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Berger Paints: Growth boosted by subsidiaries - Views on News from Equitymaster
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Berger Paints: Growth boosted by subsidiaries
Mar 14, 2014

Berger Paints has announced the third quarter results of financial year 2013-2014 (3QFY14). The company has reported 11.7% YoY growth in sales while its net profits have grown by 7.1% YoY. Here is our analysis of the results.

Performance summary
  • Top line increases by 11.7% YoY during the quarter. This was mainly due to strong performance from the subsidiaries especially the one from Nepal and positive currency effect.
  • Operating profits increase 12.7% YoY in 3QFY14 with margins remaining more or less flat.
  • Net profits increased at a modest pace of 7.1% YoY due to 22.0% YoY and 28.3% YoY growth in interest and depreciation expenses. Interest expenses increased due to rising cost of debt and borrowings taken to fund the capex. Depreciation expenses increased due to expansion plans at Hindupur and increase in the number of tinting machines. Net margins declined by 30 bps YoY to 8.0% during the quarter.

Consolidated financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 9,171 10,248 11.7% 25,288 28,910 14.3%
Other operating income  32 50 55.0% 90 128 41.8%
Expenditure 8,035 8,982 11.8% 22,544 25,783 14.4%
Operating profit (EBDITA) 1,167 1,315 12.7% 2,834 3,254 14.8%
Operating profit margin (%) 12.7% 12.8%   11.2% 11.2%  
Other income 99 83 -16.1% 232 253 8.8%
Interest 97 119 22.0% 277 336 21.3%
Depreciation 143 183 28.3% 411 499 21.5%
Profit before tax 1,027 1,097 6.8% 2,378 2,671 12.3%
Tax 259 274 6.0% 632 731 15.6%
Profit after tax/(loss) 768 823 7.1% 1,746 1,941 11.1%
Net profit margin (%) 8.3% 8.0%   6.9% 6.7%  
No. of shares (m)         346.6  
Basic & Dilutedearnings per share (Rs)*         5.6  
P/E ratio (x) *         30.9  
* On a trailing 12-months basis

What has driven performance in 3QFY14?
  • Net sales increased 11.7% YoY in 3QFY14. The sales growth was moderate due to sluggishness in demand especially from the industrial segment. Slowdown in the auto sector due to high interest rate environment also impacted the overall topline growth to an extent. However, strong performance from the subsidiary in Nepal and positive currency effect enabled the company to post double digit revenue growth.

  • Berger Paints' operating margin stood at 12.8% in 3QFY14, compared to 12.7% in 3QFY13. Due to inflationary pressures (non-material related) margins remained more or less flat. The material cost declined from 61.4% in 3QFY13 to 60.5% in 3QFY14. However, the decline in material cost was offset by increase in employee cost and other expenditure (both as a percentage of sales) to 5.6% (5.1% in 3QFY13) and 21.1% (20.8% in 3QFY13) respectively during the quarter.

  • Bottom line increased 7.1% YoY in 3QFY14 due to 22.0% YoY and 28.3% YoY growth in interest and depreciation expenses respectively. Interest expenses increased due to higher borrowings and rising cost of debt while depreciation expenses increased due to increase in the number of tinting machines and capex incurred towards Hindupur plant.
What to expect?
At the current price of Rs 212, the stock is trading at a price to earnings multiple of 30.9 times its trailing twelve month earnings. Despite an inflationary environment and sluggishness in industrial demand the company was able to grow its top line by 11.7% YoY. Strong rural penetration, better pricing power and improved performance of subsidiaries resulted in double digit revenue growth. Further, in the month of February, the company increased prices in the decorative space by 2.2%. Hence, the 4QFY14 performance is also likely to be healthy despite slowdown worries in the industrial segment. Margins are also likely to remain more or less intact due to better pricing power in the decorative space.

Considering the market share gain (2-3%) over the last couple of years and margin expansion seen due to higher A&P spend and increasing exposure towards high margin emulsion products, the stock seems to have found favour with investors. However, from here on, additional upside will be difficult to achieve as most of the benefits are already priced in. As a result, we maintain our view of buying the stock at Rs 135 or lower.

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