Published on 21/01/2021 10:50:14 AM | Source: ICICI Securities Ltd

Expect margin improvement to continue - ICICI Securities

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Hold Berger Paints Ltd For Target Rs.635

Expect margin improvement to continue

Pointers from Q2FY21: (1) Reduction in discounts and some savings in raw material sourcing will ensure the gross/EBITDA margins remain at higher levels, (2) The company has gained market share from smaller players during the quarter and has also expanded the dealer count and (3) the revenue growth momentum from tier 2 and 3 cities and villages remains intact and there is possibility of recovery in metros in H2FY21. We also believe there will be structural savings in cost items which are clubbed under ‘Other expenditure’ and commencement of UP plant will also help to reduce some costs like freight. We expect the company to improve margins in FY22 (and beyond) and remain structural bulls, yet retain HOLD rating as premium valuations vs APNT is unjustified.


* Q2FY21 results: Berger reported consolidated revenue, EBITDA, PAT growth of 9%, 33.5% and 11.8%, respectively. We believe volume growth was c.15% YoY. Just like the peers, the company has reported strong growth in tier2, 3 cities and rural markets. Though, there was volume decline in metros, there is MoM recovery with opening up of the economy. Standalone business reported revenue and PAT growth of 7.4% and 10.9%, respectively.


* Gross margins likely to remain at higher levels: The gross margins have expanded 176bps and we believe the gross margins are likely to sustain at higher levels due to (1) there is reduction in trade discounts, (2) there are some efficiencies in raw material sourcing which will reduce costs and (3) the demand from metros is likely to recover in H2FY21 which will lead to sales of premium products. EBITDA margin expanded 353bps due to better gross margins and cost saving initiatives. We believe some of the cost savings are structural in nature.


* Higher focus on waterproofing to continue: The company has reiterated that there will be higher focus on waterproofing segment. It expects there is immense potential for this segment to grow and it expects waterproofing to become major part of decorative business in coming years.


* Market share gains and expansion of dealer count: The company indicated that there is likely increase in market shares as some smaller / unorganized players would have suffered during the lockdown. It also indicated that the number of dealers has gone upwards during the quarter. Berger is largely dependent on direct distribution and wholesale channel has very low revenue contribution.


* Maintain HOLD: We model Berger to report revenue and PAT CAGRs of 6.6% and 10.4% YoY respectively. RoE is expected to decline to 24.4% in FY22 from 25.9% in FY20. However, at current valuations, we believe the stock price upside is capped, hence maintain our HOLD rating with a target price of Rs635 (540 earlier).


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