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Recovery momentum remains strong

Pointers from Q3FY21: (1) The company’s 9MFY21 revenue decline is 4.2% which is in line with 9MFY21 revenue decline of 3% of Asian Paints. Berger has likely gained market shares from smaller/unorganized players, (2) Reduction in trade schemes, revenue recovery and operating leverage resulted in EBITDA margin expansion of 212bps and (3) the revenue growth momentum from tier 2 and 3 cities and villages remains intact and there is recovery in metros, projects business and industrial paints. We also believe there will be savings in freight cost with commencement of UP plant. We remain structural bulls, yet retain HOLD rating as premium valuations vs APNT is unjustified.

* Q3FY21 results: Berger reported consolidated revenue, EBITDA, PAT growth of 24.9%, 40.1% and 50.78%, respectively. We believe volume growth was c.27% YoY. Revival in Indian economy coupled with festival season helped Berger report strong revenue and volume growth. EBITDA margin expanded 212bps YoY due to lower input prices and lower trade margins/schemes. Standalone business reported revenue and PAT growth of 24% and 53.9%, respectively.

* Revenue recovery in line with Market leader in 9MFY21: The company has reported revenue decline of 4.2% in 9MFY21. The revenue decline in 9MFY21 for Asian Paints was 3% and Kansai 13.9%. Though Berger has reported strong recovery, it is almost equal to recovery by market leader.

* Recovery in automotive and projects business: We believe recovery in automotive business with revival in economy and projects business with revival in real estate industry augurs well for Berger Paints.

* Higher focus on ancillary products to continue: The company has been focusing on ancillary products such as waterproofing and putty. It believes there is immense potential for these segments to grow. It also expects waterproofing to become major part of decorative business in coming years.

* Rising input prices but some margin tailwinds: While input prices are up c.10% YoY, we model Berger to maintain margins in FY22 due to (1) increase in revenue share of premium paints with recovery in metros, (2) cost saving initiatives, (3) operating leverage, (4) positive contribution from ancillary businesses and (5) selective price hikes.

* Maintain HOLD: We model Berger to report revenue and PAT CAGRs of 11.5% and 16.4% YoY respectively over FY20-23. RoE is expected to be stable ~25% over FY20-23. However, at current valuations, we believe the stock price upside is capped, hence maintain our HOLD rating with a target price of Rs770. Key risks are steep increase in input prices and increase in competitive pressure.

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