Berger Paints - Revenue decline in-line with the industry - ICICI Securities

In 1QFY21, Berger's revenue decline of 45.8% was an (optical) outperformance versus Kansai (58.6%) & Akzo (64.1%) and at par with Asian Paints (43%). Excluding STP acquisition (in Oct 2019), its performance (c.49% revenue decline) is in-line with industry. Likely higher trade margins, inferior revenue mix and lower profitability/ losses of STP would have impacted EBITDA margins. We believe this is transitory impact and should normalize by Q4FY21. Some cost savings are structural in nature and there will be savings in freight cost post commencement of Uttar Pradesh plant in H1FY21. We expect it to improve margins in FY22 (and beyond). We remain structural bulls, yet retain HOLD rating as premium valuations vs APNT is unjustified.

- Q1FY21 results: Berger reported consolidated revenue, EBITDA, PAT decline of 45.8%, 69.8% and 92.9%, respectively. We believe volume decline was c.40% YoY. While Apr'20 was complete washout, there is gradual recovery in May'20 and June'20. Standalone business reported revenue and PAT decline of 47.9% and 69.7%, respectively. We note international business including STP (i.e. Consolidated - Standalone) reported net loss of Rs302mn.

- Gross margin expansion of just 10bps due to likely inferior revenue mix: While input prices have declined, the gross margin expanded just 10bps YoY. We note likely reasons were (1) higher trade margins and (2) Change in revenue mix. Higher share of value-for-money products would have impacted the gross margin. In-spite of cost saving measures, EBITDA margin declined 788bps YoY due to stable fixed costs. We believe some of the cost savings are structural and the commencement of Uttar Pradesh Plant in H1FY21 will further reduce freight costs.

- Differentiation to gain market share: Berger's strategy remains differentiation to gain market share. It plans to bring differentiation in products as well as serving to trade/ consumers. As consumers focus more on essentials in tough macros conditions, Berger's differentiation strategy may face transitory hurdles.

- Margins of STP to inch upwards: STP, construction chemical subsidiary of Berger, has lower margins than Berger. We believe (1) lower margins and (2) initial placement costs would have resulted in lower profitability / losses of STP. With higher scale and product rollout through Berger's distribution, we model profitability of STP to improve in coming quarters.

- Maintain HOLD: We model Berger to report revenue and PAT CAGRs of 3.6% and 3.7% YoY respectively. RoE is expected to decline to 22.3% in FY22 from 25.9% in FY20. However, at current valuations, we believe the stock price upside is capped, hence maintain our HOLD rating with a target price of Rs540 (510 earlier).

Shares of BERGER PAINTS INDIA LTD. was last trading in BSE at Rs.541.6 as compared to the previous close of Rs. 550.35. The total number of shares traded during the day was 106342 in over 4028 trades.

The stock hit an intraday high of Rs. 555.85 and intraday low of 527.75. The net turnover during the day was Rs. 57177953.

Source : Equity Bulls

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