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Berger: Economy overcasts growth

Sep 10, 2001

Berger Paints, the third largest manufacturer in India, has managed to grow profits at a CAGR 16% over the last five years. But given the current economic scenario, can the company sustain its profit growth and keep its margins intact? In FY01, the company had reported a sales growth of 12% to Rs 4,904 m on the back of a 10% volume growth and a 1.2% rise in realisations. However, if one were to look at the trend over the last five years, per unit realisation has been on the decline. The reasons are multifold. One, competition in the decorative paint segment has intensified and five paint companies’ share almost 60% of the market in between them. Even amongst them, only few companies like Asian Paints have the pricing power on account of a strong brand recall as well as a well networked distribution spread across the country. Berger Paints is predominantly a market leader in the Eastern region of the country and concentration of dealers is narrow. Though the company has been increasing its presence in other regions also, it is yet to attain a critical mass.

The other reason for a fall in realisations is the slowing economy and uneven rainfall. We have agricultural output increasing on one hand and industrial production tumbling on the other. So, we are yet to strike a balance to push growth to the higher trajectory. But the only savior has been the housing finance industry, which is growing at a commendable rate thanks to the sops provided in recent Budgets.

Given this backdrop combined with the slowdown in the economy in the current financial year, the prospects are not promising either. 1QFY02 results seem to mirror the emerging trend. Though sales have gone up by 3% in 1QFY02, margins have declined sharply by almost 300 basis points. We expect the company to report a topline growth of 6%-7% and a 7%-9% fall in profits for FY02. Margins are expected to fall by 60 basis points. The scenario is so gloomy that the Prime Minister has to convene an emergency meeting with the industry leaders to discuss on existing bottlenecks and how to accelerate growth of the economy!

The performance of the paint companies in the third quarter of the current year is critical and is expected to have an impact on the overall results of FY02. Since festive season in the current year falls in the third quarter, we expect higher topline growth (this has been the case historically).

In such a gloomy scenario, tightening costs is very important to sustain profit growth. The company has been doing this, both on the costs front, as well as on other aspects like increasingly outsourcing paint to safeguard margins at the gross level. Production from raw material processed from outside has gone up from 26,764 MT in FY99 to 40,311 MT in FY01, a CAGR of 22.7%. The company has also tightened the working capital, which has come down from as high as 36.6% of sales to 30.3% in FY01. However, it has a long way to go (net working capital to sales for Asian Paints is around 17%).

The scrip is currently trading at Rs 86 at a P/E multiple of 8.8x the estimated FY02 earnings. On the expected sales of Rs 5,226 m in FY02, market capitalisation to sales works out to 0.4 times (market capitalisation is Rs 2,285 m). If one were to look at the stock price movement on the bourses, it has been moving in a narrow range for quite some time. Given the current state of the economy, there is not much to look forward to.

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