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Berger: Topline concerns - Views on News from Equitymaster
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  • Jul 30, 2001

    Berger: Topline concerns

    Berger Paints, the third largest paint manufacturer in India, has succumbed to the slow down in the economy. The company has posted a marginal 3.5% rise in sales to Rs 1,162 m for the first quarter ended 30th June 2001. Both margins and profits have taken a severe beating due to the subdued demand scenario.

    (Rs m) 1QFY01 1QFY02 Change
    Sales 1,123 1,162 3.5%
    Other Income 3 5 57.6%
    Expenditure 1,006 1,064 5.7%
    Operating Profit (EBDIT) 117 98 -15.8%
    Operating Profit Margin (%) 10.4% 8.5%  
    Interest 20 21 8.7%
    Depreciation 18 26 42.6%
    Profit before Tax 82 56 -31.8%
    Other Adjustments - -  
    Tax 17 5 -68.5%
    Profit after Tax/(Loss) 66 51 -22.5%
    Net profit margin (%) 5.8% 4.4%  
    No. of Shares (eoy) (m) 26.6 26.6  
    Diluted number of shares 26.6 26.6  
    Diluted Earnings per share* 9.9 7.7  

    Since Berger commands a significant market share in the industrial segment, the slow down in industrial production starting from the second half of 2001 has stalled the progress of the economy thus affecting industrial paint demand. The scenario is no different for the decorative paint segment as well. Barring Asian Paints, majority of the paint companies have witnessed slow down in sales in the first quarter of the current year.

    Operating margins have declined sharply to 8.5% in 1QFY02 from 10.4% in 1QFY01. The primary reason is the sharp rise in raw material costs. Raw material costs as a percentage of sales have gone up from 65.2% in 1QFY01 to 69.9% in the first quarter of the current financial year. This despite the fact that key raw material prices have stabilised in 4QFY01 is a cause of concern. This along with a fall in paint prices seems to have taken its toll on Berger's operating profit, which has fallen by 15.8% to Rs 98 m.

    The company’s net profit has fallen by 22.5% to Rs 51 m. Though interest and depreciation costs have gone up, the sharp fall in tax outflow has prevented the bottomline from a huge drop.

    The scrip is currently trading at Rs 86 at a P/E multiple of 11.2x annualised 1QFY01 earnings. The company's management has said that it has completed the due delegence for acquisition of a paint company. But it is not clear whether it is a acquisition in the domestic or the international markets. Berger has been scouting for acquisition in SAARC countries for quite some time. Nevertheless, the prospects for the rest of the year continues to remain challenging in light of the slow down in the economy and lack of new investment projects. The recent trends indicate that crude prices might once again shoot through the roof, which will have a material impact on raw material costs and thus margins in the second half of the year. However, a rise in kharif output on the back of a good monsoon could improve paint demand in the second half of the current year.



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