Berger Paints India - Q3FY13 Results Update - SPA Securities

Berger Paints India (Berger) registered Q3FY13 consolidated sales growth of 18% to INR 9,203mn. Higher than expected gains in margins resulted in a YoY PAT growth of 40%. EBIDTA margin expanded by 260bps YoY to 12.69%, majorly benefitting from fall in RM costs. Softening in RM cost aided by appreciation in INR would bring in further margin gains ahead. Also, expected improvement in economic growth would drive volume growth in both decorative and industrial paint segments going ahead.

Pent up demand drive sales growth

Berger registered standalone (90% of consolidated business) sales growth of 17% to INR 8,222mn in Q3FY13 on the back of estimated ~8% volume growth. The sales growth was backed by pent-up demand from previous quarter due to late rains. Although, the company witnessed good growth in decorative segment (~80% of standalone), industrial business registered sluggish growth performance on the back of slowdown in automotive sector.

Falling RM cost to bring margin gains

Company's standalone EBIDTA margin jumped by 144bps YoY to 12.19% aided by softening in RM cost, increasing share of premium products and lesser share of lower margin industrial paints segment. Key RM like TiO2 (~20% of total RM cost) has declined by 20% YTD. Company took partial price hikes in industrial segment in Sep 2012 and is planning to take further hikes in next few months. Going ahead, we expect Berger to witness further improvement in margins on the back of softening in RM cost aided by expected appreciation in INR against USD, increasing share of premium products and price hikes in industrial segment.

Subsidiaries maintained good performance

Combined subsidiaries registered sales growth of 22% in Q3FY13 to INR 981mn. Major contributor Bolix (Poland) maintained its revenues besides witnessing improvement in margins on the back of price increases and favorable Euro exchange rate. Company's other subsidiaries, Berger Nepal and Berger Becker registered strong sales growth of over 20%. Combined subsidiaries registered expansion in EBIDTA margin by 461bps YoY to 16.92% on the back of increasing economies of scale.

Other key highlights

- Company's new business lines which include construction chemicals, wood finishes and textured paints contributed ~INR 100mn to the quarter sales

- Company's Hindupur plant is on schedule and production is expected to commence from May-June of current year

- Company has increased its (active) dealer network by 14-15% in current fiscal to 11,000-11,500

Valuation and Outlook

Berger reported improvement in sales in Q3FY13 backed by pent up demand in decorative segment and better performance by subsidiaries. With expected improvement in economic environment, demand in both decorative and industrial paints segments is expected to pick up. Further, new line of products such as construction chemicals, wood finishes and textured paints would also aid the revenue growth. Softening in RM cost aided by favourable exchange rate and increasing share of premium products would continue to drive margin expansion going ahead. We have built-in higher margins for FY13 and FY14 and upgraded our EPS targets. We have, therefore, increased our 12months target price to INR 165 (20x FY14E EPS) and continue to recommend HOLD.

Source : Equity Bulls

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