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Demand and margins normalizing; upgrade to BUY as correction looks overdone

Result Synopsis

Berger Paints growth during the quarter looks much lower than peers given the presence of a large one‐off projectin the base quarter; excluding that, both growth and margin trends are not very different from peers. But growth continues to remain lower than the sector leader for past couple of quarters given the company’s relatively weaker presence in the faster growing Tier 1 markets. The worse on the margins front also seems to behind with sequential improvement in gross margins which can move up further given further price hikes taken in the ongoing quarter post sharp price hikes in December. The subsidiaries and JVs are also delivering a strong recovery in performance excluding currency impact. The management is not worried much about the emerging competition excluding the economy/mass segment where price disruption can impact market shares. It is confident of steadily gaining market share given its product innovation, strengthening distribution and branding/backward integration initiatives. The demand outlook looks positive on both decorative and industrial businesses with demand stabilizing despite the recent sharp price hikes as seen in April and May trends. We believe the recent sharp correction on competition concerns looks overdone and despite no dent to the structural story,the stock is now trading at a reasonable discountto the sectorleader, and looks to have some upside potential even giving a multiple lower than its recent history. We, therefore, upgrade our rating to BUY from Add.       

We were already building in a normalization of growth and margins in FY23 and hence broadly maintain our earnings estimates for FY23 and FY24. We are building in a revenue/EBITDA/PAT CAGR of 14%/25%29% over FY22‐24E with ROEs sustaining over 25% and ROCEs above 30% for the company. We upgrade the stock to BUY from Add with a revised PT of Rs 712 based on 50x FY24E earnings (cut our multiple from 55x earlier to factor in the risks from increasing competition and overcapacity in the space in the long term). The recent correction looks like a good entry opportunity to buy into a structural well‐managed discretionary consumption story in an attractive industry

Result Highlights

* Quarter summary – Growth in Q4 was much lower than peers on account of a significant lumpy/one‐off project related business revenue in base quarter, otherwise growth would have been 19%, 2‐yr CAGR growth at 28.1% for 4Q and 17% for FY22; GM contraction of 5.5% yoy which would have been only 3.1% excluding project income effect, other expenses also look optically lower due to the same reason .

* Margin – Gross margin at 38.9% contracted 478bps yoy; however, it showed improvement of 223bps on sequential basis. Price increases on account of higher commodity prices have resulted in sequential improvement of gross margins.

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