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Berger: Fails to enthuse

Nov 8, 2004

Performance summary
Berger Paints, the third largest paint manufacturer in the country, posted lacklustre results for the second quarter ended September 2004. While growth at the topline level is impressive, owing to higher rise in raw material related expenses, operating margins have declined noticeably in 2QFY05. Excluding the extraordinary adjustments, net profits have declined by 9% YoY.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 1,813 2,074 14.4% 3,333 3,828 14.9%
Expenditure 1,576 1,857 17.9% 2,985 3,441 15.3%
Operating profit (EBDITA) 237 217 -8.3% 347 387 11.3%
EBDITA margin (%) 13.1% 10.5%   10.4% 10.1%  
Other income 12 9 -23.3% 18 15 -14.5%
Interest 9 8 -7.0% 14 17 18.8%
Depreciation 34 40 18.2% 67 79 18.7%
Profit before tax 207 179 -13.6% 284 305 7.5%
Extraordinary income/(expense) - (5) - (1) (10) -
Tax 66 51 -22.5% 84 83 -1.2%
Profit after tax/(loss) 141 123 -12.9% 200 213 6.4%
Net profit margin (%) 7.8% 5.9%   6.0% 5.6%  
No. of shares (m) 199.5 199.5   199.5 199.5  
Diluted earnings per share (Rs)* 2.8 2.5   2.0 2.1  
Price to earnings ratio (x)         14.5  
(* annualised)            

What is the company's business?
Berger Paints is the second largest paint manufacturer in India with an overall market share of 18.0% to 19.0% (Source: Company). It is India's second largest decorative paint manufacturer (11.1%) and also the third largest industrial paint manufacturer (13.9%). Over two-thirds of its turnover comes from decorative paints and the balance from industrial paints. It benefits from a better product mix, brand popularity and has a strong distribution network. It has a strong presence in the northern and eastern markets

What has driven performance in 2QFY05?
Sales momentum continues:  Berger is a very strong player in the industrial coating segment (including road marking paints). While the company has been focusing on increasing its presence in other markets on the decorative side, increased industrial and infrastructure related investments are a positive for the industrial side of the paints business. The company continues to post impressive growth at the topline level. The performance in 1HFY05 is above our full year estimates. While we expect the industrial coatings segment to grow at around 8% per annum, growth in the decorative segment is likely to be higher at around 10% to 12% over the next three years.

Raw material pressure reflects:  Though Berger has been taking initiatives towards increasing the contribution of third-party sourcing of paints and better raw material procurement practices, the fact that raw material have risen in the global markets cannot be ignored. As per Asian Paints, while titanium dioxide prices, one of the key raw materials, has increased by around 4% YoY, select packaging material costs has increased by more than 25%. This has affected operating margins. However, better control over other expenses has lowered the negative impact of higher raw material costs.

Cost break-up...
(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Raw materials 1,245 1,406 13.0% 2,306 2,688 16.6%
% sales 68.7% 67.8%   69.2% 70.2%  
Salaries 100 115 14.8% 200 226 13.2%
% sales 5.5% 5.5%   6.0% 5.9%  
Others 382 432 13.1% 708 810 14.3%
% sales 21.0% 20.8%   21.3% 21.1%  
Change in stock (151) (96) -36.5% (229) (282) 23.2%
% sales -8.3% -4.6%   -6.9% -7.4%  

Over the last few quarters:  While Berger has managed to grow its topline above the 10% mark in the past, the pressure on margins is apparent from the graph. Berger's topline growth at 14% in 2QFY05 is much higher as against, 8% and 10% growth in the topline posted by Asian Paints and Goodlass respectively. However, at the operating margin level, has company has underperformed. Excluding extraordinary adjustments in 1HFY05, net profit growth actually stands at 11%.

What to expect?
Berger is currently trading at Rs 31 implying a price to earnings multiple of 14.5 times annualised 1HFY05 earnings. The valuations, when compared with Asian Paints and Goodlass, is on the higher side. At the same time, if crude prices were to cool off from its high (which already is), paint companies could benefit from the same significantly. However, raw material related pressure is likely to continue for atleast the next six months.


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