Result Update: Berger Paints Ltd - SELL - TP Rs.280 - Kotak

Valuations ahead of performance

- Strong volume growth in the decorative segment, stable volumes in the industrial segment and marginal contraction in operating margins due to raw material price inflation were the highlights of the results for Berger during Q2FY19.

Key Highlights

- Berger reported volume growth of 15% YoY on a strong base (~15% volume growth in Q1FY19 as well), translating into revenue of Rs 14.9 bn (+16.3% YoY). The volume growth was ahead of peers Asian Paints and Kansai Nerolac implying market share gains for Berger.

- Operating margins contracted marginally to 13.9% (-160 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. The company has taken another price increase on October 1, which is about 2.2% and announced another hike of ~1.5% from December 1st. With these price hikes, the company expects the margins to return to normal levels from Q3FY19

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

- Consequently, company reported strong PAT of Rs 1.17 bn (+5.2% YoY) in a weak macro environment.

- Management is confident of strong volume and sales growth and further improvement operational performance. Management expects the RM situation, demand for both decorative and industrial paints and pricing situation to return to normalcy by end of FY19.

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. However, macro environment remains non-conducive for business and growth. For Berger, 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, post factoring the growth prospects and post comparison with other big players, the current valuation appears stretched for Berger. Maintain estimates and SELL recommendation with an unchanged TP of 280 at 41x FY20E.

Shares of BERGER PAINTS INDIA LTD. was last trading in BSE at Rs.317.05 as compared to the previous close of Rs. 318.85. The total number of shares traded during the day was 37629 in over 648 trades.

The stock hit an intraday high of Rs. 319 and intraday low of 309.45. The net turnover during the day was Rs. 11855039.

Source : Equity Bulls

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