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Berger paints India Ltd.

Creating differentiation through innovation

Incorporated in 1923, Berger paints India is the second-largest paint company in the country. It has a vibrant portfolio of paints and tailor-made customer services in every paint segment. The company has 16 strategically located manufacturing units across India (including the subsidiaries), 2 in Nepal and 1 each in Poland and Russia. Further, it has a countrywide distribution network of 25,000+ dealers and an international presence in Nepal, Bangladesh, Poland and Russia.

Investment Rationale

* Paints sector to pick up the pace: Total market size of paint sector is ~50,000cr and out of it ~75% share is decorative while remaining is industrial. Along with other sectors, the paint sector too was impacted due to Covid disruption, but as the situation is normalizing, the industry is picking up pace with high demand for decorative products. Going ahead, we believe sector growth will be driven by rapid urbanization, shortening of the repainting cycle, government initiatives like housing for all, increased spending on real estate and higher demand for premium products as compared to traditional whitewash. This will benefit organized players, having a higher share in the decorative business.

* Decorative business to dominate: Berger is the 2nd largest listed player in the decorative space and earns the majority of its revenue via this segment. The company has been expanding its product base both in decorative and industrial segments and in a post-Covid world, the focus is not only on aesthetics but also on health and hygiene aspects of paints. The company has also introduced products such as exterior paints, interiors emulsions, powder coating for hospitals, furniture and on engineering plastic, finish coating for metal doors as well as asphaltic paint for pipe segment which will aid in higher revenue and gain market share from unorganized players. In the next 2-3 years, it aims to grow at 18-20% which would be largely driven by product innovation in the decorative and protective segment, increasing the distribution network by filling gaps and expanding capacity.

* Focus on growing construction chemical business: Apart from its core competency, Berger is looking for expansion in the construction chemical segment as the industry is expected to grow at a faster pace of 25-30%. Also, the products are widely used in infrastructure projects and residential projects which are in high demand. At present, Berger has a 4-5% market share in this space and also has tied up with a German company namely ‘VIP’ for Poly Urea. In the next 1-2 years, it aims to gain market share by 10% by expanding its capacity and manufacturing products in India.

Outlook & Valuation

Berger is one of the largest players with 18-19% market share in the organized sector. We have a positive view on the stock given its strong brand recall value, consistent growth in the decorative segment, revival in the industrial segment and market share gains. Going ahead, innovation and expansion of the distribution network coupled with the demand from the upcoming festive season and government initiatives with aid in driving revenues for the company. Further, on the margin front, price increase will help to mitigate the risk of rising raw material prices. We have initiated a Buy on the stock with a target price of Rs 900.

Buy Berger paints India Ltd : CMP 738 - Add on Dips 700 - Target Price 900 - Potential Upside 22.0%

Century Plyboards Ltd.

Well placed

Century Plyboards India Ltd (CPIL) is the largest seller of multi-use plywood and decorative veneers in the Indian organized plywood market. Further, it has started operations in segments such as laminated, Medium Density Fiber (MDF) and particle board. The Company has seven manufacturing units across India and exports to more than 15 countries.

Investment Rationale

* Indian plywood market is reviving: The sector is primarily driven by the growing number of construction activities and the expanding home furnishing segment. In FY20, it was worth 22,250cr and it is expected to grow at a CAGR of 4-4.3% between FY21-26, largely driven by high demand for wood furniture, rise in frequency to replace furniture, increase in disposable income and availability of a variety of products. We believe players in the organized sector will continue to gain market share on the back of preference towards brands, capacity expansion and withstanding pricing pressure.

* Robust product portfolio: CPIL is attractively placed and is one of the leaders in interior infrastructure sector which offer a one-stop solution to its clients. Its business segments include plywood (~51-53% of revenue), laminates (~20% of revenue), MDF (~15-17% of revenue) and remaining is from others (particle board, solar renewable, etc.). They have products for every pocket and going ahead the company’s strategy is to focus more on high margin business, increase non-ply revenue, continuously innovate products across all its segments and improve capacity utilization levels.

* Capacity expansion on cards: To meet the growing demand for MDF products, the company has a plan to expand its capacity 1) Adding additional capacity of 132000 cubic meters (CBM)/year at Punjab unit with capex of Rs 200cr by FY22-23. 2) By FY23-24, it has plans to set up a new unit in Andhra Pradesh with capex of Rs 500cr. Also, for the manufacturing of veneer and plywood, it is setting up a new unit in Punjab with a capacity of 60000 CBM/year with a CAPEX of ~75cr. The above expansion plans will aid in generating higher revenue as well as margins.

Outlook & Valuation

CPIL is among the largest manufacturers in India’s plywood segment with ~25% market share in organized sector. We have a positive outlook on the company given its leadership position, first-mover advantage in certain products, strong brand recall value and robust pan India distribution network. Further, in the last 5 years, 1) It has strengthened its balance sheet by reducing debt/equity to 0.07x in FY21 from 0.6x in FY17and 2) Generated decent cash flows which will be utilized for further capacity expansion. We have estimated its revenue/EBITDA/PAT to grow at a CAGR of 16%/18%/19% from FY21-24E and have initiated a Buy on the stock with a target price of Rs 668.

Buy Century Plyboards Ltd : CMP 546 - Add on Dips 480 - Target Price 668 - Potential Upside 22.2%

Crompton Greaves Consumer Ltd​​​​​​​

Going strong

Crompton Greaves Consumer Electricals (CGCE) is engaged in manufacturing and marketing a wide range of consumer products ranging from fans, light sources and luminaires, pumps and household appliances such as geysers, mixer grinders, toasters and irons. CGCE has been the market leader in fans, domestic pumps and street lighting for over 20 years. It has four manufacturing plants located in Goa, Vadodara, Ahmednagar and Baddi and its products are available in ~150,000 retail points across the country.

Investment Rationale:

* Consumer Electricals growth to remain healthy: After getting briefly impacted due to lockdown, the growth prospects for the consumer electrical sector look promising on the back of increasing penetration, revival in housing demand, and increased government focus on providing housing for all and electrification of households especially in rural areas. In urban areas, changing consumer preference towards value-added products and premiumization would drive growth for the industry.

* CGCE to continue to gain market share: CGCE’s increased focus on innovation and distribution network has enabled it to enhance its leadership position in the fans and pumps segment where the company is a market leader. The company has been the fastest-growing fan brand in India in the last 12 months despite the challenging situation. We believe with a positive industry outlook, new product launches, strong product portfolio, widening distribution reach and focus on premiumization would enable CGCE to grow faster than the market

Outlook & Valuation

CGCE has come out stronger aided by strong demand recovery and managed to gain market share in its key segments. It would continue to focus on increasing sales from rural and e-commerce channels and also look to enter new categories to capitalize on its growing distribution network and brand presence. On the margins front, we believe the recent commodity price inflation would have a limited impact on CGCE as the company has already taken price hikes (5-8%). Further, constant focus on premiumization and cost optimization measures would help the company to maintain its margins. The company is also evaluating inorganic growth opportunities which will accelerate its growth. We like CGCE for its strong growth potential, consistent rise in market share in its key segment coupled with a healthy dividend payout ratio. Besides, the company generates strong cash flows, has a lean working capital cycle and robust return ratios. We have rolled our estimate to FY24E and expect Revenue/ EBITDA/PAT to 13.5%/17.4%/15.5% over FY21-24E. We recommend a Buy on the stock with a target price of Rs. 577.

Buy Crompton Greaves Consumer Ltd : CMP 466 - Add on Dips 430 - Target Price 577 - Potential Upside 23.9%

JK Lakshmi Cement Ltd​​​​​​​

Strengthening the roots​​​​​​​

JK Lakshmi cement (JKLC) is a part of the JK Group, a well-known organization worldwide for its business legacy. The company is one of the strong players in the north and western part of India, with a network of about 7000+ cement dealers spread in the states of Madhya Pradesh, Chhattisgarh, Rajasthan, Gujarat, Uttar Pradesh, Uttarakhand, Punjab, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Odisha and West Bengal.

Investment Rationale

* Cement sector growth to revive: For the last 2 years, the sector has been facing challenges due to a slowdown in the economy as well as lower consumption in the housing and infrastructure sector (70-75% of total cement consumption). This led to de-growth in demand however the scenario is witnessing improvement as the situation is normalising. In the next 2-3 years, we believe the sector growth will be largely driven by improvement in demand on the back of government push towards infrastructure and housing, pick up in real estate and construction activity, upcoming festive season and increasing infrastructure activity in rural areas.

* Expansion to drive growth: Despite Covid-led challenges, JKLC expanded its cement capacity to 14 Mn MT including expansion of its subsidiary, Udaipur Cement Works (UCWL) in Rajasthan, from 1.6Mn MT to 2.2 Mn MT. In addition, it has plans to further add 2.5mn tonnes cement capacity at UCWL by FY24, which will bring growth at consolidation levels. The company’s total power capacity of 116 MW (Solar, Waste heat recovery (WHR) and Thermal Power) is appropriately utilized as ~75%+ of it is used internally which aids in saving cost. Besides, it has planned to add 10MW (WHR) in Jaykaypuram by Q3FY22 and it will further lead to saving power cost and improve profitability. Also, the company has won two limestone mining blocks which once operational can support cement capacity for 40-50 years as well as fulfill the demand of adjacent segments. Going ahead, in the next 3-4 years the company has plans to add cement & clinker capacity in the north and west India, expand footprints by entering new markets and gain market share.

* Strengthening balance sheet to continue: Over the past 5 years, the company has focused on reducing its debt and improving its balance sheet. Its debt to equity ratio (on a standalone basis) decreased from 1.4x in FY17 to 0.4x in FY21 which is an encouraging sign. For the next 1-2 years, the company plans to lower its debt levels further, which will help in reducing interest burden, raising funds for future expansion as well as improve profitability.

Outlook & Valuation

JKLC is one of the strong players in India (except the south). Its strategy for the next 2-3 years will be to maximize sales by increasing utilization levels and expanding capacity, improve realizations by focusing on value-added products, enhancing margins by cost optimization measures and reducing debt. From a long term perspective, we have a positive view on the company and have initiated a buy on the stock with a target price of Rs 758.

Buy JK Lakshmi Cement Ltd : CMP 610 - Add on Dips 550 - Target Price 758 - Potential Upside 24.2%

Kajaria Ceramics Ltd

Leadership to continue

Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India and the 8th largest in the world. It has an annual manufacturing capacity of 70.4 million square metres (MSM) which is distributed across eight tile plants in UP, Rajasthan, Gujarat and Andhra Pradesh.

Investment Rationale

* Decent sector growth expected: The Indian ceramic tiles industry is dominated by the unorganised sector and is highly competitive because of the limited product differentiation. However, it enjoys some inherent advantages such as abundant raw material from indigenous sources, advanced infrastructure and low labour costs. The industry growth in FY20 & FY21 remained subdued due to Covid-19-induced lockdown. However, in the next 2-3 years, the sector is expected to grow at a CAGR of 12-14% largely driven by a pickup in construction activity, government schemes for housing & infrastructure and increasing global demand for exports. Also, rapid urbanisation and shift from traditional to versatile products would be driving the growth which will benefit organized players to gain revenue as well as market share.

* Well placed in the sector: Kajaria is a market leader in the tiles segment with a strong portfolio of ceramics, Polished Vitrified Tiles (PVT) and Glazed Vitrified Tiles (GVT). Its products are present across the entire value chain and at every price point which aid in gaining revenue and market share. Also, the company has forayed into bathware and plywood segments through its subsidiary though the revenue is small but has aggressive expansion plans. Going ahead, its strategy is to focus on adding more value-added products across segments, improve distribution network as well as gain market share from unorganised players.

* Capacity expansion well on track: Kajaria management believes that demand resurgence will be largely from metros, urban and Tier 1 cities. Also, the pandemic has opened growth opportunities for India as global markets are working on strengthening their supply chain and China+1 sourcing strategy. To cater the growing demand, the company has planned brownfield expansion of 3 manufacturing plants at Rajasthan (Gailpur), Gujarat (Morbi) and Andhra Pradesh (Srikalahasti). The total capacity is expected to increase by 18% to 82.8 MSM from 70.4 MSM currently and these plants are likely to be commenced by FY22.

Outlook & Valuation

We believe Kajaria being a market leader will continue to benefit from opportunities in domestic as well as global markets. From FY21-24E, we expect the company to earn decent revenue growth of 12-13% however margins may be flat due to higher raw materials prices. Nonetheless, we are positive on the company from a long term perspective, given its strong brand equity, product portfolio, robust pan India distribution network and expansion plans. We have initiated a Buy on the stock with a target price of Rs 1,459.

Buy Kajaria Ceramics Ltd : CMP 1,201 - Add on Dips 1,130 - Target Price 1,459 - Potential Upside 21.5%

Polycab India Ltd.​​​​​​​

On a strong footing​​​​​​​

Incorporated in 1996, Polycab India (Polycab) is engaged in the business of manufacturing and selling wires and cables (81% of revenue) and fast-moving electrical goods (11.5% of revenue) under the ‘Polycab’ brand. It is the leading exporter of wires & cables in India. It also manufactures and sells FMEG products such as electric fans, LED lighting and luminaires, switches and switchgear, solar products and conduits & accessories. Its strong backward integrated processes ensure a consistent supply of quality raw materials while in-house research and development capabilities help the company earn national and international certifications. It has an expansive manufacturing presence in India and a global operational presence.

Investment Rationale

* Industry prospects look promising: The domestic wires & cables industry is well poised to deliver healthy growth led by multiple growth drivers. The rise in urbanization and pick up in private capex coupled with government efforts to improve infrastructure, growth in renewable energy and increasing investment in smart upgrading of power transmission are long term structural growth drivers for the industry. On the B2C front, pick-up in real estate and rise in disposable income bodes well for the overall industry.

* Polycab is well placed to outperform: Polycab is a strong player in the fast-growing wires & cables segment and enjoys strong brand positioning. It has an expansive distribution network and a strong product portfolio. It is one of the most backward-integrated cables & wire manufacturers. We believe Polycab would continue to outperform the industry given its strong focus on R&D, stable management team, increasing distribution reach and branding efforts.

Outlook & Valuation

We are positive on medium to long term growth prospects of Polycab led by positive industry growth prospects. Further, the management has set out an ambitious plan to grow its revenue to Rs. 200 bn by FY26E (implying a CAGR of 18%). This would be led by energizing its B2B segment by the increased focus on growing exports and strengthening its domestic business. On the B2C side, focusing on growing its FMEG business & margins, expanding distribution reach and digital initiatives would drive growth for the company. Put together, a positive industry growth outlook coupled with Polycab’s strong brand equity, healthy free cash generation and stable return ratios make it one of our preferred picks in the sector. We recommend a Buy on the stock with a target price of Rs. 2,890.

Buy Polycab India Ltd : CMP (Rs) 2,269 - Add on Dips 2,100 - Target Price 2,890 - Potential Upside 27.4%

V Guard Industries Ltd​​​​​​​

On the path of growth

V-Guard Industries Ltd (V-Guard) is India’s leading manufacturer and marketer of innovative and experiential products in the electrical (~45% of revenue) electronics (~28% of revenue), and consumer durables segments (~27% of revenue). It started from manufacturing stabilizers (market share of 51%) and now has forayed into diversified products such as digital UPS & batteries, cables, solar & electric water heaters, pumps, fans, switches, air cooler and many kitchen appliances. It has a strong network of 31 branches and over 40,000 channel partners.

Investment Rationale:

* Strong industry growth prospects: In the next 2-3years, FMEG sector growth will be driven by increasing demand from the real estate and housing sector as well as from government initiatives for housing. Further, rapid urbanization, rising disposable income amongst the middle class, demand for branded and premium products, easy availability of finance & low-interest rates will too help growth.

* Increasing presence in non-south markets: V-guard is a strong player in the southern market with a revenue share of ~57-58% in 2021. Over the last 5-6 years, the company’s revenue share in the non-south region has improved from 33-35% to 42-43% driven by a robust product portfolio, strong brand value and continuous innovation of new products. Further, from the medium to long term, its strategy is to increase presence in non-south regions which in turn will support its diversification into new markets, increase penetration of products and emerge as a pan India player.

* Streamlining supply chain: V-guard faced severe supply-side issues due to Covid led lockdown as the company was outsourcing ~55%+ of its requirement. However, for the last two years, the management is focusing on sourcing raw materials from locals and also planning to expand its manufacturing capacity. This will help in improving its margins as well as reduce dependence on sources outside the country.

Outlook & Valuation

V-guard has a strong business model with a diversified product portfolio, healthy distribution network and robust brand equity. From a long term perspective, we are positive on the company on the back of innovation, expansion plans, opportunities in the sector and market share gains from unorganised players. Further, the company has a strong balance sheet with decent cash flow and zero debt which augurs well for future growth. We have estimated its revenue/PAT to grow at a CAGR of 13%/16% from FY21-24E. We have initiated a Buy on the stock with a target price of Rs 321.

Buy V Guard Industries Ltd : CMP 261 - Add on Dips 230 - Target Price 321 - Potential Upside 23.0%

Whirlpool of India Ltd.

All set to recover​​​​​​​

Whirlpool of India Limited (WIL) is one of India’s leading manufacturers and marketers of major home appliances like refrigerators, washing machines, air conditioners and microwave ovens. WIL has also expanded its portfolio in cooking and built-in business by investing in ‘Elica India’. It has three state-of-the-art manufacturing facilities at Faridabad, Pondicherry and Pune. With manufacturing facility in India, the company exports to the Philippines, Sri Lanka, Bangladesh and Nepal. WIL has a strong parentage i.e. Whirlpool Corporation which has more than 100 years of history and a global presence in over 170 countries with 77,000 employees and 59 manufacturing locations.

Investment Rationale:

* Strong industry tailwinds to propel growth: The pandemic impacted the white goods industry volumes for the first few months however easing restrictions coupled with strong pent-up and festive season demand aided healthy recovery. Going forward, we expect the white goods consumer durables industry to register robust growth, given the low penetration of key appliances such as refrigerators – 33%, washing machines – 14% and air conditioners – 5%. The rise in disposable income, easy availability of finance and pick-up in real estate bodes well for the industry growth prospects.

* WIL to strengthen its position: Over the last five years, WIL has managed to consistently gain market share in its key segments (refrigerator, washing machine & air conditioner) led by expansion in the distribution network and filling product gaps. We expect a similar trend to continue given its strong brand recall, wide product portfolio and management’s constant focus on innovation and growth. Further, WIL's entry into a newer segment (air purifiers & kitchen appliances) and strong branding efforts would drive growth for the company.

Outlook & Valuation

We like WIL given the positive industry growth prospects coupled with its strong parentage, the constant focus on innovation, wide product portfolio and expanding distribution reach. We expect WIL’s revenue to grow at a CAGR of 16.5% over FY21-24E. On the margins front, despite a weak show in Q1FY22, we expect the margin trajectory to improve due to higher operating leverage, cost control initiatives and premiumization. We estimate EBITDA/PAT to grow at a CAGR of 26.3%/31.7% over FY21-24E. We recommend a Buy on the stock with a target price of Rs. 2,998.

Buy Whirlpool of India Ltd : CMP 2,291 - Add on Dips 2,000 - Target Price 2,998 - Potential Upside 30.9%

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