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Berger Paints: Higher tax outgo curbs profit growth - Views on News from Equitymaster
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  • Nov 11, 2014 - Berger Paints: Higher tax outgo curbs profit growth

Berger Paints: Higher tax outgo curbs profit growth
Nov 11, 2014

Berger Paints has announced the second quarter results of financial year 2014-2015 (2QFY15). The company has reported 14.6% YoY growth in sales while its net profits have grown by 7% YoY. Here is our analysis of the results.

Performance summary
  • Top line increases by 14.6% YoY during the quarter. The volume growth was in low double digits (11-12% kind of range) as far as the decorative business is concerned.
  • Operating profits increase 20.9% YoY in 2QFY15 with margins improving by 60 bps YoY. Fall in crude prices led to a decline in key raw material costs leading to expansion in margins.
  • Net profits increased 7% YoY despite strong performance at the operating level due to a 25.4% YoY fall in other income and 51% YoY rise in tax expenses. The tax rate increased from 25.1% in 2QFY14 to 32.1% in 2QFY15 as the income tax holiday for two of the plants located in Jammu expired on 31st March 2014.
  • The consolidated D/E ratio of the company stood at 0.55x at the end of 1HFY15.
  • The Hindupur plant started commercial production during the quarter.

Consolidated financial snapshot
(Rs m) 2QFY14  2QFY15  Change 1HFY14  1HFY15  Change
Sales 9,618 11,023 14.6% 18,662 21,585 15.7%
Other operating income  44 18 -58.2% 78 61 -21.3%
Expenditure 8,620 9,782 13.5% 16,801 19,240 14.5%
Operating profit (EBDITA) 1,042 1,259 20.9% 1,939 2,406 24.1%
Operating profit margin (%) 10.8% 11.4%   10.3% 11.1%  
Other income 83 62 -25.4% 169 167 -1.4%
Interest 123 118 -4.4% 218 244 12.1%
Depreciation 165 216 31.1% 317 428 35.3%
Profit before tax 837 987 18.0% 1,574 1,900 20.7%
Tax 210 317 51.0% 456 656 43.6%
Profit after tax/(loss) 627 670 7.0% 1,118 1,245 11.4%
Net profit margin (%) 6.5% 6.1%   6.0% 5.8%  
No. of shares (m)         346.7  
Basic & Diluted  earnings per share (Rs)*         3.6  
P/E ratio (x) *          48.7  
* On a trailing 12-months basis

What has driven performance in 2QFY15?
  • Net sales increased 14.6% YoY in 2QFY15. Strong demand emanating from the decorative segment boosted topline growth. However, two of the subsidiaries, namely Sherwin Williams & Bolix disappointed on the growth front.

  • Berger Paints' operating margin stood at 11.4% in 2QFY15, compared to 10.8% in 2QFY14. Fall in raw material costs due to decline in crude prices bolstered margin growth. This coupled with increasing share of premium emulsions further supported margin expansion. In light of these developments, Management expects margins to improve in the next quarter as well.

  • Bottom line increased 7% YoY in 2QFY15 despite strong performance at the operating level due to higher taxes after culmination of a tax holiday at the Jammu plant. Depreciation expenses too increased 31.1% YoY as the Hindupur plant commenced production indicating that CWIP has been capitalized. Other income fell 25.4% YoY further impacting the bottomline growth.
What to expect?
At the current price of Rs 368, the stock is trading at a price to earnings multiple of 48.7 times its trailing twelve month (TTM) earnings. The Hindupur plant has started commercial operations and thus volumes are likely to improve going forward. Management stated that while the domestic market is likely to show strong growth enabling the company to grow in the region of 15-20% (as in the past) international markets are posing to be a challenge except for Nepal. However, margins are likely to show improvement due to better product mix and decline in crude prices.

Overall while the company's growth prospects appear bright we reckon that valuations are a little farfetched at 48x TTM earnings. As a result, we maintain our view of buying the stock at lower levels.

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