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Strong quarter; valuation remains unattractive

* Q3 performance was above expectations with sales/EBITDA/PAT growing 25%/40%/50%. Sales beat estimates by 9%, largely in line with APNT. PAT was marginally ahead of estimates due to higher marketing spends and MTM loss in Russia.

* Commentary indicated a fairly positive outlook for decorative and industrial businesses going ahead, given a strong pick-up in metros and sustained growth momentum in smaller towns. Capacity expansion in UP has been accelerated due to the sharp recovery.

* Gross margin gains of 340bps were higher due to low-priced inventory. Input prices are seeing inflation now due to the run-up in crude prices, which may put pressure on margin ahead. Price hikes are being negotiated in industrial, but yet to be effected in decorative.

* We raise FY22-23 estimates by 14-15%. However, despite the speedy recovery and a positive growth outlook, valuations at 64x FY23E EPS (vs. 51x FY23E EPS for APNT) seem expensive. Maintain Sell with a revised TP of Rs560 (Rs480 earlier).

Strong performance aided pick-up in metros and festive demand: Berger’s domestic sales grew 24% to Rs.18.6bn, largely similar to APNT and higher than other peers, indicating market share gains. Consolidated sales growth was slightly higher at 25%, driven by better performance across domestic subsidiaries and most international geographies, excluding Russia which was impacted by lockdowns and currency depreciation. Domestic decorative growth accelerated in Q3, aided by pent-up and festive demand as well as a strong demand recovery in metros/tier 1 towns with small towns being steady. Industrial and auto segments also recovered strongly. Management commentary points to growth momentum sustaining post Q3. It has also accelerated its capacity expansion in UP, which is likely be ready by early CY22. The UP plant will have 300,000KL initial capacity with an outlay of ~Rs5bn and will enjoy tax benefits.

Margins may see pressure going ahead: Gross margin expanded 340bps, driven by low solvent-based input prices and positive benefits of changes in formulations. EBITDA margin expansion was lower at 210bps due to higher marketing spends, driving a 52% increase in other overheads. As per management, input prices are stabilizing after increasing over last few months. It is negotiating pricing actions in the industrial portfolio, and may look at price hikes in decorative too if input prices rise further.

Raise estimates by 14-15%, maintain Sell on expensive valuations: We raise FY22-23 estimates by 14-15%. However, despite the speedy recovery and a positive growth outlook, valuations at 64x FY23E EPS (vs. 51x FY23E EPS for APNT) seem expensive. Maintain Sell with a revised TP of Rs560 (Rs480 earlier).

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