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Conference call excerpts: Berger Paints - Views on News from Equitymaster
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Conference call excerpts: Berger Paints
Nov 24, 2004

We recently had a conference call with Berger Paints to understand the likely impact of higher crude prices on paint companies. We also focus on the opportunities for paint companies in the industrial and decorative paints from a long-term perspective.

What is the company’s business?
Berger Paints is the second largest paint manufacturer in India with an overall market share of 17.0%. 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 (estimated at over 9,000). It has a strong presence in the northern and eastern markets. The company also has a plant in Pondicherry for meeting southern market demand.

Price increases on the anvil…
Sales growth of 14.9% in 1HFY05 was led by higher sales of the emulsion paints. Growth was also led by higher demand for exterior paints (this segment contributed to 22% of paint sales in FY04 from a negligible contribution before five years). However, owing to higher raw material prices, margins in 2QFY05 declined to 10.5% as compared to 13.1% in 2QFY04. Due to festive season, Berger did not increase product prices in 1HFY05, which is in line with other paint majors. But the company plans to increase prices in 2HFY05 to compensate for the rise in input costs.

Scope for improvement in efficiency…
Berger was planning to expand into the western markets (higher prices) and increasing the third party sourcing to improve operating margins and reduce the working capital requirements. The graph below reflects the magnitude of improvement in working capital requirement as a percentage of sales over the last six years. As the distribution network is augmented and the contribution of decorative paint sales increases (driven by higher demand from eastern region), we expect margins to improve, albeit at a slower rate. Though raw material related pressure is likely to continue for another six months, if crude prices were to soften from the current levels, Berger will benefit.

Jammu plant to commence operation…
Berger is in the process of setting up a 25,000 MT (23% of FY04 capacity). The plant is expected to commence full operation by July 2005. The powder coating facility will start production as Phase II any time now.

Road marking paints trigger…
Road marking paints market size, which was initially estimated at Rs 6 bn under the previous government’s investment plan, has been revised downwards to Rs 3 bn. The company hopes to garner around 30% to 40% market share over the next two years.

To be the second largest player…
The company aims to be the second largest player in the Rs 66 bn paint industry by 2007. Based on the paint revenue share of the top 6 players, Asian Paints’ market share in FY04 stood at 46.9% with Goodlass and Berger commanding a 20.3% and 17.3% share.

In our view, the paint market is likely to consolidate even further with organised players expected to increase their market share from the current level of around 50%. With Asian Paints focusing on increasing market share through price reductions, it is going to be an uphill task for Berger to gain market share.

Insurance brokerage…
The company is awaiting IRDA approval of this venture. We believe that this is a diversion from the core business of manufacturing and marketing paints for Berger. To that extent, we will be cautious.

What is our view?
The stock currently trades at Rs 34 implying a price to earnings multiple of 14.0 times FY05 and 11.4 times FY06 our estimated earnings. Whilst promising long-term growth prospects of the paint sector (higher growth expected from the industrial paint segment), the near-term prospects will be governed by crude prices. Berger’s strong presence in the performance coating and powder coatings are a positive. Overall, positives seem to outweigh negatives from a long-term perspective.

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