Sirca Paints India Limited, earlier know as Sircolor Wood Coatings Private Limited, was incorporated in 2006 by founders Mr. Sanjay Agarwal and Mr. Gurjit Singh Bains.
After establishment, Sirca started import of Polyurethane Polish (PU) products from Italy and wall paints & Abrasives from Korea and sold them in India.
Sirca is the first Company to launch wood filler in India and opened its wholly owned branches in Mumbai and Chennai.
SIRCA products are mainly intended for the furnishing segment and are often developed in collaboration with some of Italy’s most prestigious furniture stores and designers.
Sirca is in marketing and trading/distributor of paints and allied products after repackaging the same.
Source: RHP
The company will only export the products which will be manufactured in its newly commissioned facility. The premium PU coating imported from Italy will not be exported to the neighboring countries.
The company has paid 600,000 euros to SIRCA Italy as licensing fees for granting manufacturing license and export to other countries such as Nepal, sri lanka, Bangladesh.The company will pay .15 euro per litre for every PU product to Sirca Italy
The company has commissioned its wood coating facility in Rai, Sonipat in the National Capital Region on the 15th of November 2019. This state-of-the-art facility has been developed in complete technical collaboration with the Sirca SPA Italy and was set up with a total capital expenditure of approximately 33.20 crores.
The production capacity of the unit is mfg. of 3,000,000 kgs of PU Thinner and 3,600,000 kgs of NC Lacquers 3,600,000kgs of melamine and 2,000,000kgs of Polyurethane products per annum initially, which is likely to be increased in the subsequent years. Actual utilization is expected to be 25 % in Ist year, 40 % in IInd year, 60 % in IIIrd year and approx 75% and above in further years.
In the Q1 FY20, the company has also commissioned a small facility of wall paint unit with an annual capacity of 24 lakhs liters which was taken on lease. The company has launched 7 products, both interior and exterior paints.
Indian Paint Industry
Indian Paint Association has highlighted that Indian paint market which was around INR 40,300 crores in 2014-15 is expected to reach INR 70, 875 crores by 2019-2020
Inventory Management at Dealer Level: The product differentiation is minimal in paint industry. The very close substitutes are readily available. Hence the inventory management at the dealer level is of a prime importance. It is also important for brand visibility and occupying the shelf space.
Distribution Costs: Distribution costs are important for a lower price product like Distemper. The Distemper is a stiff paint and is sold on weight basis. It is called as the “Bread and Butter” of the paint industry as the consumption is highest for this product. Hence, the cost associated with distribution of it is of prime importance.
Low Per Capita Consumption: The per capita paint consumption in India is in one of the lowest. This shows the lower penetration of the paint industry in the country. The paint companies have to educate the customers that they should go for the repainting of their houses frequently. This is a very unique feature of the industry that the Indian people will go for repainting either for some festival such as Diwali or occasions like Marriage or when the repainting is absolutely unavoidable.
Market Categories
Paint Industry Structure
Source: Sirca Investor Presentation
In the short run, paints industry will depend on monsoon which is crucial for rural demand, recovery post slowdown in the automotive sector and pickup of construction and housing demand. In the longer run, paints industry will grow on account of increase in disposable income, rising urbanization, rural growth, increasing trend of nuclear families and reduction in average repainting cycle on account of improvement in disposable income and lifestyle.
Wood coating market size
Source: Concall Transcript
Competition
Due to the premium brand positioning of Sirca in the market, Sirca competes primarily with high-end wood coating brands and not domestic wood coatings or wood polish products. Sirca competes directly with other brands that are into the premium segment like ICA-Pidilite. Industry leaders like Asian Paints and Pidilite Industries have collaborated with foreign brands like Renner (Italy) and ICA (Italy) respectively to give their products a premium position in the market.
The cost per square feet of PU coating of ICA Pidillite and Sirca is same as they both are superior quality products and the cost per square feet of PU coating of Asian paints is cheaper than Sirca.
Other players in the industry are Akzo Nobel, Kupsa Coatings, Charmwood (By Jubilant Industries), Kansai Nerolac, MRF Corp, Sheenlac, etc. The entry of bigger players in the coatings industry is marked by the expectation of a double-digit growth for this industry in the foreseeable future.
Source: Concall Transcript
Premium wood coatings have always been Sirca’s unique selling proposition. The company has progressed consistently in creating a market for premium wood coatings for the last 13 years to the extent that Sirca’s name in India is associated with premium wood coatings.
Source: Concall Transcript
Sirca’s edge over established competitors in Italian PU market
Source: Concall Transcript
Strengthening market position and brand recognition
Sirca has started to diversify its product portfolio to include products like economical PUs and melamine products which make up the majority of the market in terms of volumes. With the inclusion of these products, Sirca will be able to cater to a larger market and strengthen its brand recognition in the minds of the customers, who would, in later stages, make up for the high-end Italian wood coatings market.
Although there is a shift in the consumer preference, from melamine & economical PU products to high-end Italian PUs, the market size of the lower-end economical products in too huge in absolute terms to ignore.
The company has also marked its entry into the wall paints segment with the launch of 7 products this year. The entire expansion in the product portfolio will help in creating a more wholesome product kitty to offer to the dealers, which will, in turn, help in easy on-boarding of dealers and strengthen its distribution network.
Retail expansion
The company has increased its Dealer network from 555 dealers at the end of FY 19 to 1477 dealers till Q3 2020
During the same period company added 80 new sales team executives.
Company launched 4 new Sirca Studios during the same period and also opened new branch offices in Chandigarh, Kolkata and Kerala.
The IKEA opportunity ?
Promoter buying
· The promoters of the company recently bought 62,011 shares from the open market on 25/03/2020 at Rs 169.5 per share
Source: NSE Website
Financial performance
Following analysis can be done from the table :-
Revenue
· The company’s revenue has increase by CAGR of 20% over the past 7 years
· The company earlier used to generate approx. 85% of revenue from OEM sales and now the strategy has changed as they are generating 70% revenue from retails sales and balance 30% from OEM sales
· The revenue of company is further expected to increase at the same rate due to aggressive retail expansion in Pan India and export of its manufactured products to the neighboring countries
Operating Margin
· The company has been successfully able to increase its operating margin over the years and the management is focused on maintaining same margins in the future
· The company majorly operates in niche segment and is able to transfer the Raw Material price volatility to its customers
· The operating margins of imported premium Italian PU and the manufactured products in the new plant will continue to be same in the range of 25% to 26% as guided by the management
Source: Concall Transcript
· The operating margins of OEM sales and retail sales are same
Source: Concall Transcript
IPO
· During the FY 19 the company issued 48,69,600 Equity shares at cut off price of Rs 160 per share and collected Rs 7791.36 Lakhs
· The main objects of the issued was to set up the plant costing Rs 3320 lakhs and to finance working capital requirements to the tune of Rs 2500 lakhs for the near future
Capex
· The company has setup a new plant with state of the art technology in collaboration with Sirca Italy costing Rs 33.2 Cr and an additional wall paint facility which has been taken on lease with minimum capital expenditure
· The capex has been done from the proceeds of IPO
Operating Cash Flow (OCF)
· The OCF of the company turned negative during the FY 18 from positive OCF in FY 17. This can be attributed to major working capital fund requirements and aggressive expansion to retail sales
· The company has provided lenient credit terms to its customers (Dealers) but has not been able to enjoy the same credit period from its suppliers (Sirca Italy majorly). This has lead to an exponential increase in working capital requirement
· The company plans to finance the working capital requirement from the IPO proceeds
The management commits to reduce the working capital requirement by reducing the receivable days in the future
Key Ratios:
Virtually Debt free company
ROCE – 30.54%
ROE – 21.53%
ROA – 21%
Promoter holding – 67.32%
Risks
· The lead time for procuring the raw material is high and also in order to ensure readily available customized product along with a low lead time for the clients, the company has low credit period. Sirca required to provide sufficient credit period to its clients resulting in high receivables and it has minimum credit from its suppliers through against the same
· The substitute products of PU coating are gaining traction in the retail segment. The application of PU coating is a time consuming and expensive process (the professional almost takes the same amount as labor charges per square feet which is equivalent to the PU coating cost)
Eg The Sirca PU coating costs Rs 150 per square feet for final consumer, the labor charges would also be Rs 150 per square feet for applying PU coating. Hence a consumer has to pay Rs 300 per square feet for premium PU coating
· The Meister panels are popular among the final consumers as they do not require expensive labor work and are readily available as per the requirements of the consumer providing almost same aesthetics of PU coating
The company is operating in a very niche market where the incumbent players such as Asian Paints, Akzo Nobel and ICA Pidillite are present. These players already have a huge distribution network and are able to reach the markets without any additional costs and they have a great brand recall
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