Maintain SELL on Berger Paints - Marginally outperforms leader; premium unjustified - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

While Berger Paints (BRGR) marginally outperformed the market leader Asian Paints (APNT) in topline growth in 2Q (7.4% vs 5.8% - standalone), the latter continues to lead in both topline recovery (BRGR: -19.4% vs APNT: - 18.5%) and margin delivery (BRGR: 80bp contraction vs APNT's 50bp expansion in EBITDAM) in 1H. Given the immateriality in relative performance, BRGR's steep premium over APNT (75x Sept-22 P/E vs APNT's 61x) seems unjustified. While we revise our EPS estimates by 3% each for FY22/23 to account for marginally quicker pick-up in revenue, we maintain our SELL recommendation with a DCF-based target price of Rs. 490/sh (implying 56x Sep-22 P/E).

2QFY21 highlights: Consolidated revenue grew 9% to Rs. 17.4bn (HSIE: Rs. 16.8bn) as (1) the Decorative business registered healthy growth, (2) General Industrial and Protective coatings showed improved performance, and (3) subsidiaries (ex-Nepal) rebounded well. Management highlighted that top cities continue to be laggards but are expected to bounce back, while Tier 2/3/4 cities continue to do the heavy-lifting in terms of growth. Gross margin (GM) expanded 176bp to 42.8%, given benign RM costs and formulation gains. Note GM gains were partially offset by decorative paint price decreases in Sep and Dec-19. EBITDAM expanded 353bp YoY to 19.2% (HSIE: 18.1%) as (1) GM benefits tricked down, (2) the company kept a tight leash on employee/other expenses. APAT grew 13.6% to Rs. 2.2bn (HSIE: 1.8bn).

Outlook: While BRGR's 2Q recovery and margin delivery are commendable, the immaterial relative performance vs APNT despite being 1/3rd its size does not justify the premium it enjoys over the latter (75x Sept- 22 P/E vs APNT's 61x). Hence, while we revise our EPS estimates by 3% each for FY22/23 to account for marginally quicker pick-up in revenue, we maintain our SELL recommendation with a DCF-based target price of Rs. 490/sh (implying 56x Sep-22 P/E) Note: target price change is mostly a function of EPS change (3% each for FY22/23).

Shares of BERGER PAINTS INDIA LTD. was last trading in BSE at Rs.647.3 as compared to the previous close of Rs. 651.3. The total number of shares traded during the day was 15841 in over 631 trades.

The stock hit an intraday high of Rs. 655.55 and intraday low of 645.05. The net turnover during the day was Rs. 10301565.

Source : Equity Bulls

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