Berger Paints Ltd - Q2 FY21 Result Update - YES Securities

Back to double-digit volume growth but valuation comfort missing

Valuation and view - The stock is currently trading at 62x FY23 P/E , which is about a 20-25% premium to Asian Paints. While growth rates are marginally higher, margin recovery is inferior to Asian Paints. While Berger can continue reducing the gap with regards to margins, Asian Paints stands to deliver marginally better growth rates and hence there is case for the valuation gap between the two to narrow. We remain positive on the attractive long-term opportunity but are not comfortable with current valuation levels.

- Quarter Highlights - Sales/EBITDA/PAT growth of 9%/34%/13% indicating volume growth of about ~13%; GMs expanded 180bps led by lower crude prices offset by adverse product mix; strong cost savings drove 350bps EBITDA margin expansion dive lower ad spends; standalone revenue growth of 7% and 425bps EBITDA margin improvement; subsidiaries revenue growth of 22% led by STP acquisition while subs EBITDA margins were down 220bps; WC improved further; remain reasonable optimistic about near-term growth prospects for company.

- Automotive paints JV - Nippon JV showed strong revenue growth in 2Q; cost reduction initiatives have helped margins; made significant market share gains in OEMs from a low base.

- Employee cost outlook - Expect some sustained reductions in employee costs to continue going forward.

- BJN Nepal outlook - Should see positive revenue trajectory in 3Q helped some pent-up demand as well; 2Q impacted due to delayed COVID impact in Nepal.

- Subsidiaries growth - STP consolidation drove growth which was acquired in November 2019; other subs have shown marginal growth.

- Volume vs value growth - Value growth lower than volume growth as depot business had an element of price cuts in September and December 2019 plus additional discounts and an inferior mix this quarter - about 600-700bps difference between volume and value growth.

- Demand outlook - Hope demand trends would sustain; growth will get better in 3Q as metro demand normalizes which is about 30% of total revenue; currently Tier 2 and 3 markets growing much faster; October also indicating improved demand sentiment.

- Gross margin outlook - Gained from drop in crude prices; have changed some formulations which will be structural benefit in addition to import substitution; however, temporary COVID-related discounts would be rolled back.

- Waterproofing segment - See huge untapped potential for paint companies which Berger wants to leverage and create a large segment; new campaign has created lot of excitement for dealers.

- Capacity expansion plans - New upcoming plant in Lucknow to serve the UP market and also gain tax benefits.

- Rural market drivers - Distribution expansion, strong monsoon and opening up of rural infrastructure is driving better growth than urban.

- Discounting patterns - Not a significant change although discounts have started tapering off from 2Q levels given the strong demand trends.

- Long-term growth trends - Paint industry should outperform GDP growth trends because of - 1) Faster development of Tier 3/4 towns, 2) more first time user of paints will drive faster growth, 3) expansion in distribution and product portfolio, 4) new segments like waterproofing and construction chemicals, 5) market share gains for larger players and 6) industrial paints should also do well after a muted period.

- Competitive outlook - Gained market share due to supply chain issues with regional and local players in smaller markets which should sustain even going forward.

- Distribution expansion - Pace of increase in network has slackened a bit but now getting back on track; wholesale channel not very large as company prefers selling directly.

- Margin sustainability - Limited gap with Asian Paints in terms of decorative margins which should narrow further; industrial business margins (20% of business) should also improve.

- Change in labor costs - While labor costs is broadly same, cost of application has marginally increased due to sanitization requirements which consumers have accepted.

- Ecommerce initiatives - See that as an important channel; created a separate team to formulate a comprehensive plan.

- Key influencer - Dealer was biggest influencer earlier which has now shifted to painter/contractor and consumer; now marketing strategies are aimed at the painters and end-consumers.

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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