Berger Paints - Making competition see red; initiate with Buy - Anand Rathi

Berger Paints (Berger), second-largest in the Indian decorative paints industry, has been expanding EBITDA margin 25-30bps since FY09 through aggressive branding. Realisations too are on an uptrend (up 100-200bps) with the proportion of premium products rising in its portfolio. We expect earnings to rise at 21.5% CAGR in FY13-15, and initiate coverage on the stock with Buy.

Concerted branding initiatives. Berger has expanded its product kitty to include high-margin exterior paints and emulsions, two fastest-growing segments of the industry. Moreover, it has curtailed discounts on products (from 4.9% to 3.6%) and is focused on creating a strong brand value. Over FY03-12, it hiked ad spend from 3.1% to 5.3% of net sales.

'Paints' a structural growth story. Per-capita paint consumption in India is a meagre 1.3 litres (global average 7.3 litres). Over 50% of the 220m households in India do not use paints. With pucca houses rising at 5.4% CAGR in the past decade, we foresee the Indian paint sector growing ~10-12% in volume and ~4-5% in prices over CY12-20. Also, the auto industry has reported 13% volume CAGR in CY01-12. Berger, with its extensive product bouquet and established position in the traditional categories (enamel and emulsions, accounting for 50% and 17% respectively of the industry), is poised to capitalize on the same.

Investments to pay back now. Over FY05-12, Berger expanded capacities at 13% CAGR, and also took to outsourcing (14% of sales) to tap the growing demand. By FY16, it plans to add 0.41m MT of production capacity to 0.28m MT now. These initiatives, together with an expanded distribution network, have resulted in higher cost. However, revenues will follow soon.

Our take. We value the stock at a target price of Rs.228 and PE of 26x Sept 14e earnings. In the past 12 years, it has traded at 34% discount to Asian Paints. We, however, expect this discount to narrow to 10% on Berger's market share gains and better RoE. Risks. Higher raw material prices.

Source : Equity Bulls

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