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Mixed results; market share gain positive

Berger Paints India (Berger) is the second-largest paint company in the domestic market, with 10 strategically located manufacturing units and a countrywide distribution network of 25,000+ dealers.

• In Q2FY23, consolidated revenue grew 20.0% YoY on a lower base, though it was down 3.2% sequentially owing to tepid demand.

• EBITDA margin shrank 230bps YoY to 13.6% (-110bps QoQ) due to inflated material costs, and higher employee and other op. expenses. PAT thereby remained flat at Rs. 219cr (-13.8% QoQ).

• Softening commodity prices are expected to boost gross profit margin in the coming quarters. A pickup in demand in the domestic market may aid realisation in the near term. We upgrade our rating on the stock to BUY with a revised target price of Rs. 679 based on 52x FY24E adjusted EPS.

Top line recedes as realisations affected

Consolidated revenue in Q2FY23 rose 20.0% YoY to Rs. 2,671cr (+3.2% QoQ) owing to robust performance of Decorative business which recorded strong growth in volume despite inflation, with a 22.5% YoY growth in sales, and 80bps YTD gains in market share to 18.8%. Additionally, its joint ventures, Berger Nippon Paint Automotive Coatings and Berger Becker Coatings, also registered strong topline performance on account of price hikes undertaken to tackle rising input costs. On a sequential basis however, revenue was lower owing to subdued rural demand, sharp negative growth in the powder coatings segment due to slowdown in the fan industry and impact on top line of Polish subsidiary Bolix S.A. because of the Russia-Ukraine war.

Burgeoning material costs impact margin

EBITDA grew moderately to Rs. 364cr (+2.8% YoY) on lower sales realisations, while EBITDA margin contracted 230bps to 13.6% owing to inflated raw material costs, along with hikes in employee and other operating expenses. Excluding lease liabilities, short-term borrowings grew to Rs. 1,241cr as of H1FY23, as against Rs. 658cr as of FY22-end, leading to a 48.3% QoQ increase in finance costs to Rs. 24cr. As a result, PAT for the quarter remained flat Rs. 219cr on YoY basis.

Key concall highlights

• Company’s decorative business added 6,233 sales points and increased Colorbank machine installations to 3,163 units in H1Y23 (vs. 1,819 in H1FY22).

• New manufacturing facility at Sandila (UP) will commence commercial production shortly, and potentially increase capacity by 33%. The company has acquired 30 acres of land in Panagarh (WB) for production of construction chemicals, resin, and industrial products, with an estimated overlay of Rs. 175cr. It has also undertaken brownfield expansion at the Hindupur and Rishra plants.

• The management expects a mixed Q3 and Q4FY23 on the back of increased sales of high-gross-margin exterior wall coatings and waterproofing items.

Valuation

Expansion of capacity and network coverage, with expected revival in rural demand provide scope for growth. Easing inflationary pressure on monomer and solvent prices, coupled with product price increases undertaken in the recent past should aid nearterm profitability. Outlook for industrial sales remains strong owing to uptick in growth in the mobility sector, however forex impact owing to a strong dollar may limit bottom line gains. With a cautiously optimistic view, we upgrade our rating on the stock to BUY with a revised target price of Rs. 679 based on 52x FY24E adjusted EPS.

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