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Berger: Tough times ahead

Nov 13, 2001

A slowdown in the economy and weakening industrial production has clearly affected growth prospects of the paint companies in the current year. As against a growth of 12% in FY01, the paint industry is expected to grow by 6%-7% in the current financial year. Berger Paints, the third largest paint manufacturer, reported a 11% fall in profits for 1HFY02. Given the slowdown in the economy, will the second half be any different for the company?

(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Sales 1,335 1,410 5.6% 2,456 2,572 4.7%
Other Income 4 5 54.3% 7 11 54.4%
Expenditure 1,198 1,273 6.3% 2,202 2,336 6.1%
Operating Profit (EBDIT) 137 137 -0.2% 254 236 -7.3%
Operating Profit Margin (%)10.3%9.7%10.3%9.2%
Interest 27 25 -8.9% 46 46 -1.3%
Depreciation 21 28 33.5% 40 55 37.6%
Profit before Tax 93 90 -3.3% 175 146 -16.7%
Tax 18 15 -13.7% 34 20 -40.3%
Profit after Tax/(Loss) 75 75 -0.9% 141 125 -11.0%
Net profit margin (%)5.6%5.3%5.7%4.9%
No. of Shares (eoy) (m) 26.6 26.6 26.6 26.6
Earnings per share (Rs)* 11.3 11.2 10.6 9.4
P/E 7.1 8.5
(*annualised)

Berger reported a 5.6% growth in sales for the second quarter ended September 2001, which is higher than 3.5% rise in sales in 1QFY02. This could be due to a rise in decorative paint demand in light of the festive season. The company is expected to post a turnover growth of 10%-12% in 3QFY02. Although key raw material prices have stabilised in 1HFY02, the subdued demand scenario has pressurised margins. A 50% rise in other income, primarily from lease rentals, has prevented a sharp fall in net profits for 2QFY02.

We expect the company to report around 6% growth in sales to Rs 5,226 m and a 9.7% fall in net profits to Rs 257 m for FY02. Though paint demand is expected to fare better in the second half of the current year, prices would continue to remain under pressure. Since the company derives more than 15% of revenues from the industrial paint segment, the fall in manufacturing output and lasklustre investment scenario is expected to subdue industrial paint demand. As a result, margins are expected to decline by 60 basis points for FY02. Besides, Berger has been aggressively increasing the number of dealer tinting machines in recent years in line with the industry trend. This would result in higher depreciation charges in FY02 and lower profit growth (depreciation charges for 1HFY02 have increased by 37.6% to Rs 57 m).

But the expansion in dealer tinting machines will result in higher other income in the form of lease rentals. Though Berger has tightened its belt on the working capital front, inventory levels witnessed a notable rise due to lower demand in the second half of the last year. Given the prevailing demand scenario, we expect the trend to continue in the current year also.

The scrip is currently trading at Rs 80 on a P/E multiple of 8.5x annualised 1HFY02 earnings.

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