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Result Update: Berger Paints Ltd - SELL - TP Rs.305 - Kotak

Posted On: 2018-08-19 15:54:44

Valuations ahead of performance. 1/Strong volume growth in the decorative segment; 2/ stable volumes in the industrial segment; 3/ improvement in realisations leading to healthy sales growth; 4/YoY improvement in operating margins despite raw material price inflation and 5/ strong earnings growth were the highlights of the results for Berger during the quarter.

Key Highlights

- Berger reported volume growth of 15% YoY in decorative paint segment on a strong base (~11% volume growth in Q1FY18), translating into revenue of Rs 14.83 bn (+18.9% YoY). The volume growth was ahead of peers Asian Paints and Kansai Nerolac implying market share gains for Berger.

- Operating margins contracted just by 20 bps QoQ (expanded 50 bps YoY) despite high input cost inflation. To mitigate input cost inflation, the company has taken price hike of 1.5%/2% in Mar'18/May'18 respectively. We believe that any further increase in RM cost will be mitigated with price hikes and improvement in operations.

- Depreciation, interest cost, other income and taxes were stable for the company during the quarter.

- Consequently, company reported its highest ever PAT of Rs 1.35 bn (+27.1% QoQ and +19.7% YoY) well ahead of our estimate of Rs 1.1 bn.

- Management is confident of strong volume and sales growth and further improvement in operational performance. Even we believe that the situation is healthy for paint companies in every segment including decorative paints, industrial as well as auto paints.

Valuation and Outlook

- We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of Berger also indicated that the volume trends remain strong for the company and expect the trend to continue in medium term.

- Berger's performance has been better than peers and is indicative of continued market share gains. Reduction in GST rates can drive further improvement in demand. Continued strong quarterly performance, ahead of the peers has impelled us to increase our estimates for Berger. For Berger, now we estimate 10% volume CAGR over FY18 - FY20E with improvement in operating margins and ROE of ~23.3% and ROCE of ~30.4% for FY20E. However, the valuations at the current price and factoring growth prospects looks stretched. Recommend SELL with an increased TP of Rs 305 (from Rs 280) at 45x FY20E earnings in line with valuation of peers.

Shares of BERGER PAINTS INDIA LTD. was last trading in BSE at Rs.333.5 as compared to the previous close of Rs. 329.35. The total number of shares traded during the day was 146989 in over 1971 trades.

The stock hit an intraday high of Rs. 337 and intraday low of 330.55. The net turnover during the day was Rs. 49132450.


Source: Equity Bulls

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