Muted response to Akzo Nobel India's buyback plan

Akzo Nobel India’s stock opened with a gap of 3% today and gained as high as 5% compared to previous session after the company announced buyback of 1.3 million shares (2.7% post-merger share capital) at Rs 920 per piece and capex of Rs 150 crore at Gwalior in Madhya Pradesh. However it ended with a gain of just 1.8% to Rs 879.

According to Anand Shah, analyst, Elara Capital, the buyback will be valuation neutral over the longer run as cash utilised for buyback (Rs 120 crore) will reduce from the cash balance of Rs 1,080 crore (substantial portion to valuation). Also, the tepid response to the buyback announcement could be partly due to the fact that it will happen only by July and today the broader markets were also weak.

After the buyback, the free float on the stock will come down to 37.66% from 40.36% as on March 2012 quarter.

Capacity expansion of 50 million litres at Gwalior (likely by end of next year) will increase its existing capacity by 50% (to 150 million litres), which will help in improving profitability as the company is debt free.

The company is positive about the merger of three Indian subsidiaries namely Akzo Nobel Coatings India, Akzo Nobel Car Refinishes India and Akzo Nobel Chemicals (India) with itself. This will help achieve the target of becoming one billion euro company in India by 2015. Emerging markets including India contribute 40% of parent’s revenues and hence Akzo Nobel India will also be at the heart of the parent’s future growth strategy along with Brazil, China and Indonesia.

Amit Jain, managing director of the company foresees benefits like economies of scale, operational/financial synergies with nine business units, access to several global brands and new markets with wide portfolio and geographical presence.  However some analysts are concerned about the high exposure to industrial paints business post-merger. Earlier the company derived 85% of its business from decorative paints, which yields relatively higher margins (directly proportional to the share of emulsions in the product mix) and is better placed during challenging times. Says Shah, “Rising contribution of industrial business (now at 45% of revenues) is likely to keep valuations under check.”

Analysts advise existing investors to sell or reduce their holdings and new investors to avoid the stock despite reasonable valuation of 18 times FY13 estimated earnings (historical band of 13-29 times).