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.

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.