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Berger Paints: Scaling new heights

Sheetal Agarwal/Mumbai 29 Nov 12 | 12:40 AM
 Berger Paints India Ltd
tradenow

BSE   01 Sep 14 | 12:00 AM

345.05  1.2 (0.35%)

NSE   01 Sep 14 | 12:00 AM

345.25  0.4 (0.12%)

In the last year, the Berger Paints stock has outperformed the Sensex, as well as the stocks of its smaller peers, owing to healthy volume growth and stable market share. Berger’s focus on high-growth and high-margin emulsion products, backward integration efforts for its emulsion requirements and expanding distribution network would help it maintain market share and record better growth, analysts say.

Through the next two to three years, the company’s revenues and earnings are estimated to grow at a compounded annual growth rate (CAGR) of 17 per cent and 20 per cent, respectively.

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From the stock perspective, at 20 times the FY14 estimated earnings (Rs 7 a share), it is trading at a 25 per cent discount to the Asian Paints stock. The valuation gap has reduced sharply, compared to the historical discount (average) of 40 per cent to Asian Paints, which analysts expect to drop to about 15 per cent. Most analysts are bullish on the Berger stock and expect upsides of 15-18 per cent over a year, against the current Rs 143-levels.

HOW THEY STACK UP
In Rs crore Asian Paints Berger Paints Kansai Nerolac
Revenues 10,837 3,350 2,917
% change y-o-y 12.9 13.6 12.2
Ebitda margin (%) 16.0 10.8 12.8
Bps change y-o-y 30 50 -20
Net profit 1,105 205 238
% change y-o-y 15.7 13.9 10.3
EPS (Rs) 115.2 5.9 44.2
RoE (%) 35.9 23.8 20.8
All figures are estimates for FY13
Source: Analyst reports

“Berger has remained our top pick in the paints space, owing to consistent growth, market share gains, superior margin management and the potential to surprise in earnings/margins due to mix gains," says Anand Shah of Elara Securities. Shah has a ‘buy’ call on the stock, with a target price of Rs 176 a share.

In the last two years, Berger recorded a robust 24.8 per cent CAGR in revenues, and this has helped it increase the revenue gap with Kansai Nerolac. Though growth has moderated a bit, owing to the delayed monsoon and the festive season being somewhat delayed (compared to last year), analysts expect it to rise. So far this financial year, Berger has posted volume growth of seven per cent. Analysts expect this to rise to 10.1 per cent by March. For 2013-14, they estimate Berger’s volumes to grow 13-14 per cent.

Despite growing competition, the company has managed to maintain market share of 16-18 per cent. Analysts expect this would continue.

“Having built a robust distribution network, strong relationships with dealers/painters and a wide product portfolio, Berger is now targeting premiumisation of its product portfolio, with renewed focus on advertising and promotional activities. We expect Berger to maintain its market share in the future, while Kansai Nerolac and Akzo Nobel would lose share to Asian Paints," says Rakshit Ranjan, analyst at Ambit Capital. However, given the strong positions of its peers, it would be interesting to see how the scenario shapes up.

Increased focus on the premium category might help Berger expand its overall earnings before interest, tax, depreciation and amortisation margins, currently about 200 basis points lower than Kansai’s. This is one reason why Berger lags its peers at the net-profit level. Compared to economy- and mid-segment paints, in which margins are 33-35 per cent, premium-segment margins are at least 40 per cent. This category is also expected to see better growth, compared to the economy and mid segments. Therefore, expect Berger’s margins to improve and its profits to rise faster than its revenue.

Among paint companies, Berger has the second-best distribution network. Analysts estimate it is about 42 per cent larger than Kansai Nerolac’s. It also enjoys strong foothold in Tier II and III cities. However, to catch up with Asian Paints, Berger would have to increase its distribution efficiencies significantly, something analysts don’t expect anytime soon. Analysts also feel Berger would have to strengthen its sub-brands such as Silk, Rangoli, Bison and Jadoo.

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