Gladiator Stocks - Berger Paints - ICICI Securities

Strategy

Buy Berger Paints: in the range of Rs. 540.00-553.00 for target price of Rs. 635.00 with a stop loss of Rs. 497.00. Time Frame: Six months

Technical View

- The stock has registered a resolute breakout above the falling supply line joining highs since Feb'20 (Rs. 597) signalling resumption of the primary up trend thus offering fresh entry opportunity

- Structurally the stock has been trading in a secular up trend. Key point to highlight over past four years is that, on multiple occasions buying demand emerged in the vicinity of 52 weeks EMA coincided with demand line joining lows since July 2019 (Rs. 302). Currently both of these are placed around Rs. 500-490 levels which is expected to act as major value area for the stock in case of any corrective decline

- The aforementioned evidences makes us confident to believe, stock would resolve higher and accelerate upward momentum towards Rs. 635 in the medium term as it is 123.6% external retracement of Feb-Mar 2020 decline (Rs. 597 - 390), placed at Rs. 635 levels

Fundamental View

Berger Paint (BPIL) is the second largest decorative paint player in India with an organised market share of ~17%. The company has kept its market share intact despite aggressive expansion by the leader and other MNC paint players in domestic market. In the last five years, BPIL has invested heavily in capex, brand building (average 5% of sales in the last five years) and product innovation with a strong balance sheet position.

Berger Paints reported strong domestic volume growth in the first two months of Q4FY20. However, domestic revenue (~ 87% of consolidated sales) declined ~13% YoY in Q4FY20 (higher than industry leader) mainly due to ~45% lower volume offtake in March 2020 owing to lockdown. Lower realisation was largely due to a change in product mix. However, the company has not initiated any price cut despite recent decline in raw material prices. However, the management guided that future price cuts on selected product categories cannot be ruled out given the softness in input prices. Unlike industry leader, Berger Paints has low revenue exposure in metros. Hence, it is better positioned to cater to pent up demand in tier II, tier III cities post easing of lockdown. While the product mix is likely to stay skewed towards low end product categories, the revival in maintenance related works would help drive volume growth in the medium term. Gross margin is likely to stay elevated due to a sharp fall in monomers and solvent based product prices.

Berger Paint is likely to report strong earning CAGR of 22% FY20-22E supported by a recovery in demand and elevated margins (backed by benign raw material prices). With minute D/E (of 0.2x), strict working capital management led to strong cash flow from operation (up ~60% YoY) in FY20. We maintain our positive stance on the stock given its strong balance sheet position.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_GladiatorStocks_BergerPaints_Aug20.pdf

Shares of BERGER PAINTS INDIA LTD. was last trading in BSE at Rs.547.85 as compared to the previous close of Rs. 551.6. The total number of shares traded during the day was 70260 in over 3306 trades.

The stock hit an intraday high of Rs. 560.5 and intraday low of 545.55. The net turnover during the day was Rs. 38880698.

Source : Equity Bulls

Keywords