valuations front, the stock is available at price-to-earnings multiple of 30x. We advise investors to enter the counter with a one-year price target of Rs. 1,500.