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Mark-up over leader unjustified

Berger Paints continues to execute well and beat estimates (24.9% YoY vs HSIE: 16%). However, performance fell short of APNT’s 26%. The former lagged APNT in margin delivery too over 9MFY21. (APNT: ~230bp vs BRGR’s 56bp) as APNT managed costs better. Given the immateriality in relative top- line performance and weaker margin delivery over 9M, BRGR’s steep premium over APNT (79x FY23 P/E vs APNT’s 61x) seems unjustified. While we marginally revise our EPS estimates upwards by 3-4% each for FY22/23 to account for quicker revenue pick-up, we maintain our SELL recommendation with a DCF-based target price of Rs. 610/sh (implying 62x FY23 P/E).

* 3QFY21 highlights: Consolidated revenue grew 24.9% to Rs. 21.2bn (HSIE: Rs. 19.7bn). Decorative paints is estimated to have clocked a healthy 31/5% volume/value growth led by pent-up demand timing, strong festive season, share gains from unorganised, recovery in metro/tier-1 catchments. Note: APNT clocked volume/value growth of 33/26% and KNPL is estimated to have clocked 23/18.6% volume/value growth in 3Q. Within the Industrial portfolio, Auto industrials were strong, while protective coating lagged other segments. Management called out RM spikes, even as no price hikes have been taken in decorative paints, although negotiations are underway in industrial coatings. BRGR has brought forward capacity augmentation plans for the UP unit, given strong demand revival. 300k KL capacity is scheduled to be commissioned by 4QFY22 (Phase 1) and a Capex of ~Rs5 bn+ is earmarked for the same over next 2-3 years. Most subsidiaries witnessed improved topline and profitability. Consolidated EBITDA/APAT grew 40/51% to Rs. 4.15/2.75bn resp (HSIE: Rs. 3.94/2.62bn).

* Outlook: While BRGR continues to execute well, it has lagged APNT over 9MFY21 (on top-line as well as margin delivery), despite being 1/3rd the leader’s size and having relatively lower metro exposure. Hence, in our view, the steep premium it enjoys over APNT seems unjustified (79x FY23 P/E vs APNT’s 61x). We maintain our SELL recommendation with a DCF- based target price of Rs. 610/sh (implying 62x FY23 P/E).

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