SELL on Berger Paints - Catalysts missing for a performance encore - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities

(TP Rs 460, CMP Rs 552, MCap Rs 534bn)

Berger Paints (BRGR) has gone toe-to-toe with dominant leader APNT over FY10-20 despite the former's higher industrial salience, implying that its decorative biz has outpaced APNT's. Growth has been smartly navigated alongside improving profitability via aggressive product innovation/ premiumisation, efficient marketing and distribution expansion (GM/EBITDAM differential has reduced from 856/924bp to 320/560bp over FY10-20). While this narrative will continue, outperformance is unlikely to be as steep over FY20-23, given that (1) BRGR will have to contend with APNT's stepped-up aggression at the bottom of the pyramid and (2) margin levers seem to be missing. We build in revenue/EBITDA/PAT CAGR of 8/9/10% over FY20-23E (closely tracking APNT) and initiate coverage on the stock with a Sell recommendation and a DCF-based target price of Rs. 460/sh (implying 55x Sep-22 P/E) as there is nothing on the investor table at 66x Sept-22 P/E. RoICs are likely to mean revert to 22% by FY22/23.

Outperformed market leader: BRGR's 5/10 year growth rates of 8/13% mirrors that of APNT's despite the former's higher industrial salience (20% of domestic sales), implying that BRGR's decorative biz has outpaced that of APNT's. It has also narrowed its profitability gap vs APNT over FY10-20 (GM/EBITDAM differential has reduced from 856/924bp to 320/560bp over FY10-20). Key underpinnings for this outperformance are (1) improvement in product price ladder, (2) smart brand-building, (3) improving distribution quality, and (4) strategic tie-ups with strong category partners.

Albeit, do not expect a performance encore: Growth narrative will continue, albeit BRGR's decorative outperformance vs APNT is not likely to be material, given the latter's stepped-up aggression in driving sales from the bottom of the pyramid, thereby restricting BRGR's sales outperformance. We model 11/12% and 8/9% volume CAGR for APNT/BRGR over FY20-23.

Margin levers absent over FY21-23: Benign RM costs are likely to keep GMs elevated in FY21 at ~43% (up 170bp YoY) but are likely to mean revert over FY21-23 as (1) RM costs firm up with demand recovery, (2) the momentum in low-GM (lower-end) paints outweighs that of premiumisation, and (3) down-trading gains steam amidst pressure on incomes. Cost of operations is expected to remain elevated in FY21/22, due to (1) pandemic-led unfavourable leverage and (2) unabsorbed costs hitting the P&L once the Sandila Plant is commissioned in FY22. Hence, we build in a modest 60bp EBITDAM expansion, mostly mimicking GM gains over FY21-23.

Valuation and outlook: While BRGR remains a credible No. 2 in paints; at 66x Sept-22 P/E (18% premium to APNT), risk-reward seems unfavorable. We assign a DCF-based TP of Rs. 460/sh (implying 55x Sep-21 P/E). Implied assumptions: (1) 10-year revenue CAGR: 12.6%, (2) FY20-30E/FY30-41E FCFF CAGR: 20/13.5% resp. (3) WACC: 10.5%, and (4) terminal growth: 6%, FCF/PAT conversion of ~70% over FY20-30E. Initiate with a Sell Reco.

Shares of BERGER PAINTS INDIA LTD. was last trading in BSE at Rs.556 as compared to the previous close of Rs. 551.9. The total number of shares traded during the day was 76717 in over 2172 trades.

The stock hit an intraday high of Rs. 558.7 and intraday low of 548.1. The net turnover during the day was Rs. 42608422.

Source : Equity Bulls

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