Stock Pick From The Chemical Sector

HERE IS WHY:

• The amalgamation of its the three businesses has worked very well for the company’s growth
• Its brand Dulux is one of the most popular in the paints category
• It has widened its business beyond paints to other categories, which has helped it diversify and lower dependence on the paints business

Kolkata-based Akzo Nobel (erstwhile Imperial Chemical Industries) is writing an entirely new chapter of growth after its current promoters acquired majority stake in the company. Its shares have risen at a CAGR of 18 per cent since 2008, showing investors’ faith in the current management, which has led to value creation. 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 2013. All these, we believe, are signs that the company is set to achieve new heights in the future and hence we see it as a worthy pick for investors. On the completion of 100 years of its existence, it also gave out a special dividend of Rs 60 to its shareholders this year.

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. In their pre-merger avatars, AN Car was engaged in marketing of automotive paints. AN Chemicals was a manufacturer of chemicals while AN Coatings was in the business of coatings.

Shareholding Pattern As Of June 2013
Foreign Promoters	72.96
FII	3.11
DII	9.09
Bodies Corporate	7.04
Public	7.8
Total	100

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. Within coatings, it now has a presence in industrial coil coatings, marine and protective coatings, coal and specialty coatings, automotive and aerospace coatings, etc. In the chemicals business, Akzo Nobel sells 30 different chemicals to various industries including those in pharmaceuticals, rubber, polymers, etc. Post the amalgamation, the company has reported an overall growth in its operations. Its return ratios have improved and turnover has also more than doubled in the span of just two years.

Further, the company is investing in a brand new coatings facility at Gwalior. This will be funded by internal accruals. The facility is expected to be commissioned in this fiscal year which will further fuel growth. It has also launched a new range of products under wood finishes and adhesives in FY13, which would yield good results going ahead. We remain bullish on this segment considering the growth seen in the domestic plywood market and the performance of companies in this segment.

In FY13, Akzo Nobel reported 12 per cent growth in sales, which touched Rs 2180 crore. Its net profits went up by eight per cent to Rs 218 crore. The EBITDA margins improved from 14.77 per cent to 14.98 per cent. The first quarter results for the current fiscal though were not very robust, with a decline seen in its net profits. The management told us that rupee depreciation has taken a toll on the company’s results but a price hike is on the cards to contain the rupee impact, and hence, the numbers should look better in the future.

On the valuations front, the stock is available at a 12 month forward price-to-earnings multiple of 20x. We advise investors to enter the counter at the current price, with a one-year price target of Rs 950, which will give an upside of 11 per cent from the CMP.

LAST FIVE QUARTERS (Rs/CR)
Particulars	Jun 13	Mar 13	Dec 12	Sep 12	Jun 12
Total Income	573.64	540.4	605.16	523.41	563.01
Depreciation	9.78	9.55	9.75	10.01	9.34
Other Income	10.17	51.19	24.12	27.26	35.55
Interest	0.37	7.42	0.49	0.39	0.63
Profit Before Tax	49.03	83.34	63.72	53.19	78.87
Tax	14.22	19.81	13.09	8.38	17.98
Net Profit	34.81	62.5	50.63	44.81	60.89
Equity Share Capital	46.66	46.66	46.66	46.66	47.96