On recovery path post easing of lockdown norms…
Berger Paint’s Q1FY21 performance was largely marred by lockdown in the domestic and overseas business. Domestic business (~87% of consolidated sales) recorded ~48% fall in topline mainly due to washout April 2020 sales. However, post easing of lockdown restrictions, Berger saw ~90% sales recovery in May 2020 and reported double digit volume/value growth in June 2020 supported by pent up demand. Demand was largely driven by suburban and rural India where the impact of pandemic was limited. However, demand from metro regions remained impacted due to extended/intermediary lockdowns. On the subsidiary front, BJN Nepal was severely impacted by lockdown as it had only 10 working days in the quarter. However, Poland subsidiary Bolix SA exhibited an improved topline performance due to the nature of the business, which involves application of external insulation on building sites. On the raw material front, gross margin fell 266 bps QoQ (flat YoY) mainly due to a change in product mix, adverse current movement and price cut taken in the last 10-month period. Going forward, the management saw good demand traction in decorative paints post ease in lockdown restrictions (in July-August 2020) and expects a strong recovery in demand from Q3FY21 onwards. While we stay positive on the stock, we believe at CMP the stock captures all near term positives.
Lockdown drags topline performance
Q1FY21 consolidated revenues fell 46% YoY led by ~48% YoY drop in the revenue of domestic business. However, revenue fall in subsidiaries was limited to ~20% YoY due to topline growth in Bolix Poland (classification of construction works under essential categories), along with consolidation of newly acquired business of STP Ltd. The management expects strong demand revival, going forward, supported by festive demand, easing restriction in urban clusters (drivers of its premium products).
Lower operating leverage drags EBITDA margins
Gross margin in Q1FY21 fell 266 bps QoQ (flat YoY) due to unfavourable mix, adverse currency movement and use of higher cost of inventory. This coupled with higher fixed costs weigh on EBITDA margin, which fell ~549 bps QoQ (788 bps YoY) to 9.9%. However, the management has indicated at improved profitability in the coming period backed by favourable product mix, benign raw material cost and various other cost optimisation measures taken during lockdown.
Valuation & Outlook
Berger Paint is likely to report strong earning CAGR of 20% in FY20-22E supported by a recovery in demand and elevated margins (backed by benign raw material prices). We maintain our HOLD rating with a revised target price | 580/share, considering the current price captures all near term positives.
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