Covid Surge Won’t Delay New Launches, Capex For Berger Paints

Revenue of Berger Paints grew at an annualised rate of 15% in the last two fiscals compared with 16% for Asian Paints. The quarter ended December saw it perform in line with estimates, aided by rural demand and a pick-up in urban areas.

Q4 Highlights (YoY)

• Consolidated revenue grew 50% over a year earlier in Q4, driven by 53% growth in the domestic business.
• Ebitda and net profit rose 61% and 102%, in line with estimates of analysts tracked by Bloomberg.
• Overheads put pressure on margins.
• Q4 followed consolidated revenue, Ebitda, and net profit EBITDA, PAT growth of 24.9%, 40.1%, and 50.78%, respectively, in Q3, indicating a sustained momentum.

Most of the country, however, is back under local restrictions amid a resurgence in infections in a deadlier second wave. Commodity costs are also rising. Berger Paints, however, expects a rebound as soon as cases start coming down.

Growth has run almost parallel for paints and waterproofing segments, according to Abhijit Roy, managing director at Berger Paints. While other segments may have marginally underperformed, he expects demand to pick up in the coming months as states start unlocking business activity.

Roy is confident of double-digit volume growth in the ongoing financial year ending March 2022, driven by urban demand and lifting of restrictions. And because of inflation expectations, value growth will be higher, he said.

Roy, however, wouldn’t hazard a guess about rural demand as the pandemic has this time reached the hinterland. It’s too soon to say whether rural markets will bounce back or whether they will remain subdued after unlocking the economy, he said.

For Berger Paints, a pandemic-induced economic slowdown won’t delay new launches and capex and they would go as planned. And despite rising raw material prices and capex costs in FY22, Roy said the company is confident to maintain margins on the back of premiumisation and measures like cost cuts.

Brokerage View

Nomura

• Maintain reduce with a target price of Rs 675 (vs Rs 620 earlier), implying a downside of around 16%
• While Berger Paints has the ability to drive relatively strong sales/volume growth, see some impact/delayed demand from the second Covid-19 wave that has penetrated rural markets (a key driver of strong growth).
• Believe price hikes will lag inflation, and build in some margin pressure in FY22F.
• Increase FY21F/22F/23F EPS by 5%/3%/4% to factor in the Q4 beat; however, the paint maker's current valuation at 80x March-23F EPS is much higher than its past three-year average of 63.5x and Asian Paint’s 66x despite having similar growth.
• Grasim’s impending entry may cap further multiple expansion.
• Key upside risk: innovative launches driving high demand.

Emkay Global

• Retails ‘sell’ rating on the stock with a target price of Rs 585, a potential downside of nearly 30%.
• Growth and execution remain impressive but earnings surprises are likely behind now, given rising margin pressures.
• Valuation at 68 times estimated earnings per share for FY23 is at a 20% premium to Asian Paints and expensive.

ICICI Securities

• Maintains ‘Hold’ recommendation with a target price of Rs 800, implying little upside from current levels.
• Remains positive on Berger’s strong positioning in value-for-money paints; strong distribution network, especially in East India; aggressive growth strategy and innovation and; high probability of market share gains in ancillary segments such as waterproofing and putty.
• Premium valuations are unjustified.

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