Berger's effort to narrow the gap with Asian Paints is a marathon - CSEC Research

Berger Paints is the second largest player in decorative segment in India, with a market share of ~21% in decorative segment. Berger is a distant second to Asian Paints, which currently has a market share of ~52% in decorative segment in India. Globally Berger Paints ranks no. 33 and the company is taking series of steps to enter the top 25 club by 2016. They also plan to increase their market share in decorative segment by 200bps to ~23% in next four years. Increasing the market share is not going to be an easy endeavor, as the competitors will try hard to protect their turf. However we believe with the following initiatives i.e. capacity building, introducing new products, strengthening the distribution network and aggressive marketing strategy will help Berger in gaining market share.

Scope for margin expansion

Asian Paints enjoys higher margin when compared to Berger Paints. The higher margins are mainly attributed to the factors like scale benefit, increased focus on high margin decorative segment, mainly premium products and water based paints. Decorative paint margins are 3-4% higher than industrial paint and among decorative paint, water based paint has 5-7% higher margin than solvent based paints. Currently, the revenue share for Berger from water based paint is slightly over 50%, and the share is expected to increase by ~2% YoY. In the last five years the revenue share from water based paints has increased by ~10%. We have estimated that for every 2% increase in water based revenue share will lead to a margin expansion of 10bps to Berger, keeping everything constant. Moreover, we expect the capacity addition, falling raw material prices, and price increase will augur well for margin expansion. We expect Berger Paints EBIDTA margin to expand 40bps and 30bps in FY13 and FY14 to 10.7% and 11% respectively.

Outlook & Valuation

Historically, Berger Paints has traded at an average discount of ~36% to Asian Paints (5year average PER) and we believe the discount will narrow down to ~30% to Asian Paints due to capacity addition, margin improvement and higher return ratio. Berger Paints, at CMP trades at 22.3X, 18.5X and 15.5X to its FY13, FY14 & FY15 earnings respectively. We assign a target multiple of 18X FY15E (PEG of 0.89) and rate Berger Paints a "Buy" with 18months target price of INR 163.

Key Risks to our recommendation include company's inability to pass on the cost increase on a timely basis, leading to crunch in margin and consumers down trading or deferring painting due to uncertainty in the economy and job environment.

Source : Equity Bulls

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