The Indian equity large-cap benchmarks namely the Nifty 50 and Sensex were rangebound on Wednesday with the Nifty 50 Index showing flat to minor losses during the afternoon session. Even the small-cap and mid-cap indices were trading flat as of the afternoon. While the indices failed to cheer the sentiments of capital market participants, select few names from the mid-cap and small-cap segments of the market outperformed their respective benchmarks.
Today, team Tavaga would perform a stock analysis on one such stock which is a part of the Nifty 500 index. The company has reportedly published a fantastic set of numbers recently for the quarter that ended on 30th September 2022.
The stock idea we would like to discuss with our viewers is Akzo Nobel India Limited (NS:AKZO). This is not a stock recommendation from Team Tavaga, we can probably recommend an investment idea only after considering your goals in life and the risk category you belong to. Therefore, do consider this analysis only for educational purposes.
About the company:
Akzo Nobel India Ltd. is primarily engaged in the manufacturing of paints and varnishes with its flagship brand - Dulux Paints. With a focus on capacity augmentation, Akzo Nobel India currently operates in its 5 manufacturing sites across India. Clocking a 50% increase in its distribution network in 2022 to cover 5,000 Indian towns, Akzo Nobel has scaled up its distribution via online and offline channels. It currently has 20,000 retail points and 4,000 B2B customers in India. While Kansai Nerolac Paints (NS:KANE) is known for automotive paints, Akzo Nobel also has one specialized world-class color center for automotive and specialty coatings in Bangalore.
Recent Quarterly Performance:
The biggest takeaway from the recent results posted by Akzo Nobel India Limited is that it has yet again gained market share from its peers despite high input costs and incessant rains which can prove to be detrimental for exterior paints. Akzo Nobel reported year-on-year revenue growth of 25% which was higher than Asian Paints (NS:ASPN) (revenue growth of 19.4%), Indigo Paints (revenue growth of 23.7%), and Kansai Nerolac (revenue growth of 19.2%).
Adding to the above-discussed growth drivers such as an increase in distribution networks, its early success in waterproofing and the relaunch of velvet touch have also shown clear growth visibility. While its gross margin declined by 1.88% due to higher input costs, it was partially offset by the hike in prices and the volume growth it could achieve.
Key Financials:
As discussed above, the higher expenditure due to a rise in raw material prices was offset by an increase in sales and price hikes.
Moreover, the company has consistently managed to sustain positive cashflows (in the past) from its core operations with FY23 operating cashflows likely to double compared to FY22 operating cashflows.
While the sales growth for the last 10 years has been muted due to various reasons, with the economy picking up and the construction and real estate activity likely to get a boost, Team Tavaga expects Akzo Nobel to ride the uptick in the economy, especially in the premium segment, better than any other listed players.
Valuations
Akzo Nobel India Limited is the cheapest stock in the sector compared to peers such as Asian Paints (trading at a historical P/E of 78.67), Berger Paints (NS:BRGR) (trading at a historical P/E of 60.55), Kansai Nerolac (trading at a historical P/E of 58.63), and Indigo Paints (trading at a historical P/E of 58.34). Akzo Nobel currently trades at a historical Price to Earnings ratio of 33x.
Key Risks
- Higher raw material prices, especially that of titanium dioxide and crude oil
- The extent of damage caused by prolonged rains in October 2022 is still unknown (floor paints remain the most affected segment of Akzo Nobel)
Considering the fundamentals, valuation, and key growth drivers of Akzo Nobel India Limited, the stock provides the biggest margin of safety in the sector. Moreover, the promoters hold close to 75% of the company thus providing confidence to minority investors about their commitment to enhancing the shareholder value. The stock rallied today on the back of positive commentary by many analysts on the back of strong results Akzo Nobel posted, and therefore, investors must consult their advisors before taking any position in the stock.
Moreover, Akzo Nobel India Limited is a small-cap stock as per the market capitalization rules laid out by SEBI & AMFI, and therefore it is exposed to higher volatility as compared to other larger players in the sector. That said, along with its improving fundamentals and decent valuations, Akzo Nobel also has a dividend yield of more than 3% making it one of the most attractive stocks to watch out for.
Disclaimer: The above commentary is only for educational purposes and not a recommendation.