Issue #006 features Shalimar Paints & GHCL Textiles - two companies that're starting a new innings for themselves. We examine their investing thesis & the opportunity they present
Hi Shankar, Very good article as always. I enjoyed doing further research on both of these stocks and Risk/ Reward is definitely appealing for GHCL Textiles. I hope Shamilar
One idea for your next article '- Have you looked into Shankara demerger and Strides demerger? What do you think?
Great piece, Shankar! Looks like it's not easy to take on the incumbents in the Paints industry (Asian Paints, Berger). What is your view on Grasim's entry into the segment? Given their distribution, operation capability, and some vertical integration up the value chain, would Grasim be a better bet than Shalimar and Indigo in the coming decade?
1. There is little information on Grasim/JSW/Pidilite's entry into the paints business such as which territories, which segments, strategy, scale etc. So now is a bit like shooting in the dark
2. Grasim might be a better bet than Shalimar or Indigo from a scale standpoint but that's not what you & I are looking for, right? I mean, as shareholders, we are more keen on stock price upside and high volumes is a weak determinant of that. This part will become clear only after 2-3 years of seeing Grasim's operations.
From a stock price POV, Grasim is valued at around 25 P/E, whereas the top notch Paint companies are valued at 50+ P/E. Grasim is adding a significant manufacturing capacity in Paints, which even at a moderate capacity utilisation could push it to No 2/3 player in the market. Of course, easier said than done. The only reason I am interested is the potential re-rating of Grasim from a Chemicals/Commodity stock to a meaningful player in the Paints business. As you correctly say, let's wait out.
If you notice the average age of the employees is above 38 years and since it is originally from West Bengal( some example like ITC also headquartered there) , I sensed there was a good amount of friction in terms of adopting new technology (particular of people/govt. from that region) etc. But recent commentary from the management as Shankar showed above is encouraging.
Great article Shankar. Maybe you can add one more thing for Shalimar paints is the holding of JSW group in the company. They own shares in the promoter category ( as shown on screener) under 2 entities Hexa Securities And Finance and Nalwa sons. Do you think this entity can help JSW paints in the future and hence they have a stake in shalimar paints?
Thank you very much. The Jindals have been investors in Shalimar Paints for over 30 years now; Ratan Jindal acquired it in 1989 or 1990. I haven't really thought much in terms of this interplay between Shalimar Paints and JSW Paints (which comes under Sajjan Jindal, brother of Ratan Jindal) as I felt it will be an overthink. If some new, relevant information comes along then we can revisit this, otherwise I feel its just conjecture for now.
1. GHCL Textiles Limited doesn't really have a shareholding of it's own. As a demerged entity, it retains much of the shareholders of GHCL Limited. Also, the entity is barely 3 quarters in (the demerger was effective 01.04.2023) so things will remain fluid for some more time. I look at this as an opportunity esp. when the business seems undervalued & has good upside
2. I had looked into the management of GHCL Textiles -- due to space constraints I couldn't add it to the newsletter. The company seems to be run by an experienced & competent team. It's led by Mr. Rajappan Balakrishnan who has done his diploma in textile technology & has nearly four decades of industry experience. Moreover, Mr. Ravi Shanker Jalan (Managing Director of GHCL Limited) is on the Board and the overall team has many experienced professionals who have guided the yarn business successfully through various economic cycles.
Thanks for the detailed reply Shankar. You are right, I checked the Promoter Holdings in GHCL itself which is itself same (19% odd). It is interesting bet though, I agree.
Hello Jawad - No, I don't offer specific stock or product advice on a continual basis. I do have 1:1 paid consultations that people use for organizing their portfolio, getting their queries solved and to learn from my experience. Typically this is availed by investors who have 50 lakhs to 3 crores in wealth (exclude the property they live in), have more of mutual funds, generally salaried and are building a wealth plan over the next 15-20 years
Hi Shankar, Thanks for bringing some colors to the Shalimar story.
I used to hold this stock in 2018 or so, but made an exit a few years later. Definitely it sounds like a win-win for both Shalimar(with more distribution channels, investor's push for profitability, etc) and Infra.market (as they are prioritising retail sector compared to other infra players like OfBusiness and Zetworks). Lets say the distributions are done nicely and all the retailers (including Infra.market) have Shalimar paints lying in their stores, does this count under revenue/sales ? My only worry is if only retailers are buying it to sell, but the customers still preferring Asian/Berger from their stores. (from infra.market, it would exclusively be Shalimar). So the numbers to look out for is the paints sold from infra.market which should ideally contribute to their majority of he revenue going forward. And Infra.market is growing close to 90 to 100% in annual sales (majority is construction material). Also I read somewhere the paints industry is going to grow around 9.38% CAGR until FY28(https://www.zeebiz.com/markets/stocks/news-shalimar-paints-share-price-nse-bse-sensex-nifty-open-offer-hella-infra-market-256660), and Shalimar's claim to achieve the growth rate of 25% is not only at 2x but 2.5x the industry standard, also the point that big players like JSW, Grasim entering the market.
This could also mean there's more juice left in the paints!! that so many players wants a sip out of Asian paints!!
Though I checked Asian Paints numbers for last two years, definitely Shalimar grew 2x in comparison to Asian Paints, but Indigo Paints also showed impressive growth in comparison to Asian Paints!
The team of Infra.market seems good (IIM alumnis).
Hello, thanks for this note. I agree with many points. The paints market is likely to grow at 9-11% for many years and yes, Shalimar grew by 2x as compared to industry (which is primarily AP)
Kudos to your work. Just wanted to ask whether your thesis regarding Shalimar Paints still remain intact or their is some update in thesis/strategy owing to recent correction in stock price?
Thanks Keval ji. I didn't pursue Shalimar Paints after Q3 results given the troubles of the larger paints industry. Most companies have struggled due to weak demand conditions & customers have downtraded from the premium segment. As there were better opportunities available elsewhere, I exited my small position in Shalimar Paints at a 15% loss and applied the proceeds elsewhere.
Thank you for the reply. I have initiated small position basis your newsletter and my findings. I hope there is turnaround story in place via Infra market. Will increase position subsequently with the management providing more clarity. I would like to give this bet sufficient time to capture real estate cycle (4-5 years). I have also taken similar bet on Samman Capital (prev. Indiabulls Housing Finance).
WIth limited downside, there is scope for learning to be taken from such stories and potential gains.
1 : Depreciation seems very high and so will it struggle to generate free cash? As a comparison Nitin spinners has comparative lower depreciation as a percentage of its operating income. Are the mills old or just relative realizations lower. If it is realizations then why so since both are in same industry.
2 : The business needs to be cost conscious. Are the mills near to cotton growing and export friendly logistics zones?
1.a) I'm sorry, I didn't understand the context between FCF & depreciation. Can you please elaborate? Technically, FCF excludes non-cash expenses like depreciation
1.b) Just FYI on Nitin Spinners. The quarterly depreciation is increasing to 36 crores from Q3FY24 onwards (it used to be 22 crores earlier but there has been some change in depreciation policy I think)
2. Every business needs to be cost conscious. Can you please elaborate your thesis on export friendly zones and the context please?
My bad, the depreciation should not impact the FCF for sure. But it is striking nevertheless that in the accounting profit , we see depreciation almost accounting to nearly 5% of the sales. The total margin is operating margin is 7-8%.
It is also interesting to note as you did that the depreciation policy also shifted at Nitin Spinners.
From a cost reduction, I am coming from an understanding that yarn manufacturers are more of a price taker for the end product. So the game is to win over cost. I believe these could be done by doing backward integration (for example investing in windmill power) and to be strategically positioned so that logistics of sourcing and delivering to key markets is as less as possible. That is why I was asking whether they have these advantages.
Hi Shankar, Very good article as always. I enjoyed doing further research on both of these stocks and Risk/ Reward is definitely appealing for GHCL Textiles. I hope Shamilar
One idea for your next article '- Have you looked into Shankara demerger and Strides demerger? What do you think?
Thank you very much. I haven't looked at these two demergers. If you have a detailed thesis, can you please share at hello@beginnersbuck.com?
Great piece, Shankar! Looks like it's not easy to take on the incumbents in the Paints industry (Asian Paints, Berger). What is your view on Grasim's entry into the segment? Given their distribution, operation capability, and some vertical integration up the value chain, would Grasim be a better bet than Shalimar and Indigo in the coming decade?
Thanks Palash for your question. My views:
1. There is little information on Grasim/JSW/Pidilite's entry into the paints business such as which territories, which segments, strategy, scale etc. So now is a bit like shooting in the dark
2. Grasim might be a better bet than Shalimar or Indigo from a scale standpoint but that's not what you & I are looking for, right? I mean, as shareholders, we are more keen on stock price upside and high volumes is a weak determinant of that. This part will become clear only after 2-3 years of seeing Grasim's operations.
From a stock price POV, Grasim is valued at around 25 P/E, whereas the top notch Paint companies are valued at 50+ P/E. Grasim is adding a significant manufacturing capacity in Paints, which even at a moderate capacity utilisation could push it to No 2/3 player in the market. Of course, easier said than done. The only reason I am interested is the potential re-rating of Grasim from a Chemicals/Commodity stock to a meaningful player in the Paints business. As you correctly say, let's wait out.
This is an interview with Gupta, Shalimar's MD/CEO, who mentioned (https://www.business-standard.com/companies/news/jindal-family-backed-shalimar-paints-scripts-new-coming-after-stagnation-123081000444_1.html) the entry of more players in the market is good for Shalimar coz of their age old brand name. I partially agree to that coz big players will spend heavily on marketing (recent tournaments you'd have noticed JSW and Grasim ads) while age-old player like Shalimar might have a win coz of its brand recall. Also I read an interview from their HR who specified that they're prioritising hiring younger talent from Millennials and Gen-Z group ( https://hr.economictimes.indiatimes.com/news/industry/shalimar-paints-here-60-of-rd-is-led-by-women/112360114).
If you notice the average age of the employees is above 38 years and since it is originally from West Bengal( some example like ITC also headquartered there) , I sensed there was a good amount of friction in terms of adopting new technology (particular of people/govt. from that region) etc. But recent commentary from the management as Shankar showed above is encouraging.
Great article Shankar. Maybe you can add one more thing for Shalimar paints is the holding of JSW group in the company. They own shares in the promoter category ( as shown on screener) under 2 entities Hexa Securities And Finance and Nalwa sons. Do you think this entity can help JSW paints in the future and hence they have a stake in shalimar paints?
Thank you very much. The Jindals have been investors in Shalimar Paints for over 30 years now; Ratan Jindal acquired it in 1989 or 1990. I haven't really thought much in terms of this interplay between Shalimar Paints and JSW Paints (which comes under Sajjan Jindal, brother of Ratan Jindal) as I felt it will be an overthink. If some new, relevant information comes along then we can revisit this, otherwise I feel its just conjecture for now.
great, thanks for the details.
Great article sir
Thank you so much, Dr. Rajendra
Great article Shankar. Kudos! A quick doubt, I was checking GHCL Textiles. The promoter holdings is low at 19.15%. How do we look into this?
Thank you Kapil. My views:
1. GHCL Textiles Limited doesn't really have a shareholding of it's own. As a demerged entity, it retains much of the shareholders of GHCL Limited. Also, the entity is barely 3 quarters in (the demerger was effective 01.04.2023) so things will remain fluid for some more time. I look at this as an opportunity esp. when the business seems undervalued & has good upside
2. I had looked into the management of GHCL Textiles -- due to space constraints I couldn't add it to the newsletter. The company seems to be run by an experienced & competent team. It's led by Mr. Rajappan Balakrishnan who has done his diploma in textile technology & has nearly four decades of industry experience. Moreover, Mr. Ravi Shanker Jalan (Managing Director of GHCL Limited) is on the Board and the overall team has many experienced professionals who have guided the yarn business successfully through various economic cycles.
Thanks for the detailed reply Shankar. You are right, I checked the Promoter Holdings in GHCL itself which is itself same (19% odd). It is interesting bet though, I agree.
Yet another Gem!
Thank you very much
Excellent article Shankar
Thank you Abhijeet ji
I found the content interesting.
I look forward to reading the newsletters as and when they come out.
Thank you very much. Pls do forward it to your friends who have an interest in investing & encourage them to subscribe
Will do so.
Do you offer investment advice to individual investors on a professional basis?
Hello Jawad - No, I don't offer specific stock or product advice on a continual basis. I do have 1:1 paid consultations that people use for organizing their portfolio, getting their queries solved and to learn from my experience. Typically this is availed by investors who have 50 lakhs to 3 crores in wealth (exclude the property they live in), have more of mutual funds, generally salaried and are building a wealth plan over the next 15-20 years
Thank you for your reply.
Thank you sir. GHCL textiles sure does looks promising.
Most welcome. Glad you found it useful
Hi Shankar, Thanks for bringing some colors to the Shalimar story.
I used to hold this stock in 2018 or so, but made an exit a few years later. Definitely it sounds like a win-win for both Shalimar(with more distribution channels, investor's push for profitability, etc) and Infra.market (as they are prioritising retail sector compared to other infra players like OfBusiness and Zetworks). Lets say the distributions are done nicely and all the retailers (including Infra.market) have Shalimar paints lying in their stores, does this count under revenue/sales ? My only worry is if only retailers are buying it to sell, but the customers still preferring Asian/Berger from their stores. (from infra.market, it would exclusively be Shalimar). So the numbers to look out for is the paints sold from infra.market which should ideally contribute to their majority of he revenue going forward. And Infra.market is growing close to 90 to 100% in annual sales (majority is construction material). Also I read somewhere the paints industry is going to grow around 9.38% CAGR until FY28(https://www.zeebiz.com/markets/stocks/news-shalimar-paints-share-price-nse-bse-sensex-nifty-open-offer-hella-infra-market-256660), and Shalimar's claim to achieve the growth rate of 25% is not only at 2x but 2.5x the industry standard, also the point that big players like JSW, Grasim entering the market.
This could also mean there's more juice left in the paints!! that so many players wants a sip out of Asian paints!!
Though I checked Asian Paints numbers for last two years, definitely Shalimar grew 2x in comparison to Asian Paints, but Indigo Paints also showed impressive growth in comparison to Asian Paints!
The team of Infra.market seems good (IIM alumnis).
Looks like a stock to accumulate on dips!
Thanks again for the stories!
Hello, thanks for this note. I agree with many points. The paints market is likely to grow at 9-11% for many years and yes, Shalimar grew by 2x as compared to industry (which is primarily AP)
Is there now a tail wind here... can shalimar be accumlated nw?
Hi Shankar,
Kudos to your work. Just wanted to ask whether your thesis regarding Shalimar Paints still remain intact or their is some update in thesis/strategy owing to recent correction in stock price?
Thanks Keval ji. I didn't pursue Shalimar Paints after Q3 results given the troubles of the larger paints industry. Most companies have struggled due to weak demand conditions & customers have downtraded from the premium segment. As there were better opportunities available elsewhere, I exited my small position in Shalimar Paints at a 15% loss and applied the proceeds elsewhere.
Thank you for the reply. I have initiated small position basis your newsletter and my findings. I hope there is turnaround story in place via Infra market. Will increase position subsequently with the management providing more clarity. I would like to give this bet sufficient time to capture real estate cycle (4-5 years). I have also taken similar bet on Samman Capital (prev. Indiabulls Housing Finance).
WIth limited downside, there is scope for learning to be taken from such stories and potential gains.
Does the shalimar story still hold good? Stock seems to be beaten down in the last three months..
What do you think about jio finance? There is a lot of chatter in YouTube about this.
Hello Shankar,
Thank you for writing insightful posts.
Few questions on GHCL
1 : Depreciation seems very high and so will it struggle to generate free cash? As a comparison Nitin spinners has comparative lower depreciation as a percentage of its operating income. Are the mills old or just relative realizations lower. If it is realizations then why so since both are in same industry.
2 : The business needs to be cost conscious. Are the mills near to cotton growing and export friendly logistics zones?
Hello Abhishek ji,
Thanks!
1.a) I'm sorry, I didn't understand the context between FCF & depreciation. Can you please elaborate? Technically, FCF excludes non-cash expenses like depreciation
1.b) Just FYI on Nitin Spinners. The quarterly depreciation is increasing to 36 crores from Q3FY24 onwards (it used to be 22 crores earlier but there has been some change in depreciation policy I think)
2. Every business needs to be cost conscious. Can you please elaborate your thesis on export friendly zones and the context please?
Hello Shankar ji,
My bad, the depreciation should not impact the FCF for sure. But it is striking nevertheless that in the accounting profit , we see depreciation almost accounting to nearly 5% of the sales. The total margin is operating margin is 7-8%.
It is also interesting to note as you did that the depreciation policy also shifted at Nitin Spinners.
From a cost reduction, I am coming from an understanding that yarn manufacturers are more of a price taker for the end product. So the game is to win over cost. I believe these could be done by doing backward integration (for example investing in windmill power) and to be strategically positioned so that logistics of sourcing and delivering to key markets is as less as possible. That is why I was asking whether they have these advantages.
Yes, the cost of raw material plays a big part. The other cost is ofcourse, power. I haven't done a macro understanding of export zones, my apologies
Hi Shankar, GHCL Textiles seems corrected , P/E seems high (57), Is there anything in fundamentals change? I could not see any bad news yet.