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Berger Paints: Subdued growth - Views on News from Equitymaster
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Berger Paints: Subdued growth
Jun 29, 2015

Berger Paints has announced the fourth quarter results of financial year 2014-2015 (4QFY15). The company has reported 7.7% YoY growth in sales while its net profits have grown by 5% YoY. Here is our analysis of the results.

Performance summary
  • Top line increases by 7.7% YoY during the quarter. All the wholly owned subsidiaries showed improvement in topline during the quarter.
  • Operating profits increase 14.3% YoY in 4QFY15 with margins improving by 60 bps YoY.
  • Net profits increased 5% YoY despite strong performance at the operating level due to fall in other income and increase in tax and depreciation expenses.
  • The board of directors have declared a total dividend of Rs 1.25 per share during the year.
  • The company granted 160,743 number of equity shares to its employees during the quarter pursuant to the exercise of ESOPs.

Consolidated financial snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Sales 9,635 10,381 7.7% 38,545 43,050 11.7%
Other operating income  25 22 -11.2% 153 171 11.9%
Expenditure 8,600 9,193 6.9% 34,384 38,113 10.8%
Operating profit (EBDITA) 1,060 1,211 14.3% 4,314 5,107 18.4%
Operating profit margin (%) 11.0% 11.6%   11.1% 11.8%  
Other income 107 102 -4.7% 360 360 0.2%
Interest 130 142 9.3% 466 501 7.5%
Depreciation 208 238 14.6% 707 925 30.8%
Profit before tax 829 932 12.5% 3,500 4,041 15.5%
Tax 275 352 27.7% 1,006 1,394 38.6%
Profit after tax/(loss) 553 581 5.0% 2,494 2,647 6.1%
Net profit margin (%) 5.7% 5.6%   6.4% 6.1%  
No. of shares (m)         693.4  
Basic & Diluted  earnings per share (Rs)*         3.8  
P/E ratio (x) *         49.8  
* On a trailing 12-months basis.

What has driven performance in 4QFY15?
  • Net sales increased 7.7% YoY in 4QFY15. The growth was muted a bit as decorative business continued to suffer. However, the same is expected to show improvement over the future. Even the industrial & automotive segments are expected to sustain recovery.

  • Berger Paints' operating margin stood at 11.6% in 4QFY15, compared to 11.0% in 4QFY14. Decline in crude prices supported margin growth. However, management indicated that crude based raw material prices are expected to increase a bit in the near to medium term.

  • Bottom line increased 5.0% YoY in 4QFY15 despite strong performance at the operating level due to higher taxes and depreciation expenses.
What to expect?
At the current price of Rs 195, the stock is trading at a price to earnings multiple of 49.8 times its trailing twelve month (TTM) earnings. Growth in current quarter was subdued while management also expects raw material prices to firm up in the near term. Exchange rate volatility continues to remain a concern. Nonetheless, with Hindupur plant having started commercial operations volumes may jump going forward. While we feel that the current expansion plans and heavy promotional spend will help the company to gain market share, stiff competition and strong network channels of market leader Asian Paints will make the job that much difficult. Apart from it, breaking into new geographies like Western and Southern parts of the country is not likely to be that easy and may take time.

While Berger Paints has decided to expand capacity to boost growth, challenges do prevail due to stiffening competition in the industry. Margins may also remain under pressure if crude prices increase or exchange rate turns volatile. Even the valuations 49.8x TTM earnings appear to be stretched. As a result, we maintain our view of buying the stock at lower levels.

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