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Berger: Underperforms peers - Views on News from Equitymaster
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  • Jun 17, 2003

    Berger: Underperforms peers

    Berger Paints declared its full year performance for FY03 during the weekend. While revenues are higher by 11%, net profit has grown at a slower rate due to higher provisioning towards tax. The company has managed to improve its operating margins, despite input cost pressures. However, when Berger's results are compared with its peers like Asian Paints and Goodlass, they do not seem that impressive.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net sales 1,265 1,367 8.0% 5,291 5,864 10.8%
    Other Income 16 11 -33.5% 31 26 -17.5%
    Expenditure 1,149 1,231 7.1% 4,779 5,267 10.2%
    Operating Profit (EBDIT) 116 136 17.2% 512 597 16.6%
    Operating Profit Margin (%) 9.1% 9.9%   9.7% 10.2%  
    Interest 15 (8)   74 39 -47.7%
    Depreciation 30 35 16.3% 114 131 15.2%
    Profit before Tax 87 120 37.7% 355 453 27.4%
    Extraordinary items (9) -   (9) (1) -94.6%
    Tax 5 28 491.5% 32 118 265.3%
    Profit after Tax/(Loss) 73 92 25.3% 314 334 6.5%
    Net profit margin (%) 5.8% 6.7%   5.9% 5.7%  
    No. of Shares (m) 26.6 26.6   26.6 26.6  
    Diluted Earnings per share 11.1 13.9   11.8 12.6  
    P/E Ratio (x)         6.6  

    Berger's topline growth for FY03 is marginally higher than our estimate of 9%. The company is among the market leaders in the industrial paint segment with growing contribution from decoratives. It has also been focusing on increasing contribution from decorative paint demand in the last three years with the expansion of dealer network and installation of tinting machines. That said, Berger's distribution is largely focused in the Northern and Eastern regions, which has restricted its revenue growth. Besides, industrial paint demand is growing at 5%-6% per annum and has been hampered in the last three years due to slowdown in the economy.

    Quarterly trend in sales performance...
    (% YoY change) 1QFY03 2QFY03 3QFY03 4QFY03
    Asian Paints 17.4% 14.8% 10.3% 12.9%
    Goodlass 12.0% 9.4% 13.7% 13.5%
    Berger 17.4% 14.4% 9.6% 8.0%

    The table above highlights the quarterly YoY change in revenues for the top three players in the sector. Clearly, Asian Paints and Goodlass have been growing at a faster clip than Berger. While Asian Paints' new product introductions in the exteriors segment, wood finishes and polyurethane combined with other retailing initiatives are providing the growth momentum, Goodlass has benefited from higher auto sales (it is a market leader in automotive paints to OEMs). In terms of operating and net profit margins also, Goodlass and Asian Paints score higher. Given this backdrop, despite having larger distribution network than Goodlass, Berger is growing at a slower rate due to its regional concentration. While we expect Berger to post an 8% growth in topline in FY04, competitors are more aggressive and as a result, Berger's market share may come under pressure.

    Operating margins have increased by 50 basis points for FY03. This is a creditable performance despite a sharp rise in input costs like titanium dioxide by 13% in 4QFY03. We expect growing contribution from decorative paint segment as a key reason for the improvement in margins. Decorative have superior margins than industrial and automotive paints. Though depreciation charges have risen in light of installation of dealer tinting machines, lower interest charges have translated into a 27% rise in PBT. Net profit at Rs 334 m is in line with our expectations.

    A comparative view...
      Asian Paints Goodlass Berger
    FY03 in snapshot
    Sales (% YoY change) 19.6% 11.1% 10.8%
    Profit (% YoY change) 24.2% 45.6% 6.5%
    OPM (%) 16.8% 11.2% 10.2%
    NPM (%) 9.0% 6.1% 5.7%
    P/E (x) 16.9 8.1 7.0
    P/BV (x) 5.0 1.4 1.4
    Market Cap/Sales (x) 1.5 0.5 0.4
    *FY03 earnings

    The stock currently trades at Rs 88 implying a P/E multiple of 7.0x FY03 earnings. Berger has declared a dividend of Rs 6 per share, which works out to a dividend yield of 6.8%. The stock has been on the rise in the recent past on the basis of lower valuations compared to its peers. However, we expect Asian Paints and Goodlass to continue to outperform Berger in the medium-term.



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