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Berger Paints: Double digit growth again - Views on News from Equitymaster

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Berger Paints: Double digit growth again
Aug 5, 2014

Berger Paints has announced the first quarter results of financial year 2014-2015 (1QFY15). The company has reported 16.8% YoY growth in sales while its net profits have grown by 17% YoY. Here is our analysis of the results.

Performance summary
  • Top line increases by 16.8% YoY during the quarter.
  • Operating profits increase 27.8% YoY in 1QFY15 with margins improving by 90 bps YoY.
  • Net profits increased 17% YoY due to strong performance at the operating level and a 21.7% YoY increase in other income. However, sharp rise in interest and depreciation expenses curtailed growth at the net level.
  • During the quarter, Berger allotted 10,836 shares to its employees towards the exercise of options granted under the ESOP plan.

Consolidated financial snapshot
(Rs m) 1QFY14 1QFY15 Change
Sales 9,044 10,562 16.8%
Other operating income 34 43 26.8%
Expenditure 8,181 9,458 15.6%
Operating profit (EBDITA) 897 1,147 27.8%
Operating profit margin (%) 9.9% 10.8%  
Other income 86 105 21.7%
Interest 94 126 33.9%
Depreciation 152 213 40.0%
Profit before tax 738 913 23.8%
Tax 247 338 37.3%
Profit after tax/(loss) 491 575 17.0%
Net profit margin (%) 5.4% 5.4%  
No. of shares (m)   346.5  
Basic & Diluted  earnings per share (Rs)*   1.7  
P/E ratio (x) *    41.0  
(*On a trailing 12-month basis)

What has driven performance in 1QFY15?
  • Net sales increased 16.8% YoY in 1QFY15. Strong demand emanating from the decorative segment boosted topline growth.

  • Berger Paints' operating margin stood at 10.8% in 1QFY15, compared to 9.9% in 1QFY14. The total material cost declined from 61.2% in 1QFY14 to 60.4% in 1QFY15. Employee costs as a percentage of sales also declined to 6.2% in 1QFY15 from 6.3% in 1QFY14.

  • Bottom line increased 17% YoY in 1QFY15 due to strong performance at the operating level and 21.7% YoY growth in other income. However, a 33.9% YoY and 40% YoY growth in interest and depreciation expenses curtailed profitability growth to an extent. Interest expenses increased due to higher borrowings while depreciation expenses were presumably higher as the company is in expansion mode.
What to expect?
At the current price of Rs 303, the stock is trading at a price to earnings multiple of 41 times its trailing twelve month (TTM) earnings. Berger Paints is currently in expansion mode. The Hindupur plant, (Andhra Pradesh) for which the company invested Rs 1,400 m, will go on stream in August itself. The second plant, at Jejuri near Pune, for which the company invested Rs 400 m, is expected to be commissioned near September. The Hindupur plant would make decorative paints while the Jejuri one would make automobile paints. Apart from organic expansion, for which it has invested heavily, Berger is also looking out for potential acquisitions particularly in South Asian countries.

The company has maintained its second largest market share in the decorative paints business and is expected to clock in 15-20% revenue growth this fiscal. As such, the company's growth prospects appear bright. However, we reckon that valuations are a little farfetched at 41x TTM earnings. As a result, we maintain our view of buying the stock at lower levels.

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