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Berger Paints: Seasonality factor hurts growth - Views on News from Equitymaster
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Berger Paints: Seasonality factor hurts growth
Feb 9, 2015

Berger Paints has announced the third quarter results of financial year 2014-2015 (3QFY15). The company has reported 8.2% YoY growth in sales while its net profits have declined 0.2% YoY. Here is our analysis of the results

Performance summary
  • Top line increases by 8.2% YoY during the quarter. The volume growth from the decorative business slowed a bit because of seasonality.
  • Operating profits increase 13.3% YoY in 3QFY15 with margins improving by 50 bps YoY. Fall in crude prices led to a decline in key raw material costs leading to expansion in margins. However, management stated that the full effect of the fall in crude prices will be seen in 4QFY15 and 1QFY16.
  • Net profits fell 0.2% YoY despite strong performance at the operating level due to increase in tax and depreciation expenses. Tax expenses increased as the income tax holiday at two of the company's unit in Jammu expired. Depreciation expenses were higher by 41.4% YoY as Hindupur plant started operations.
  • The board of directors have declared interim dividend of Rs 0.6 per share during the quarter.
  • The company's powder coating plant at Jejuri started production during the quarter.
  • On 9th Jan 2015, the company's equity shares underwent a split whereby the face value was reduced to Rs 1 per share from Rs 2 per share.

Consolidated financial snapshot
(Rs m) 3QFY14  3QFY15  Change 9MFY14  9MFY15  Change
Sales 10,248 11,084 8.2% 28,910 32,669 13.0%
Other operating income  50 87 75.6% 128 149 16.4%
Expenditure 8,982 9,680 7.8% 25,783 28,921 12.2%
Operating profit (EBDITA) 1,315 1,491 13.3% 3,254 3,896 19.7%
Operating profit margin (%) 12.8% 13.3%   11.2% 11.9%  
Other income 83 91 9.7% 253 258 2.3%
Interest 119 115 -2.9% 336 359 6.8%
Depreciation 183 259 41.4% 499 687 37.5%
Profit before tax 1,097 1,208 10.1% 2,671 3,109 16.4%
Tax 274 387 41.2% 731 1,042 42.7%
Profit after tax/(loss) 823 821 -0.2% 1,941 2,066 6.5%
Net profit margin (%) 8.0% 7.4%   6.7% 6.3%  
No. of shares (m)         346.7  
Basic & Diluted  earnings per share (Rs)*         5.96  
P/E ratio (x) *         56.9  
* On a trailing 12-months basis. Berger underwent a split of 1:1 on 9th Jan 2015.
Since the split date falls outside of 3QFY15, number of shares reported in the press release is not adjusted.
We use the pre-adjusted split price of the stock to calculate P/E ratio so as to enable a like to like comparison.

What has driven performance in 3QFY15?
  • Net sales increased 8.2% YoY in 3QFY15. The growth slowed down a bit as decorative business suffered because of seasonality. However, the industrial business performed well during the quarter. Nepal operations also slowed down a bit during the quarter thereby impacting growth.

  • Berger Paints' operating margin stood at 13.3% in 3QFY15, compared to 12.8% in 3QFY14. Fall in raw material costs due to decline in crude prices bolstered margin growth. However, considering that crude prices have fallen quite a bit management indicated that there might be a correction in certain end product prices whose raw material costs are heavily influenced by crude derivatives.

  • Bottom line declined 0.2% YoY in 3QFY15 despite strong performance at the operating level due to higher taxes and depreciation expenses.

What to expect?
At the current price of Rs 213, the stock is trading at a price to earnings multiple of 56.9 times its trailing twelve month (TTM) earnings. Growth in current quarter was subdued due to seasonality but as Hindupur plant has started commercial operations volumes are likely to improve going forward. Also, the full effect on margins amidst fall in crude prices is likely to be witnessed over the next 2 quarters. However, management did not rule out pricing cut in certain products amidst significant decline in crude prices. Overall while the company's growth prospects appear bright we reckon that valuations are a little farfetched at 56.9x TTM earnings. As a result, we maintain our view of buying the stock at lower levels.

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