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Berger: What in FY04?

Dec 18, 2002

Berger Paints is the third largest paint manufacturer in India with an overall market share of 13.0%. 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 balance from industrial paints. It benefits from a strong product mix, brand popularity and has a strong distribution network. The company acquired Snowcem India’s exterior paint division in FY02.Positives:
On the macro front, the Indian housing industry has been growing at the rate of 12%-14% in the last five years. Increasing household incomes, rising double income families and decline in housing loan rates have given a new lease of life to the housing industry. Added to the positivism are the tax incentives, which made housing an affordable proposition. We expect the housing sector to grow at 2x GDP in the medium-term, which will result in increased demand for the paint sector.

The per capita consumption of paints continues to remain sluggish at 0.5 litres. When compared to other developed countries, the figure is relatively very low. This coupled with strong brands, widespread distribution network, significant market presence in Eastern India would enable Berger to notch higher growth rates in the future. Over the last six years, the company’s revenues have grown at a CAGR of 14%. We expect revenues to grow at a CAGR of 7% over the next five years.

Berger acquired Snowcem India’s exterior paint division in FY02. Snowcem is the second big player in the exterior paint segment (market leader being Asian Paints). Lack of new product introductions and regional presence resulted in Asian Paints overtaking Snowcem, in terms of market share, in the last three years. But given Berger’s distribution and production expertise, we expect this acquisition to significantly add to the volume growth of Berger.

Negatives:
One of the key concerns is poor monsoon in the first half of the current fiscal year. On the back of an expected 6% fall in food grain production in FY03, CMIE’s GDP growth estimate is pegged at a meager 3.1%. Since paint demand tends to be on the higher side during the festive season, which in turn in reliant on the rural economy, we expect a sluggish growth in revenues in FY04.

Valuations:
The stock currently trades at Rs 72 implying a P/E multiple of 6x FY03E earnings. Valuations when compared with Asian Paints that is trading at 16x FY03E earnings seem to be on the lower side. But it has to be remembered that Asian Paint’s market leadership, marketing and distribution abilities are superior and so are operating parameters.

Valuation comparison...
ParticularsAsian PaintsGoodlass NerolacBerger Paints
Current price (Rs) 330.0 140.0 72.0
P/E (x) 15.7 7.8 6.0
Market Cap/Sales (x) 1.5 0.4 0.3
Performance parameters
Operating margin (%)16.3%8.7%9.3%
Return on Assets (%)11.3%6.1%9.4%
Return on Networth (%)26.1%13.1%18.6%
Net working capital/Sales (%)9.9%19.2%25.8%

For more detailed analysis with projections, view our complete research report on Berger Paints.

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